The value of paper money is collapsing
Over the past twenty years the value of paper money has fallen markedly. Since September 1992, for example, the US dollar has lost 80% of its value, the Euro has lost 83% and the British pound 84%, and it’s a process that’s far from over. Investors and those with wealth are becoming increasingly aware of this threat and are opting to hold gold since it offers the ultimate store of value and hedge against inflation.
In response to the global financial crisis, the United States, together with many other G20 nations, dramatically increased their level of debt. They did this in order to pump new money and credit into the global economy and avert a collapse of the financial system and global depression. Their actions prevented, or rather postponed, a collapse; however, they also turned a banking crisis into a sovereign debt crisis.
Now, as part of the solution to their unsustainable levels of debt, and in an attempt to stimulate economic activity, these nations have adopted a deliberate policy of currency debasement.
Today all currencies are fiat, that is, they are money only by government edict, by the law; they have no inherent value and are not backed by reserves. Because of this central bankers around the world can create/ print new money almost without limit, and as with all markets currency prices are set by the law of supply and demand, and as more dollars, euros, pounds and yen are created, their value falls.
In the words of US Federal Reserve chairman, Ben Bernanke, the world’s most influential central banker:
“US dollars have value only to the extent that they are strictly limited in supply. But the US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost. By increasing the number of US dollars in circulation, or even by credibly threatening to do so, the US government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper money system, a determined government can always generate higher spending and hence positive inflation.”
Herein lies the problem with today’s fiat (paper) money. Because it can be created at the touch of a button, it doesn’t provide a good long-term store of value, which is why more and more wealthy individuals and investors are swapping their dollars, euros, pounds and yen for gold.
Although gold is a commodity and has some uses as an industrial metal, its primary role is as a monetary asset and it has served as money for thousands of years.
“Gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium.” Murray Rothbard.
Gold is indestructible, is no one else’s liability, and cannot be created at will by central bankers. Gold then, is the ultimate currency.
On 7 September 1992 it took US$343 to purchase one ounce of gold. On 7 September this year, i.e. twenty years later, it takes US$1,728 to buy the same ounce of gold. That means that, relative to gold, the US dollar has lost 80% of its purchasing power.
The table below shows the loss of purchasing power, relative to gold, of the world’s major currencies in just the past twenty years.
Source: Gold prices from World Gold Council
In the words of Winston Churchill, “All previous attempts to base money solely on intangibles such as credit or government edict, or fiat, have ended in inflationary panic and disaster”, and I believe that our current experiment with a faith-based paper money system will be no different.
The United States, Japan, Great Britain, France and many other nations are in dire financial straits and their extreme level of indebtedness virtually ensures continued monetary debasement. And as the value (purchasing power) of paper money declines, so the value of gold will continue to rise.
Ultimately our political leaders and finance chiefs will see sense, and return us to some form of sound money (likely backed by gold), but not until we have experienced a great deal more pain. In the mean time it is gold that provides the best protection from the collapsing value of our paper money, and that is why investors will continue to gravitate towards it.