Persistently Out of Step
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August 29, 2016
Mrs. Clinton's strange September public appearance schedule.
CONFUSION: IS ROGOFF PUSHING FOR CASHLESSNESS OR MERELY LESS CASH?
There's quite a buzz at the moment about the promotion of a "cashless society." Dr. Kenneth Rogoff, a Harvard Professor of Public Policy has written a book on the subject to be published in September by Princeton University. "The Curse of Cash" lays out the case for eliminating higher denomination notes, such as the $100.00, $50.00, and $20.00 allowing the public to make do with $10.00, $5.00, and $1.00 notes. (Maybe the occasional $2.00 bill?)
We do not forget, however, that in 2014 Dr. Rogoff wrote "Getting rid of physical currency and replacing it with electronic money would allow central bankers to set negative interest rates without people bailing out into cash."
However, today Dr. Rogoff is basing his argument against cash on the fact that the underworld uses mostly $100.00 bills in its nefarious schemes. And he readily admits that anonymity of cash is popular. "It delivers absolute anonymity, portability, liquidity and near-universal acceptance."
Several details of this plan for a "less-cash" society are hanging fire. What will be done about all those $100.00 bills that exist all over the world? All these century notes are not necessarily in the hands of gangsters. A few loyal Americans may have a few neatly tucked away in a bedroom closet "just in case." Will they be called in? This would flush a lot of cash out of the underworld but also out of the hands of innocent citizens who merely hold a stash in the sugar bowl against the possibility of a monetary calamity of some sort.
The U.S. does not cancel existing legal tender. It has reneged on its promise to redeem paper currency in gold or silver, and it habitually destroys the purchasing power of the dollar through inflation, but it does not cancel the face value of old cash. ie; A 1920's $10.00 gold certificate may still be deposited in a bank and $10.00 credited to one's account. Old silver coins still count at face value if deposited. It makes no sense to do that, of course, since these items are collectible at prices much higher than their face value.
Let's hope the presidential candidates are asked to comment publicly on this question of cashlessness....or, "less-cash-ness."
If Von Greyerz is correct,
hyperinflation is heading our way.
Here we go again! Periodically someone warns us of a pending hyperinflation. This would make each U.S. dollar worth far less than it is today and the inflated price of gold would rocket to unbelievable levels...perhaps $10,000.00 per ounce or more.
Egon von Greyerz puts it like this: "Currency collapse is already happening with all currencies down 97-99% in the last 100 years. The final 1-3% will happen in the next few years as governments print unlimited amounts of money. But remember that the last 1-3% fall is 100% from here and thus a total destruction of money. So whatever cash you have will be totally worthless in the coming hyperinflationary phase." FINAL CATASTROPHE
We tend to take predictions like this with several grains of salt. It's true that despite its legal tender status fiat currency usually succumbs to runaway price inflation because government creates too much of it. The first U.S. episode of heavy currency inflation occurred in the 18th century when the Continental Congress printed currency is abundance to pay off debt accrued in the Revolutionary War. They eventually sunk to near worthlessness. ("Not worth a continental.")
A personal note. . .
We have paid the rent on this wee corner of the internet through May of 2017. Age and bad eyesight might put us out of business before then. But keeping it relatively up to date, particularly with items and commentary on the terrible mess governments have made of trying to become too big for their britches by taking on un-payable debt and creating a phony form of "money", demands that we spend a bit of each day keeping tabs on economic trends. It's a self-assigned occupation.
The primary goal is to keep us out of the poor house. History is filled with major monetary screw-ups and we want to be in as safe a position as possible with our modest resources when the next currency calamity occurs. Our hope is a reader or two might find encouragement to look into the situation on his/her own.
We and the Missus faced a minister and said "I do" in August of 1948. As far as we can tell that puts us in a marriage longevity category reached by barely one percent of married couples. This does not entitle us to any award or even any particular recognition, although we aim to throw a really big party if we can keep the momentum going two more years to claim 70 years as wife and husband.
Here's a brief commentary about that long-ago year when we paid the top rate in FICA taxes....$54.00 per year. First class stamps were 3¢ each and a loaf of bread set us back 14¢.
The Royal Bank of Scotland
has become the first bank in the U.K. to
impose a negative interest rate on depositors.
Would you pay your bank a fee to hold your money? This is a far cry from the old system in which you put spare cash into a bank account and received some annual compensation from the bank for doing so. Remember the oldtimers who used to speak of the "miracle of interest compounding?" No one mentions that any more.
Today a simple checking account might pay some tiny interest rate (less than 1 percent, annually) if one maintains a substantial minimum balance. Otherwise there are plenty of charges for a variety of services, including overdraft insurance.
