The end of paper money?

[aramz]

Hey guys,

I just wanted to post a thought that I have had cross my mind from time to time. It’s just a thought and a point of interest I thought would be good to bring to the forum to hopefully get some other opinions. I am not a big financial guru so any opinions and general discussion on the matter would be great.

We all know that there is a Euro sovereign debt crisis going on atm. Portugal is looking sketchy and Spain, Italy and Greece are ticking time bombs. If these countries defaulted and the Euro crumbled what do you think would happen to forex? The deutschemark would most probably take over as the Euro currency that would be traded and paired up with other currencies you would think? Do you think this would have a massive impact on FX trading or would the DM simply slot in place of the Euro?

On another note just say down the track (this is just for a point of discussion) the American dollar lost it’s status as the reserve currency of the world and just say paper money like the dollar suffered heavily from massive inflation and people were hinting at a return to the gold standard as the fiat money experiment eventually folded how do you think this would impact forex trading and do you think this could happen?

I am making my way as a forex trader and would one day like to turn fulltime and earn a living from it. These matters I just mentioned have crossed my mind if only vaguely but I am always interested in other peoples thoughts on this topic of currency’s over time eventually folding and how it would impact Forex trading….

 

[boofhead]

Your observations seem a little simplistic. A devalued Euro could see growth in European manufacturing. If the cars made by the German makers somehow become cheaper to the rest of the world they would lose some prestige but plenty more would but them.

 

[TabJockey]

Hey guys,

I just wanted to post a thought that I have had cross my mind from time to time. It’s just a thought and a point of interest I thought would be good to bring to the forum to hopefully get some other opinions. I am not a big financial guru so any opinions and general discussion on the matter would be great.

We all know that there is a Euro sovereign debt crisis going on atm. Portugal is looking sketchy and Spain, Italy and Greece are ticking time bombs. If these countries defaulted and the Euro crumbled what do you think would happen to forex? The deutschemark would most probably take over as the Euro currency that would be traded and paired up with other currencies you would think? Do you think this would have a massive impact on FX trading or would the DM simply slot in place of the Euro?

On another note just say down the track (this is just for a point of discussion) the American dollar lost it’s status as the reserve currency of the world and just say paper money like the dollar suffered heavily from massive inflation and people were hinting at a return to the gold standard as the fiat money experiment eventually folded how do you think this would impact forex trading and do you think this could happen?

I am making my way as a forex trader and would one day like to turn fulltime and earn a living from it. These matters I just mentioned have crossed my mind if only vaguely but I am always interested in other peoples thoughts on this topic of currency’s over time eventually folding and how it would impact Forex trading….

Your a brave man to trade forex without a basic understanding of global economics.

Fiat is a major technological advance, we are not going back unless we are talking about a post apocalyptic society.

 

[explod]

Fiat is a major technological advance, we are not going back unless we are talking about a post apocalyptic society.

Interesting take, would love to hear you expand a bit on that?

And what if paper/cyberspace fiat becomes worthless. For value in the past money was backed by labour, property, or some intrinsic product or bullion. Today it is debt on debt.

Just like to hear your take on the possibilities Tabjockey. And we are sick of "it cant happen" or they wont' let it happen". What if it does ?

 

[aramz]

Yeah I am still learning with regards to forex. Very green on the economic stuff but I have done well trading technically on a micro account.

My main topic of discussion was concerned with Nations like Greece and Spain defaulting and possibly reverting back to their old forms of currency. That way they could print more money and tackle their problems their own way rather than with the whole European unions currency values in mind.

I read this post on another forum and it kind of sparked some previous thoughts I had on the matter and it aids in explaining what I am on about I guess. Apologies if my view is simplistic and not written that well.

“Germany wanted the Euro in the first place to hold it's currency down because it's an exporting country. Unfortunately went badly wrong for other countries (understatement).

So now it can either:
a) try to hold it together and keep on paying out for bailouts for ever. or
b) go back to a DM likely to rocket and become uncompetitive.

