Inflationary money – ‘let it be done’ (fiat)


Owl was telling Kanga an Interesting Anecdote full of long words like Encyclopædia and Rhododendron to which Kanga wasn’t listening.

Unlike Owl I always have a problem spelling Tuesday – my shortcomings here saved by a spellchecker and an intuitive notion that something doesn’t look right.  When extraordinarily large valuations are put on artifactsit simply doesn’t look right, especially when the artifact being purchased appears to be trivial, like a comic book.  But this of course misses the point, which is that the investment in artifacts can be a means of hoarding wealth.  This also means that large exchanges of money for artifacts has to take place.  However: regardless of the price that an artifact may sell for, in a world where the medium of currency exchange is fiat money, any sum of money becomes irrelevant.  With fiat money, there is no need for money to exist in a form that requires its physical exchange.

The ability to buy a Renoir, Buggatti, Louis Quinz, or the first issue of the Superman comic, incurring large financial transactions, relates more to a credit rating than the actual ability to produce the money required. The first issue of the Superman comic sold recently for a record $2.16m and it’s highly unlikely that the buyer attended the sale with a suitcase full of money or even attended the sale at all, being able to make the purchase by telephone or some other electronic means. For a comic issue published in 1938, originally costing  just 10 cents, $2.16m is a good return.  In 2010, the relative worth of $0.10 from 1938 was:

 1938 -1970
1971 – 2010
                   RELATIVE VALUE INDEX (US Dollar)                    Measuring the worth of 1938 $0.10 cents
 $0.28
$1.51
using the Consumer Price Index
 $0.28 $1.22 using the GDP deflator
 $0.58 $1.44 using the unskilled wage
 $0.61 $1.74 using the Production Worker Compensation
 $0.76 $2.42 using the nominal GDP per capita
 $1.21 $3.61 using the relative share of GDP

When the United States closed the commodity based link between gold and the dollar in 1971, the world entered a new age of fiat currency .  Fiat money is supported by nothing more than people’s faith in their government’s issuance of banknotes and coinage and foreign investors having faith in a government’s sovereign credit rating.  Post 1971, most of the major trading currencies became fiat money, which ‘floated’ in a market environment, this being in a world with a history of paper money defaults.  Historically, no government has had the discipline to maintain its currency, fiat or commodity based, without resorting to the printing of money for political gain and financial loss.  Those who invest large sums buying artifacts and investing in commodities such as gold, do so because of an innate distrust in the long-term value of any paper money.

For example, if we take a 1938 $0.10 cents as the reference point, then measuring its worth using the CPI index in the above table indicates that introducing fiat money in 1971 lead to a greater measure of inflation. In the thirty-two year period up to 1970 the original $0.10 cents became a requirement to spent $0.28 cents to have the same buying power (all things being equal).  In the forty-year fiat money period up to 2010, this $0.28 cents now required the spending of $1.51 dollars to have the same buying power (all things being equal).   The thirty-two year period 1938-1970 has a multiplier of 2.8 and a thirty-two year period from 1971 to 2003 has a multiplier of 4.5. The increase in the multiplier over the fiat money period showing that money is inflating at a greater rate than during the earlier period.  However, the 72-year multiplier for a 1938 Superman 10 cent comic book is 21 million (that is: for a 10-year-old who bought the comic in 1938 and sold it in 2011 at the age of 83)!

  • Facts are meaningless. You could use facts to prove anything that’s even remotely true!
  • Oh, people can come up with statistics to prove anything, Kent. 14% of people know that.
  • If you really want something in this life, you have to work for it –Now quiet, they’re about to announce the lottery numbers!
  • Just because I don’t care doesn’t mean I don’t understand!

–Homer Simpson

Apart from any hedonistic desire to own such artifacts, there is no doubt a pragmatic view that it affords the best protection against ubiquitous  inflationary money and especially fiat money.  The extraordinary appreciation in the value of artifacts and the post 1971 upward trend of gold prices, could be considered to represent:

  1. Increasing discretionary incomes in favour of those able to invest in artifacts and gold (the rich are getting richer).
  2. A shift in capital investment in favour of investment in artifacts and gold (the hoarding of wealth)
  3. A better indication of monetary inflation than any published government figures.
  4. The possession of insider information by those who really understand money markets.

Whilst this appreciation in the value of artifacts and gold may represent any combination of the above,  investors simply moving their wealth out of fiat money fits them all. Those wishing to hoard wealth are aware that fiat money is not a suitable vehicle for doing so, it never holds its value. Historically, fiat money has always been the most inflationary currency medium.   Those who are able, always convert large sums of their discretionary fiat money into commodities (gold) and artifacts (treasures).  An activity that accelerates as confidence in the stability of fiat money declines, to the point at which there is a run on fiat money and a financial crisis.

Monetary scholar Edwin Vieira claims that every 30 to 40 years the reigning monetary system fails . The following graph on the price of gold would seem to support Viera’s analysis. The price of gold over the period shown in the graph below, would suggest a link between the value of gold and the global introduction of fiat money in 1971.  The unusual peak in 1980 is coincident with the Russian invasion of Afghanistan which caused investors to trade dollars for gold when fear gripped the market (another indicator of the inherent instability of fiat money).  Despite a calming of the markets, the upward trend in the price of gold that began in 1971 never returned to its 1971 value.  It did remain ‘relatively stable’ during the period 1982 -2005, if averaging approximately $335 ± 33% per troy ounce can be called relatively stable.  It is suggested that 2005 was a pivotal year for gold prices, as the price of gold has increased year on year since then and shows no sign of abating.  It remains to be seen whether or not the seemingly exponential increase in the price of gold, post 2005, marks the end run for the life cycle of fiat currencies and the end of relatively stable money.

9 responses to “Inflationary money – ‘let it be done’ (fiat)

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  5. Araminta December 13, 2011 at 20:06

    I’m still reading Peter.

    I’m not sure we really do actually want inflationary policies, and rising property prices is only attractive to those who think about the house they live in as an investment. It is not, and now perhaps they will figure this out. I doubt it though, a few years of increasing house prices and they imagine that it will go on for ever, despite evidence to the contrary.

    Like

    • Peter Barnett December 13, 2011 at 22:53

      Hello Araminta

      I’m sure that people want stable money, but suspect that the vast majority of ‘ordinary’ people don’t understand what is needed to achieve this. I do not share your optimism that ‘they’ will figure it out (as with my picture of Owl – it’s all rather boring). I think we both agree that as long as the media keep drip feeding them with the ‘good news’ of increasing house prices and stock market equities inflation will continue unabated. Missing the point of course, that the two real benificaries of this inflation are the bankers and the government.

      At the moment it’s interesting me. I’m trying to follow a logical path, but every stone upturned reveals something unpleasant beneath it.

      Like

      • Araminta December 13, 2011 at 22:59

        Doesn’t it just, Peter. I’m not sure that logic is applicable, but I admire your persistence!

        It is just so difficult to understand, but please do carry on your research. I’m at least stumbling my way through, but I’m not sure our various leaders understand what is going on either, sadly.

        Like

  6. xueta December 8, 2011 at 15:53

    Dear Peter, If you wish to leave a comment on “Ashkenazim” then please do so!

    Like

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