Inflationomics

When Money Fails to Function

Money functions best as a medium of exchange when its value fluctuates the least.  When it maintains a relatively constant value, it allows people to price goods relative to other goods.  When it costs $5.00 for ten pounds of sugar and $5.00 for one gallon of Concord grape juice, it is easier for most people to trade things for the dollars than it is to trade the sugar for the juice.  Most people don’t produce sugar or grape juice.  It is easier for one person to specialize in producing the grape juice and another to specialize in producing the sugar and each person sells his/her specialties to customers for a medium of exchange.  Those people, in turn, use that same medium to buy other goods.

And when a carpenter charges me $18.00 per hour, while a handyman charges me $40.00 per hour, it is easier for me to know which is a better value (assuming the dollars are of the same value).  I can see which one gets more done for the same number of dollars.  In short, money makes division of labor possible and when money fails to function, division of labor breaks down and peaceful co-existence becomes more difficult.

People can no longer specialize in a specific field or job, they must become generalists and do everything themselves; i.e., grow their own food, build/repair their own housing, cook, make clothing, obtain fuel for heating/cooking, etc.  In other words, they must become self-sufficient.  They can no longer rely on others to perform certain functions as there is no good way to pay others.  Barter may work in some limited cases, but for the most part, without reliable money, trade is virtually impossible.  Businesses fail, people go hungry.  Individual productivity declines.  The law of comparative advantage no longer applies.  People can’t focus on that which they do best.  They must focus on all aspects of survival or leave the country.  In short, an advanced economy needs a reliable money to function.

Unfortunately, occasionally, a country’s central bank gets carried away and prints more money than the country produces goods.  This can lead to hyperinflation. That happened in Germany during the early 1920s, Hungary during the mid-1940s, and Zimbabwe during the late 2000s, to name a few instances.  In each of these cases, people were able to survive, in part, because they could exchange their inflating currencies into precious metals, or other more stable currencies.  And that worked fine because not all central banks inflated their currencies out of existence at the same time.  Some currencies were backed by gold and remained relatively stable.  In short, there were alternate forms of money that could be used.  Today, all the world’s currencies are paper (fiat) currencies.  None are backed by gold (or any other tangible asset) and they are all being inflated to allow their users to have a “cheap” currency so they can undercut the users of other currencies. In short, they are under the sway of inflationomics.  It’s just a matter of time before they all reach the bottom and follow the fate of the German, Hungarian, and Zimbabwean currencies.

Yes, inflation rates are relatively low at this time; however, the U.S. dollar supply and other fiat currencies’ supplies are growing faster than the world is increasing its supply of goods. Many of the world’s central banks are clearly moving in the direction of Germany, Hungary, and Zimbabwe, while others are starting to accumulate gold.  In my opinion, it’s just a matter of time before the U.S. central bank (the Fed) loses control of the paper money supply and the U.S. dollar reaches a tipping point and is rejected as the world’s reserve currency.  When that happens, many paper moneys will fail to function as a medium of exchange and the world will have to find an alternate form of money to avoid a break-down of the division of labor and world-wide strife.  It looks to me like that form of money will be gold/silver and copper.  Are you ready?

Robert Jackson Smith

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