Probably euro is destined to fail, was too idealistic in the first place. imo Greece would be better off back with the depreciating Drachma and "restructured" debt, at least it would be flooded with German tourists again looking for cheap gyros and they could move on.”

The above kind of goes in line with my post about the deutschemark and other currencies returning and the experiment with the Euro not working. It’s all just a fictional discussion of what would happen etc. I was keen to know peoples thoughts on the possible impact these occurrences would have on the forex market.

The US dollar being overthrown as the reserve currency and the impact of that on forex was another issue I wondered about. I have also read quite a bit about the whole monetary system that the world now indulges in and how flawed it is. I could try and find these sources and relay some information to explain better this sentiment but I was just seeing if anyone had any thoughts on what would happen to the forex market if these events unfolded over time.

Anyway thanks for replying. If this topic doesn’t generate much talk and it seems a bit silly that’s fair I just thought I’d put it out there on this forum to gauge other people’s thoughts as I am not the most clued up on economic and fiscal matters.

 

[TabJockey]

Ok when you you have some sort of interest, and you hear all this garbage thrown around on the Internet and from that garbage you take an opinion, what you have to do is sit down and do some proper research.

Acedemics much smarter than me or you are paid good money to research and write journal articles on the issue. Read some of them.

There are arguments on both sides of the fence for fiat money, but you rarely see the pro's come up in a place inhabited by so many crazy conspiracy thoery believers and gold bugs as the internet. So here are the basic arguments for Fiat money, which personally, convinced me that its the way to go:

1. Empirical studies show commodity backed money to be inherently pro-cyclical with significantly higher volatility over fiat. This is so important. Boom bust rollercoasters suck (and so did the 1800's).

2.Fiat currency is not subject to the changes in technology that increase or decrease the value of gold. Can you imagine your savings being cut in half because scientists discovered how to replace gold with something cheaper? What a rubbish system that would be!

Stability of value allows investors and business to make rational decisions. Can you imagine that a few years back, you thought gold was going to rise, so instead of investing in whatever business your involved in, you just hold your money. Can you imagine how awesome the economy would run, if in the middle of a gold run, everyone stopped spending thier money because they believe it will be worth much more tomorrow?

3. Studies have shown that recessions and depressions in countries with fiat, the economy fares better and recovers quicker.

4. Commodity money has a problem of constant deflation. Deflation is bad look it up. Lots of studies show that deflation is the antichrist of the economic world.

5. Obviously fiat money is easier to transfer and manipulate! Moving large amounts of gold around is not a productive effort!

Believe what you want but try to research both sides.

 

[TulipFX]

We would be in a global depression now if we had a gold backed currency system.

Floating exchange rates are vital to counter these shocks.

 

[tothemax6]

Hey aramz,
Yes the nature of the EU and the Euro does suggest that the system must collapse, taking the Euro with it. However, that is just a suggestion - for instance the USSR should have collapsed quickly, but it took 70 years to do so. The EU could persist indefinitely, the Euro with it.

The reason the Euro should collapse is: firstly (as proven) whenever a government cannot repay its debt it gets bailed out (and this is seen as important to keep the monetary union intact), secondly governments love spending borrowed money without really wanting to have to repay it (since this means spending less money). Logically, this should result in what I like to call 'money spew', which has other names, like quantitative easing, debt monetization, and 'money printing', which occurs when some agency (be it the ECB or IMF) covers the bill with fresh money/credit.

But again, the problem is that there aren't many economies at the moment which aren't susceptible to this problem. Japan is big on money-spew (even though it doesn't and hasn't helped them), so is the US, so is the UK. FX trading is currency against currency - you have to pick a 'good' one and a 'bad' one. Gold has worked fairly well so far as a 'good' one.

 

[tothemax6]

1. Empirical studies show commodity backed money to be inherently pro-cyclical with significantly higher volatility over fiat. This is so important. Boom bust rollercoasters suck (and so did the 1800's).