With the specter of negative interest rates entering the picture the day may come when banks will be falling all over themselves competing to offer the lowest charges to accept your deposits. Coupled with the push for a "cashless society" what are consumers going to do?
Tough call. If too many people rush to take cash out of their bank accounts, on the grounds it's cheaper to keep it in a shoe box at the back of the closet, the supply of paper currency would quickly run out. And there's the downside of possible theft. A shoebox full of cash may not cost anything to hold, but the danger of it being heisted is high.
So, what'll it be? The loss of purchasing power through negative interest rates on funds deposited in a bank, or the shoebox or mattress at home?
At the moment the Royal Bank of Scotland is imposing negative interest rates chiefly on balances held by smaller businesses. When it spreads to ALL deposit accounts there may be an uproar....except in Scandinavian countries where people embrace the concept of cashlessness and inflation.
Innocents and Money
Mark Twain meets the Portuguese reis.(We composed this a year ago to demonstrate to a friend how gold money retains purchasing power over long periods of time. He didn't get it.) Mark Twain’s “Innocents Abroad” is the fascinating journal of his travels with a party of seventy-six wandering Europe and the Middle East in 1867. Upon arriving in Portugal one Mr. Blucher was so glad to be on solid land once more that he invited nine of the party to dinner at the town’s principal hotel. They enjoyed a fine meal, good wine, and cigars all around—but when the bill arrived Mr. Blucher nearly had apoplexy.
“Landlord,” he said, “this is a swindle. I’ll never, never stand it. Here’s a hundred and fifty dollars, Sir, and it’s all you’ll get. I’ll swim in blood before I pay a cent more!”
What disturbed Mr. Blucher was the magnitude of the charges. For ten dinners the price was 6,000 reis. A charge of 2,500 reis was posted for cigars, and 13,000 for wine. What Mr. Blucher did not know was the exchange rate of Portuguese reis for U.S. dollars. The proprietor sought someone on the premises to help him translate the numbers to U.S. money.
The dinner charge of 6,000 reis was $6.00. The cigar bill totaled $2.50. Eleven bottles of wine came to $13.20 for a grand total of $21.70 for the celebratory dinner for ten.
The bill could have been paid with a U.S. $20.00 gold coin, plus a silver dollar, a silver half-dollar, and two silver dimes. Those coins today would be worth roughly $1,100.00 in terms of their metallic content.
Could a party of ten today find full-course dinners in a nice restaurant for about $110.00 each? Very likely.
This anecdote from 148 years ago underscores gold’s store-of-value attribute, conveying purchasing power over long periods of time.
(Written: August - 2015)
In the good old days financial giants such as J.P. Morgan understood the role of money. In their view gold was money while paper notes, bonds, etc., were merely IOUs...promises to pay at some future date. In fact, Mr. Morgan is on the record saying "Gold is money. Nothing else."
He clearly meant that paper IOUs were a promise of money payment but could not simultaneously BE money.
When Morgan made the comment the U.S. mint price per troy ounce of gold was $20.67. When the U.S. stopped redeeming its notes in gold held by foreign trading partners the mint price was $42.22. Today the market price is a little more than $1.300.00. This represents a terrific drop in the purchasing power of the paper dollar. (Note: Most "dollars" do not exist in paper form. They reside as electronic digits in the bowels of computers.)
Comes now this question: Should one invest in gold today in the hope its price will soar?
A boatload of emails lately advises us that we're missing out on big profit if we don't buy gold now before the price goes up to $5,000.00 or $10,000.00 or some other lofty figure.
It's true that one can make a profit by exchanging paper money for gold at a lower price and selling the gold for paper when and if the price rises. But since the price of gold almost always soars on the wings of paper dollar price inflation, how does one make an actual "killing" when the dollars received in the future sale won't buy nearly what they would when the gold was bought?
Our conclusion is we will not see $5,000.00 gold unless price inflation rises sharply. Gold is a first rate barometer when it comes to measuring expectations concerning currency inflation. At the moment, however, the Federal Reserve can't even get the inflation rate up to its goal of 2 percent on an annual basis.
So, we're with ol' J.P. on this one. Gold is money because it serves the classic function of money....it is 1/ It is a store of value, 2/ a standard of measure, (a troy ounce is always 400 grains), 3/ it is a medium of exchange recognized everywhere in the world.
As sought-after as paper money is it can't offer the attributes of money the Founding Fathers had in mind when they drew up the U.S. Constitution. Today's fiat currency fails miserably in conveying purchasing power over long periods of time. For example, since leaving the remains of the gold standard in 1971 the U.S. dollar of that time has declined to a purchasing power of 18¢.
When it reaches zero it will be nice to hold some real money....gold.
Since 1971 the purchasing power of the dollar has sunk to 18¢.