Wednesday, November 11, 2015

Gresham's Law Hits Currencies

A recent episode in my life correlates to what is happening in international currencies. My lease is coming to an end. My greedy landlord offered me an extension with a rent increase of 16%. Isn't he sweet? I thought about that. I have to make due with the same income and yet, this one aspect to my life now costs me 16% more than yesterday. My protests fell on deaf ears. I reminded him that I always pay on time, get along with the complex neighbors, never cause a problem and take care of his property. He reminded me that my same apartment only generated $500 per month for him in the past. I thought about that. What do you do when your income is the same when rent was $500 per month and now, almost $700? You become homeless is my first thought. I wanted to tell him that his greed will drive out the good tenants and will be replaced by those who never pay on time, cause problems and don't take care of the premises. Gresham's Law: Bad money drives out good money. Fiat money killed our silver coins and devalued our currency. Good neighbors are replaced by poor neighbors and then, crime.
Take my above situation and now, apply it to what is happening with global currencies.
understand the benefits of fiat money. It costs them nothing to print and although this printing devalues your currency, the lower market value will cause a surge for your nation's exports. They never mention the flipside. A lower valued currency is a negative aspect to their citizens and in addition, this policy will also cause inflation to their imports and thus, a hardship to the citizens like my rent increase. These political tendencies are nothing new. We had a doozy back in 1921 - 36 period. There was one difference. It appears that "printing" policies by governments then, allowed more time to determine the effects of it, as compared to today. Let's revisit.
Germany overprinted. They destroyed their currency which led to the collapse of the government. In 1925, France and Belgium devalued. This made England and the US with the stronger currency. They got the exports and we got the deficits. In 1931, England struck back by going off the gold standard and devalued. Then, in 1933, the US devalued and closed gold to its citizens. Then, in 1936, England, France and Belgium devalued again to gain market share in exports. It is the same today except the time duration seems to be 24-months at the most as opposed to three to five years back in the day.
politician's understand the disposable society and instant gratification After the financial crisis of 2008, all governments printed, but the US kept at it with another devaluation in 2011. Then, the Japanese under Abenomics made a bigger push downward in 2012. They not only printed and bought government bonds, but also stock shares. The EU answered with stimulus. Now, they've added QE and negative interest rates. A government does something and the competing government follows with something, but all forget that its citizens still have the same income with food rising with taxes rising with insurance rising and eventually, gasoline will catch up. What do they do become homeless? The Syrian refugees are walking to Germany and Europe, but where will the homeless citizens of these nation's walk too?
The pie is shrinking and there is not enough to go around and to answer Liz Saunders: Yes, there is over capacity and it is in currencies. There is not enough pie which means almost all get less and this is demonstrated by China.
is 10% of the global GDP and if China gets less than this effects everyone else. A quarter less for China equates to 2.5% less for world GDP which according to the IMF will be 3.6% in 2016. By my math I see global GDP will be 1.1%. I guess they use modern math. Now, I see another problem. Say, I'm right at 1.1%. However, if China shrinks, then its trading partners who are also part of the equation will also shrink to which, makes the 1.1% figure too high because they will have less. Bad money is being driven out by worst money which whether you realize it or not, is the cashless society. Jobs are outsourced leaving only transfer "money" as income. The velocity of money is disappearing to a digital account ledger which is another reason to End the Fed!