Inflationomics

When Paper Money is Free

If I could borrow money at 0% interest or even 1% interest with inflation at 1%+, why wouldn’t I? All I have to do is find an investment that has a greater return than my cost. Most stocks, real estate, art, and other collectibles qualify. Maybe that’s why most stocks, real estate, art, and other collectibles have been on the rise. But how long will it last? Didn’t the Fed say it would raise interest rates during 2015? Couldn’t that cause a slow down or crash in the markets? Possibly, but then, the Fed could always reverse its course, lower interest rates and print more money.

That’s the nice thing about owning a printing press when you have a paper currency monopoly, or a computer when you have a digital currency monopoly. How much does it cost to print more currency units? A few pennies? A dollar? So you just add more zeroes to the piece of paper. With digital currency, there is no cost—it’s free. In short, the Fed won’t run out of “money” because it doesn’t cost the Fed anything to create more currency (U.S. dollar) units. (And it won’t have to pay for the helicopters to drop paper money to the people, per Ben Bernanke.)

So why should the Fed stop creating more currency units; i.e., U.S. dollars? Everyone, especially the Fed’s master; i.e., the U.S. government (the world’s largest debtor) needs more money. And then there are U.S. companies that are “too big to fail.” There are U.S. cities, and states, and other countries’ central banks who can’t afford to bail out their own banks and businesses. And, as long as the world uses U.S. dollars to do business, there will be more demand for them.

At some point, however, the world may tire of the constantly eroding purchasing power of the U.S. dollar and may look for an alternate currency—something that will hold its value, something that isn’t free, something that can’t have its supply manipulated and printed out of thin air. Could that be another paper currency? I suppose, but that would only be a temporary fix. Nevertheless, some people are suggesting that the IMF’s SDR (Special Drawing Rights), which is based upon a basket of currencies, may be used more widely as a reserve currency in the near term. Still others are suggesting that when the IMF revises its basket of currencies later this year that this could have deleterious effects on the U.S. dollar…and they could be correct; however, I doubt that any changes will occur suddenly. These kinds of changes generally occur gradually, over time (as they have been doing so far).

Could bitcoin or some other digital currency replace paper currencies? Maybe for the more sophisticated people with internet access. But I believe that the things that have served mankind for thousands of years, i.e., precious metals, will do the best job—because they aren’t free and they are universally accepted. Even central banks have come around and become the largest purchasers of gold in recent times. What do they know that you should know?

Robert F. Sennholz

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