Yes the gold standard does not fix this, as it is caused by the cycle of expanding bank credit, followed by bank runs. However fiat does not fix this either. Instead, fiat allows the credit expansion to be open-ended, resulting in epic booms and busts (e.g. tech bubble, the epic bubble+crash that slammed japan and from which it still hasn't recovered 20 years later, the us housing bubble). The inflationary nature of fiat also lowers its quality as a money, since gold money does not suffer this effect.

2.Fiat currency is not subject to the changes in technology that increase or decrease the value of gold. Can you imagine your savings being cut in half because scientists discovered how to replace gold with something cheaper? What a rubbish system that would be!

This point is terrible. Fiat money savings routinely loose value. Sometimes the value is even vaporized (recent examples being zimbabwe, and before that latin america) in what is called 'hyperinflation'. Gold cannot do that. And the scientists point can apply to any asset, from housing to every other rare metal.

Stability of value allows investors and business to make rational decisions. Can you imagine that a few years back, you thought gold was going to rise, so instead of investing in whatever business your involved in, you just hold your money. Can you imagine how awesome the economy would run, if in the middle of a gold run, everyone stopped spending thier money because they believe it will be worth much more tomorrow?

When gold is used as the medium of exchange, it does have a stable value, as IT is the point of reference - the item by which all other items are priced. Its exchange value in terms of some fiat credits somewhere (what we currently call 'the gold price') would be irrelevant, in spite of the volatility of this (irrelevant) exchange rate.

3. Studies have shown that recessions and depressions in countries with fiat, the economy fares better and recovers quicker.

I would like to see them. Correlation does not imply causation.

4. Commodity money has a problem of constant deflation. Deflation is bad look it up. Lots of studies show that deflation is the antichrist of the economic world.

All of these so called 'studies' refer specifically to the 1929 crash+depression, and blame the depression on the deflation which occurred following the bust (which is what happens after a bust). They ignore previous crashes, with the same effects, which recovered quickly (1920/21 crash), and they ignore the massive government interventionism that followed the 1929 crash versus others.

5. Obviously fiat money is easier to transfer and manipulate! Moving large amounts of gold around is not a productive effort!

That's why then invented banks to hold the gold for you .

 

[GumbyLearner]

That's why then invented banks to hold the gold for you .

How all interested wish

A great vid featuring a very clever oz comedian posted on youtube by Aaron G Nielsen.

"No-one uses gold these days, Shaun. My God, where have you been?" LOL .

 

[aramz]

First off thanks for the replies and videos. Tabjockey and to the max thankyou for your detailed responses.

You raise a few interesting points Tabjockey. A lot of which seem to go in line with that of keynesian economic principles which are known to bring about inflation. The core of keynesian policy is that governments could smooth out volatility of free markets by expanding the supply of money and running large budget deficits when times were tough. Tough times like recessions are argued by some to be necessary to compensate for unwise decisions made during booms which are created by false signals being sent to businesses when governments stimulate economies with lows interest rates. Keynesians look to mitigate the busts rather then preventing the artificial booms.

The video link that you posted TulipFX is very interesting. It delves into quite a few things I have read about with regards to economic policies etc. It discusses John Maynard Keynes economic ideology and his impact of the macro economics of the world. I think the many posts below the video some up this video the best. Here is one for example: "Very disappointed in Freidman's view. Not even a mention of the monetary inflation pre-depression as the cause of the Depression. Then praising Keynes. Messed up. How about Ludwig Von Mises, the man who predicted the Depression?"

Ludwig Von Mises studied under Austrian economic principle which argues that recessions are necessary etc. like I mentioned above. His policies were however trumped in an economic showdown with Keynesian policies.
"Keynesians policies had a key advantage because they offered the hope of pain-free solutions, Keynesianism was an instant hit with politicians. By promising to increase employment and boost growth without raising taxes or cutting government services, the policies advocated by Keynes were the economic equivalent of miracle weight-loss programs that required no dieting or exercise. While irrational, such hopes are nevertheless soothing, and are a definite attraction on the campaign trail. Keynesianism permits governments to pretend that they have the power to raise living standards with the whir of a printing press."

