I know it is pretty pathetic. Saturday night and I am blogging. Even worse, I am writing about a couple of good economic books that I have read lately. There are a couple of words you wouldn’t expect to see in the same sentence, “Economic book” & “Good”.
The three books that I have read lately are:
Leverage: How Cheap Money Will Destroy the World
Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown
Currency Wars: The Making of the Next Global Crisis
I guess it isn’t too hard to see a trend regarding the subject matter. There is an advantage of reading a ton of material on the same subject. While at first, you may be overwhelmed with information, the final outcome is you become numb to the input. Until, there is something that strikes you as something very critical, inciteful and pivotal.
While no doubt all of these books were good. It was Paper Money Collapse by Detlev Schlichter that left me with the biggest transformational shift in my thinking and outlook. Detlev’s book is a historical account of different monetary systems. It has been a couple of months since I have read the book, so my book review is only broad in scope. Summarizing the book as best as possible, the world as we know it has always been on a quasi gold system. Yes, governments have bastardized the system. Many countries did not adhere to a gold system, but there was always some country, somewhere that was on the standard and their currency would provide some type of anchor. Remember that common phrase “The Gold Standard”. Or countries would go off the gold standard during times of war, but then would eventually return. Or governments would reset their currency to a higher gold value, effectively devaluing their currency. Like we did when all gold was confiscated in the 1933, at around $21 and then once the government owned all the gold, the US then agreed to re-peg the dollar at $35 per ounce of gold.
So while there was continual failure to adhere to a pure gold standard as countries bastardized their attempts, there at least appeared to be a general recognition that a gold standard of some form was desirable, lest people loose complete faith in the currency. Remember when the US Dollar was know to be “As Good as Gold”? That is because it was, until 1971, when Nixon reneged on the US’s promise to redeem dollars for gold, and since that time the entire world has been on a paper money system, with no currency anchored to gold (maybe with the possible exception of the Swiss Franc which was backed by 40% gold, until 2000). Wonder why Switzerland’s currency is so damn strong.
So for the last 40 years the entire world has been on a paper system. This system has worked OK for a while, as long as we have an ever growing supply of money to mask the eventual failure. Now it may seem that 40 years is not that long, but it is actually enough time for the foundation of the illusionary system to have it’s foundation erode, even while the outer facade appears intact.
What was a paradigm shift for me in my thinking, is how we have completely gotten away from the thought that gold IS money, and that elastic paper money is technologically better. The current thought is that “Gold bugs” are just primitive. Technology and Bernanke can certainly do a better jog of managing the money supply. But having read this book, I kind of feel like one of the kings court that actually believed that the “Emperor’s New Clothes” really were something special, but now I have awakened to see that the country is just running a naked printing press. The world has shifted away from gold as a reality. Maybe 5-15 years ago central banks were net sellers of gold, confirming this lack of respect yellow metal. Selling their reserves at less than $300 per ounce.
It is as if the United States population after decades of obesity, finally just gives in and embraced obesity. Fat become the new beauty, medical studies to confirmed that slender is dangerous to your health, and healthy athletic people are looked upon as mentally defective. Could this really happen? I say this has happened with paper currency and gold.
Couple this books insight that paper currency NEVER works in the long run, add in the other books main points and you have the perfect storm:
Exorbitant Privilege, the fact that US has been the reserve currency with the power to print money. Plus the now standard method to battle for export supremacy is to devalue your countries currency (See Currency Wars). Helping politicians world wide justify their fallacy that a week currency is good for the nation as a whole, and encouraging countries to race to the bottom of the currency war. He with the weakest currency wins? The first country to impoverish their citizens first wins?
What I gained from “Leverage”, Karl Denninger’s book, was the timing of the whole process. If you follow Denninger’s blog, you know he is a big fan of math, charts and graphs. The most important concept from Denninger’s book is the concept of two graphs with exponential growth that are slightly different. As an example, let’s take 4% exponential growth (4% – how fast our economy grows), and 7 % exponential growth (7% – how fast our government grows), and contrast these two charts side by side. You will see how these two charts remain relatively close for a good period of time. Then all of a sudden within a short period of time, the two charts diverge massively.
What Denninger’s book conveys to me is that when things fall apart, they fall apart quickly. I think we are on the leading edge of this disintegration. The difference between the governments growth and the ability of our economy to fund this growth. The question that I have not answered in my own future outlook is whether this will be inflationary or deflationary. But this is food for another topic.
My best guess at this point is that significant financial trauma will initially be deflationary, followed up by inflation.