The Run on Paper Money
Ran in Barrons 12/9/10 as
ETFs to Play Precious Metals' Surge
The meteoric price rise of precious metals such as silver and gold to record highs marks the beginning of a larger movement of capital into safe havens. Investors are loosing faith in currencies backed solely by the guarantee of a government whether it is dollars, euros, yen or renminbi. As this outflow out of paper money into hard assets gains momentum precious metals and other money surrogates will continue to rocket higher in price.
Like a bank run this outflow out of paper money will create a crisis of confidence that will challenge policy makers and bring with it strong inflationary pressures. The demise of government backed currencies will have serious repercussions, for markets, livelihoods and even how we are governed.
The Float
Our current monetary regime of Floating exchange rates began in 1973 with the abandonment of Bretton Woods which pegged exchange rates to the dollar which was then convertible into gold. It was the first time in history that currencies were not fixed, or linked to gold or some other commodity. Markets were to determine rates.
The Float and the ensuing deregulation opened up markets and spawned financial innovation. This fostered capital mobility and redefined money as new investment vehicles were created. Money markets, credit cards and new mutual fund alternatives changed how individuals managed their money. For institutions and corporations currency trading and derivatives opened up new windows of trading and how business was conducted.
Why Now
At 37 years of age the Float is well past the 20 to 30 years most monetary regimes last. With many countries mired in debt the talk in the gold market has turned to concern about the viability of governments and their currencies. Even countries like China who are running surpluses are inexorably linked to other countries through trade and their holdings of foreign government bonds.
Front page headlines about currency wars show the tension and the inability of world leaders to come to terms over exchange rates. While such banter has been a feature of the Float, no one is flinching. In the 1980’s it took only a few years for countries to agree that the high value of the US dollar was responsible for the large USA trade deficit and we had the Plaza accord in 1985 that let the dollar fall. Today China has been rigidly keeping its currency low and has been for over a decade.
Fiscal austerity has become the rage in Britain, the Eurozone and among newly elected Tea Partiers, but is it the right policy at this time? One of the guiding principles that I learned as a global money manager was that timing is as important as policy, in other words, you don’t wear your swimming trunks outside in January. The world needs governments to spend. There is also a multiplier affect between countries as policies feed off each other. The economy in Britain will be slowed by its austerity and by that of other countries.
Austerity policies will leave the central banks as the only lever left to stimulate growth and many will pick up the slack and ease as we have seen with the Fed’s quantitative easing. This will increase inflationary pressures.
While newly elected conservatives and Tea Partiers want to talk tough to their base they are also talking to a larger global audience that can be easily spooked. The dollar swooned after the last Republican sweep in 1994. Clearly the Mexican peso crisis triggered it, but Republican rhetoric fed it.
Financial Innovation
Financial innovations and products developed during the Float will facilitate the run on paper money and hamstring policy makers. Prior to 1973 capital was not mobile, markets were closed and investment opportunities limited. Not so today. Now investors can buy physical gold, gold futures, gold ETFs and more. Some of these new products are highly liquid and fungible, making them like money. Not only do such vehicles provide a competing alternative to paper money, they will attract speculative funds causing large inflationary price rises as we have seen in commodities such as oil.
Financial innovations such as COLA adjustments on entitlements will increase government expenditures as inflation rises and rises.
A New World Order
Precious metals will continue to see large price rises. I believe that silver will outperform gold shorter term and take out its old high. Investors should consider buying silver ETF’s such as SLV, SIVR and DBS. I would also recommend buying pre 1965 US silver coins to have physical assets which can be easily purchased on Ebay for around melt value. As the bull market for currency alternatives gathers, investors will look for new vehicles such as stamps the same way that they reach for yield and lower credits in a bull market for bonds.
Commodities will appreciate although at a lower rate than silver and gold. Consider ETF’s such as DBC, GSG and GCC.
Interest rates will surge because of inflationary pressures from rising commodity prices and the necessity of governments to pay more to retain and attract capital as the run on paper money gains momentum. This will burst the bond bubble and deal a blow to the stock market as well. Deficits will balloon and the fear of default will increase, bringing tension and mayhem. Countries will be forced to find ways to calm markets and citizen concerns. They may be forced to link to gold or some other commodity to restore confidence in their currencies. They may also attempt to implement constraints in the flow of capital. How governments respond will determine whether we have high or hyperinflation.
The greatest challenge to governments may come from global corporations, or some commodity cartel that has a commodity component or some other money surrogate that the public has confidence in. They could come up with their own financial instrument and create some sort of alternative to paper money. For example, an IOU backed by gold or oil that is commoditized, tradable and accepted for payment at retail outlets like a credit card. Arguably this money creating ability will give them quasi sovereign status in the world. If this happens they will begin usurping the role of government and its functions.
