Gold has always been treated both as a store of value and as a medium of exchange. It cannot be printed on demand to meet the political needs of incompetent governments. That is why gold has retained its role in the world’s monetary system after all these thousands of years.
Today, we are reaching the natural end of one particular phase of the world’s monetary system. The dollar was useful for many years as the currency of global business. The US economy was the largest. And for many years, the currency was strong, owing to American growth (among other things). You did business in dollars because it was a stable unit of value no matter where you were doing business in.
Lately, the US dollar is a lot less stable. America runs large deficits. It’s a consumption based economy and a debtor nation. The dollar-denominated trade in oil shows is one aspect of the currency’s fatal weakness. But why is the dollar’s weakness a global economic problem?
Like cheap credit and cheap energy, the dollar was a pillar of the world economic system. These three ingredients made for record expansion of international trade and commerce. A kind of global division of labour involving raw materials, factory production, shipping, transport, retailing and consumption became a reality.
We’d submit that the trifecta of more expensive energy, tighter credit and no one true global currency with which to conduct a high volume of financial transactions threatens that system of the world. And nothing waits in the wings to play the dollar’s role.
The result is a contraction in global economic activity, or at least more friction as the world finds a replacement (if it finds a replacement). You could argue that the entire experiment of fiat money (government printed money not backed by precious metals) is reaching its end game. And obviously, if that’s the case, a currency crisis is synonymous with an economic crisis.
But anytime you mess with the price of money—as the artificial setting of interest rates does—you mess with people’s values themselves. By targeting inflation, you disincentivise saving. Higher-than stated inflation eats into people’s purchasing power. But it’s what happens in their brain and gut that really matters.
When you don’t trust the value of the money in your pocket, you begin to behave differently. You’re more defensive, more short term. Values—like prices—become relative. If things like eggs, milk, and bread, can change in price so quickly, it throws people and their understanding of the world off.
Without constructing a whole sociological theory of the consequences of inflation (such theories exist) we’d say that a currency crisis is always an economic crisis…because what people think of money determines all of their subsequent economic behaviour, be it prudent and economical or reckless and maniacal.
We live in a time of relative monetary values. And even those values—the intermarket relationships between asset classes—are breaking down. The good news is that all that volatility makes it again possible to find undiscovered value or mis-priced assets. The bad news is that a lot of false value is going to be destroyed.
Markets and Money