Monday, January 21, 2013

Currencies and Gold

The tug-of-war over the currency continues to be played out in precious metals. The government prints money to prevent illiquidity, illiquidity being an agreed upon evil learned from the Great Depression. Using the logic that availability and price are inversely related, people assume the value of the dollar will drop as we are printing a lot of them. Consequently they buy precious metals, particularly gold and silver--but some platinum and palladium, purchases that are buttressed by some industrial use so that there is a commercial demand as well as an assumed value demand. These metals are their hedge against a perceived decrease in value of the currency, i.e. the dollar.

A problem here is how perception influences value. We perceive the dollar as less valuable and metal as more so. But why? Metal is only one place to put money. What if the dollar is perceived as the best of all, admittedly failing, currencies? Would that result in people leaving those currencies, euro or baht or wampum, for the dollar? Would that result raise the value of the dollar?

There are examples in history of currency unrest in this country. Andrew Jackson was a sworn enemy of banks, particularly central banks. For him it was a question of placing too much power in the hands of the Federal government, interfering with individual contracts and using a currency that had no intrinsic value. Before he left office he refused to renew the charter for the Second Bank of the United States, the country's central bank. As a result individual states and banks began printing their own money. And so did many enterprising crooks. When his vice-president, Martin Van Buren, succeeded him, he wanted to retire the government debt. He decided to sell government land to do it but ordered the treasury to accept only gold or silver as payment. This became known as The Panic of 1837. Inflation soared, the markets declined and the country experienced a seven year depression.

By the 1850, one half of the circulating currency was counterfeit.

One could imagine a scenario where penicillin might be priceless. Or handguns. Or a GPS. Totally reasonable appearing people will pay $10,000 for an unusual book. Flea markets have small, cluttered tables of things of value to some, not to others.

Value is subjective. In currency, perception is reality. That may be helping now but it has a serious downside.

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