Clearly the times they are a changing
Madis Senner is the author of The Way Home—Making Heaven on Earth (O Books http://www.amazon.com/Way-Home-Madis-Senner/dp/1846942489/ref=sr_1_1?ie=UTF8&s=books&qid=1292376777&sr=8-1 ) that details how our collective consciousness has trapped us and how we can break free.
Like a bank run this outflow out of paper money will create a crisis of confidence that will challenge policy makers and bring with it strong inflationary pressures. The demise of government backed currencies will have serious repercussions, for markets, livelihoods and even how we are governed.
The Float
Our current monetary regime of Floating exchange rates began in 1973 with the abandonment of Bretton Woods which pegged exchange rates to the dollar which was then convertible into gold. It was the first time in history that currencies were not fixed, or linked to gold or some other commodity. Markets were to determine rates.
The Float and the ensuing deregulation opened up markets and spawned financial innovation. This fostered capital mobility and redefined money as new investment vehicles were created. Money markets, credit cards and new mutual fund alternatives changed how individuals managed their money. For institutions and corporations currency trading and derivatives opened up new windows of trading and how business was conducted.
Why Now
At 37 years of age the Float is well past the 20 to 30 years most monetary regimes last. With many countries mired in debt the talk in the gold market has turned to concern about the viability of governments and their currencies. Even countries like China who are running surpluses are inexorably linked to other countries through trade and their holdings of foreign government bonds.
Front page headlines about currency wars show the tension and the inability of world leaders to come to terms over exchange rates. While such banter has been a feature of the Float, no one is flinching. In the 1980’s it took only a few years for countries to agree that the high value of the US dollar was responsible for the large USA trade deficit and we had the Plaza accord in 1985 that let the dollar fall. Today China has been rigidly keeping its currency low and has been for over a decade.
Fiscal austerity has become the rage in Britain, the Eurozone and among newly elected Tea Partiers, but is it the right policy at this time? One of the guiding principles that I learned as a global money manager was that timing is as important as policy, in other words, you don’t wear your swimming trunks outside in January. The world needs governments to spend. There is also a multiplier affect between countries as policies feed off each other. The economy in Britain will be slowed by its austerity and by that of other countries.
Austerity policies will leave the central banks as the only lever left to stimulate growth and many will pick up the slack and ease as we have seen with the Fed’s quantitative easing. This will increase inflationary pressures.
While newly elected conservatives and Tea Partiers want to talk tough to their base they are also talking to a larger global audience that can be easily spooked. The dollar swooned after the last Republican sweep in 1994. Clearly the Mexican peso crisis triggered it, but Republican rhetoric fed it.
Financial Innovation
Financial innovations and products developed during the Float will facilitate the run on paper money and hamstring policy makers. Prior to 1973 capital was not mobile, markets were closed and investment opportunities limited. Not so today. Now investors can buy physical gold, gold futures, gold ETFs and more. Some of these new products are highly liquid and fungible, making them like money. Not only do such vehicles provide a competing alternative to paper money, they will attract speculative funds causing large inflationary price rises as we have seen in commodities such as oil.
Financial innovations such as COLA adjustments on entitlements will increase government expenditures as inflation rises and rises.
A New World Order
Precious metals will continue to see large price rises. I believe that silver will outperform gold shorter term and take out its old high. Investors should consider buying silver ETF’s such as SLV, SIVR and DBS. I would also recommend buying pre 1965 US silver coins to have physical assets which can be easily purchased on Ebay for around melt value. As the bull market for currency alternatives gathers, investors will look for new vehicles such as stamps the same way that they reach for yield and lower credits in a bull market for bonds.
Commodities will appreciate although at a lower rate than silver and gold. Consider ETF’s such as DBC, GSG and GCC.
Interest rates will surge because of inflationary pressures from rising commodity prices and the necessity of governments to pay more to retain and attract capital as the run on paper money gains momentum. This will burst the bond bubble and deal a blow to the stock market as well. Deficits will balloon and the fear of default will increase, bringing tension and mayhem. Countries will be forced to find ways to calm markets and citizen concerns. They may be forced to link to gold or some other commodity to restore confidence in their currencies. They may also attempt to implement constraints in the flow of capital. How governments respond will determine whether we have high or hyperinflation.
The greatest challenge to governments may come from global corporations, or some commodity cartel that has a commodity component or some other money surrogate that the public has confidence in. They could come up with their own financial instrument and create some sort of alternative to paper money. For example, an IOU backed by gold or oil that is commoditized, tradable and accepted for payment at retail outlets like a credit card. Arguably this money creating ability will give them quasi sovereign status in the world. If this happens they will begin usurping the role of government and its functions.
Clearly the times they are a changing
Madis Senner is the author of The Way Home—Making Heaven on Earth (O Books http://www.amazon.com/Way-Home-Madis-Senner/dp/1846942489/ref=sr_1_1?ie=UTF8&s=books&qid=1292376777&sr=8-1 ) that details how our collective consciousness has trapped us and how we can break free.
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