Quoted from the book 'How an economy grows and why crashes' by Peter Schiff.

Here is a video which delves into the possibility of a US dollar collapse in the future. It is not some anti US propaganda all the people interviewed are highly renowned figures in global Economics and mostly American themselves:

http://www.youtube.com/watch?v=4n3g5lUgkWk&feature=related

I find all these topics interesting and I for one am still learning a lot. I do however seek out information quite often and have read books on the subject of global economics and the current mess we are in. A lot of the stuff I have read is very fresh in my mind and I didn't study economics at high school so I may not always explain myself that well and that's why I quoted a book I recently finished reading. I'm 25 and none of my mates are into this kind of thing so any talk on the matter is welcomed.

 

[aramz]

DEFLATION... IS IT REALLY THE ENEMY?


With regards to your comment on deflation I have taken the time to write down a chapter from a book by Peter Schiff 'How an economy grows and why it crashes'. Schiff predicted the mess we are currently in before it happened. His views are highly respected and his synopsis of deflation is quite thought provoking imo.

"There is no greater propaganda victory in economics today than the complete vilification of deflation (and the relative acceptance of inflation). As far as economists and politicians are concerned, deflation, which is defined as the overall decline of prices over time, is the economic equivalent of the bubonic plague. At the slightest whiff of deflation, governments will typically enact policies to push prices back up.

But what's wrong with falling prices? It would shock just about everyone to know that prices in the United States fell steadily for almost 150 years... from the late 1700's all the way to 1913! But during that time we experienced some of the fastest economic growth in the history of the planet. This was made possible for the precise reasons described in this chapter: increased efficiency. When combined with a stable supply of money (as existed in the United States until the establishment of the Federal Reserve), efficiency will push prices down.

The vastly increased productivity of the industrial revolution made it possible for working class people to afford all kinds of goods, like upholstered furniture, tailored clothing, plumbing, and wheeled transportation, that were previously available only to the rich. Deflation meant that $100 saved in 1850 could buy many more goods and services in 1880. Why is this not a good thing?

Yet despite the obvious benefits of lower prices, we still fear deflation. We are told that if prices were to fall, people would stop buying, companies would stop spending, workers would lose jobs and we would all return to the economic dark ages.

But we all see time and time again how falling prices do not deter particular industries. In the early twentieth century, Henry Ford made a fortune, and his workers became the best paid in the industry, by steadily bringing down the price of cars. More recently the computer industry has made bundles of money despite the fact that it's products constantly experience significant price deflation. Yet despite plunging prices the computer revolution continues unabated. As a result of this efficiency in design and manufacture, millions and millions of people each year spend less and less to experience the marvels of digitization.

Modern economists mistakenly assume that spending drives growth, and that when deflation is present, people tend to defer purchases (to allow prices to fall); and when they do spend, the diminished price makes less of an economic impact. This is absurd.

As we've said before, it's not the spending that means anything. It's the production that counts!

People do not need to be persuaded to spend. Given that human demand is essentially endless, if people don't want something there is likely a good reason. Either the product is no good or the consumer simply cannot afford to buy it. Either way, the act of deferring a purchase, or saving instead of spending, is made for rational reasons and tends to benefit the economy as a whole.

In fact, if consumers are not spending, the best way to spur demand is to allow prices to fall to more affordable levels.

Despite all the exculpatory evidence, deflation remains economic enemy number one. This is because inflation (the opposite of deflation), is every politicians best friend."

Food for thought...

 

[tothemax6]

How all interested wish
A great vid featuring a very clever oz comedian posted on youtube by Aaron G Nielsen.

One of my favourite videos