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Richard Daughty "The Mogambo Guru"

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Asking Too Much of a Fiat Currency

By Richard Daughty "The Mogambo Guru"      Printer Friendly Version
Jun 24 2008 11:47AM

"What's your solution?" asked a Daily Reckoning <> reader. "Or isn't there one? If the world's population is going to implode, will that be through mass starvation/dehydration? Or will we run out of beer and all end up killing each other? Or will a terrorist bomb wipe us all out first? Will technology save the day? Isn't the whole thing survival of the fittest? Is survival of the fittest really the best way of describing it for the human race? Or is it more 'luck'… Is there a solution, or do we just sit back and watch the world fall apart?"

Since The Daily Reckoning people did not laugh at that question, although it deserved it, neither will I, but I want to. The answer, sans laughing, is that, like the "combination" menu at an old-time Chinese restaurant, it is some from Column A and some from Column B, although instead of you chowing down on some delicious Chinese grub and making goo-goo eyes at the pretty little China-doll waitress, various poisons are crammed down your throat and almost everybody dies, and it costs all your money.

And the reason I say this with such conviction is that not once in 3,000 years of governments spending more than they had, even using a fiat currency <> that can be created at will in unlimited quantities, not once has it not ended badly. Very badly.

And the worst of all is when a government creates too much fiat money, like now, and now all that money that has been created around the world has to be spent on something, driving up the price, and the people who sold that something made a profit, and then they will spend the money on something else, driving up the price of that, too.

Around and around the money goes, and pretty soon the prices of everything are so high that people can't afford to buy stuff, like gasoline and food, and then they get all aggravated and panicky, and they will come over to my house asking me to loan them some money, piteously crying out "You're my brother! Help me!" and "You're our son! Help us!" and as I am slamming and locking the door in their faces, I yell out, "Me no speakee English! Go away!"

Experience has shown that they are not going to be satisfied with that response, nor with the explanation of why prices are so high, which I was going to give them in the form of Thomas Donlan's editorial commentary in this week's Barron's, who writes, "Bernanke told a credulous audience last week that higher oil prices were driving up the risk of inflation. This is exactly backward: Inflation has already happened. Price increases for oil and other goods are occurring now to reconcile the prices of things with the depreciated value of paper money."

Then he gets to the interesting part when he says, "The fundamental problem, however, is not paper money. It's not the long absence of a gold standard. Here and everywhere, the inflation problem is an absence of moral commitment to maintaining the value of money", and that all we need are "monetary authorities and political masters who read the markets and take action to maintain a constant value of money." Hmmmm!

Naturally intrigued, I tried this out by posing a similar situation to my wife, and asked, "Why do we need joint ownership of stuff? Let's put it all in my name and you can trust me!"

I will not describe her insulting response, but I will say that this reminds me of a past conversation with Junior Mogambo Ranger (JMR) Phil S. where I took that very stance. Phil, on the other hand, would have none of it, and easily countered my argument with the fact that to trust politicians and bankers to "do the right thing" and not buy votes, or make as much profit, by creating too much money, is too much to ask, as the entire history of mankind attests, with sad story after sad, miserable story of national suffering and pandemic bankruptcy at the hands of politicians and bankers doing exactly that!

And that is why the Founding Fathers, while writing the Constitution, scratched out the part where it said "Bankers and politicians will please refrain from destroying a fiat money by over-issuance", and instead revised it to read that it was, instead, illegal to "make anything but gold and silver coin a tender in payment of debts", and for the sole reason is that it is impossible to increase the money by printing gold!

Byron W. King at Whiskey and Gunpowder <> surprisingly says that even adhering to the Constitutional requirement of gold and silver as money to achieve a stable money supply may be old-fashioned, as "Oil is now serving as the source of global monetary discipline that gold used to perform. Oil supplies are severely constrained. Dollar supplies aren't. In the era of Bretton Woods, the global monetary system followed the golden rule: 'He who has the gold makes the rules.' But today, the 'rule of crude' dominates."

So you want to know who is buying and stockpiling oil? Easy: "That's why today's oil buyers, like the late French President Charles de Gaulle, are so eager to exchange their dollars for a tangible asset. De Gaulle shipped France's dollar reserves across the Atlantic in exchange for gold bars from the vaults of Fort Knox. Today oil traders are shipping their excess dollars to the New York Mercantile Exchange in exchange for barrels of oil. The motives are identical. Only the underlying monetary asset has changed."

How interesting: Trying to preserve buying power with advanced purchases of oil! Sort of like buying gold and silver, but messier. Stick with silver and gold. You'll be glad you did, as your motives are the same as everybody else's, and nothing will preserve your buying power like precious metals! Whee!

Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it.



Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications.