from 3 November:
Palm Beach Country Florida: Turmoil the day after the
election continued widespread. Name calling between
various factions was at a high level. Courts were bracing
for the onslaught of lawyers representing several groups.
Ida Been, a retiree from New Jersey, was incensed, "Can
they never get it right!" Having to be restrained
from striking Ms. Been was a red-faced man, loudly proclaiming,
"The whole thing was a reprehensible mess."
Yes, it was. Ms. Been's poll watcher team was to get
the Krispy Kremes and the attacking gentleman's to get
the Dunkin Donuts. The orders had been reversed. As
for the voting, a replay of the Millennium Bug seemed
This article is the second in a series on moneyization.
We do recommend reading the previous one for background
understanding, available usually in the archives of
most sites. The shifting tide of global money is the
focus of our attention. Just as anyone fishing needs
to be aware of the tides, so does the investor. Otherwise,
the "portfolio ship" may be dashed on the
rocks by the rising and falling of the tidal wave of
monies. In this one we also define moneyization and
further expand your knowledge base.
Understanding and knowledge are the two most powerful
tools of investment. A well-worn metaphor is that of
providing the fish or teaching someone to fish. Anyone
can scour the internet for that occasional investment
idea that works, or that greater number which do not
succeed. More important are the skills to recognize
and perceive the meaning of shifts in the world of money.
Recognition of the danger in the twin deficits of the
U.S., the federal and the trade, was the first learning
step. The second learning step is knowing of the massive
shift, on a global basis, of money that is beginning.
Before proceeding on to our assignment, let us reflect
on the current situation. The format for the following
table is intentional. One of our goals is to get more
investors to think in ounces and Euros, rather than
the old-fashioned custom of U.S. dollars. Several reasons
exist for wanting to adapt your way of looking at the
money world. This table is formatted in the way the
world will come to look at relative values of monies,
in Gold and Euros.
||Valued In Gold(oz.)
Note: For those with a math mind, we may have to quote
currencies in Gold Oz. 10-3. That may be the currency
measure of the future.
For no good economic nor financial reason, around the
world more than 150 different national monies exist(Cohen,2004
). Since only one is really required to conduct all
business done on earth, the number is certainly excessive.
Agreement on quoting of money values even makes little
sense. At the bottom right of page C-1 of The Wall Street
Journal is a snapshot of the money values. The Euro
is quoted in dollars. The yen is quoted in number of
yen per dollar. British pounds are quoted in dollars.
Canadian dollars are quoted in Canadian dollars per
dollar. And for those with a memory, the Swiss franc
no longer merits front page coverage as presumably hard
currencies are no longer relevant in the financial era.
This plethora of national monies means that one may
need to be exchanged for that of another if transactions
for goods and services are to occur. Not content to
let a system exist to simply provide for required economic
transactions, the financial community felt compelled
to transform it into an opportunity to trade. Some trading
does serve economic purposes, providing liquidity and
pricing information. Most trading simply generates fee
income for brokers, and provides the opportunity to
have periods of great success(manias) alternating with
Trading of national monies, foreign currency trading
or forex, is now a massive undertaking. A recent estimate
puts the value of trading on foreign exchange markets
at US$1.9 trillion per day(World,2004). Add to that
another trillion dollars worth that trade over the counter,
and the world is shaking the dice with almost three
trillion dollars of transactions in forex each day.
Equity and bond markets are side shows compared to such
activity. And remember, most of this money churning
adds no value to the economic well being of the world.
Little doubt exists that trading of this size is not
necessary to facilitate the daily exchange of goods
and services in the world. Most of this activity is
done by bright, young college graduates with massive
computers running questionable mathematical algorithms
that have been back tested over the past twenty minutes
of trading. Perhaps knowing that the financial security
of the world rests each night on the success of this
combination makes you sleep well. Others, though, might
have a more mixed reaction.(Remember the space mission
that failed cause part of the team was working in metric
and the other in English measurement?)
When the meltdown in this trading frenzy occurs is no
longer the question. Rather than waiting for the big
meltdown, people around the world have reacted to the
long series of mini meltdowns that have already occurred.
In the previous article the dismal record of national
monies was reviewed. On a broad basis, national monies
have been a good way to destroy wealth for a lot of
people. But, people learn from their mistakes. Around
the world a massive shift of wealth away from weak currencies
Investors, individuals and businesses will not hold
national monies that develop weakness. Any currency,
including the much worshiped U.S. dollar, will not be
retained if doubt develops over the likelihood of it
serving as a store of value. These groups have been
burned too many times. What's the old saying about fool
Around the world a move to concentrating wealth in
fewer national monies is readily evident. The work of
the International Monetary Fund on 85 countries suggests
that a significant move on the part of consumers and
businesses out of their home monies has already happened.
At the end of 2001, on average 34% of bank deposits
in these countries were denominated in foreign monies
rather than their home money(De Nicolo´, Honhohan
& Ize, 2003). Roughly a third of bank deposits have
been shifted to presumably more stable monies. That
level of a shift is far from insignificant for not included
is either foreign currency in their pockets or bank
deposits in a foreign nation. Further,
this situation demonstrates both a willingness and an
ability to shift easily among national monies.
The early research literature on these shifts, desiring
to gain an understanding of this development, is filled
with attempts to empirically measure the extent to which
citizens of certain countries had shifted from domestic
money to foreign money. These efforts, largely due to
measurement problems, were not adequate or especially
successful. Early discussions referred to this phenomenon
as dollarization, as much of the early identification
of the phenomenon was in Latin America. Motivations
for these studies were generally the money related economic
problems of individual countries. Citizens in these
countries had been buffeted by inflation, devaluation,
depreciation, confiscation, nationalization, and politicians
for decades. The barrel of a rifle could not get them
to hold their home money.
Hysteresis became a common term in the literature to
describe the phenomenon observed in that research. Inflation
rates and past depreciation in the exchange rate were
largely used as explanatory variables for dollarization.
However, when inflation moderated and currencies regained
relative stability, the citizens did not shift back
to the domestic money(Tandon & Wang,2003;Helleiner,2003).
The term, hysteresis, was borrowed from the physical
sciences as it describes a situation that continues
despite the removal of the forces causing the initial
From this point on though, the term "moneyization"
will be used rather than "dollarization."
The latter term implies that dollars are the money being
substituted for the domestic money. Such is not always
the case, as British pounds, Swiss francs, Japanese
yen and now the Euro are acceptable foreign monies in
many places as substitutes for local money. Obviously
these monies are not dollars which makes the term inappropriate.
In a similar vein, use of the term "currency"
is not appropriate for only a portion of the world's
money supply is in the form of currency. Substitution
has increasingly taken place in the form of monies and
financial assets, rather than currency.
Perhaps the best effort to quantify the level of moneyization
has been done by and for the International Monetary
Fund, and was referenced above. Concern for these financial
developments stems from the impact on a country's ability
to conduct monetary policy. A consequence of moneyization
is that the value of a country's money is likely to
be more volatile on foreign exchange markets(Berge &
Corbo,2003). This condition has serious implications
for the future volatility of the U.S. dollar, but that
will have to wait for a future article. Many national
monies, including perhaps the U.S. dollar, are caught
in a circular flow of negative forces that suggests
they are more likely to become something viewed in a
museum rather than in the wallet.
The move by individuals and businesses to stronger
monies, or de facto moneyization, is only one aspect
of the process. De juro moneyization is also occurring.
Table I summarizes the move by nations to replace their
national monies with others. This table is certainly
not complete in present form for many of the neighboring
countries to the European Union are moving either to
the Euro, pegging to the Euro, or experiencing de facto
Euroization. While certainly somewhere a nation created
a new national money, not since the dissolution of the
former Soviet Union have monies been created in any
number. Please note that this effort certainly does
not attempt to be the definitive source of national
money creation and destruction.
vote is not going well for the U.S. dollar!
Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary,
Malta, Poland, Slovakia, Slovenia
Belgium, Finland, France, Germany, Greece, Ireland,
Italy, Luxembourg, Netherlands, Portugal, Spain
of joining EU. Euro adoption date to be determined.
(European Central Bank,2004a) 2International
Of the 15 nations originally joining the European Union,
the naturally stubborn United Kingdom and Sweden do
not use the Euro. Denmark pegs its currency to the Euro(European
Central Bank,2004b). The alignment of nations for entry
into the European Union has grown in recent times. As
these nations bring their internal policies into conformity
with EU standards the dates for adoption of the Euro
will be determined.
Decisions are being made by periphery countries on
the future character of their national monies. Additionally,
a de facto shift to the Euro is observed in these countries.
Russia is the second largest holder of U.S. dollars
in the world(Oomes,2003). A reasonable expectation would
be that Russia may experience a shift to the Euro purely
for trade and travel related reasons given the close
proximity to the European Union and the volume of trade
and travel between the EU and Russia. The impact of
such a large shift in money ownership could prove interesting.
An important learning step is that the citizens of all
the nations in or near the European Union are already,
or will be, selling dollars and buying Euros.
Thus far we have observed a string of massive currency
crises over the years that have cost people hundreds
of billions of dollars of wealth. People have responded
by moving out of the questionable monies created by
their own nation. Governments too have been busy, dumping
their national monies, moving to the Euro as a better
alternative. The world of tomorrow will be one of fewer
national monies. The survivors will be those monies
in which investors have confidence and in which they
want to be invested. The next step to consider is the
coming clash of two major currencies, the dollar and
the Euro. Momentum, it will be argued, is on the side
of the Euro. And besides, who in the world does not
already own too many dollars?
Dollar denominated investors and businesses need to
recognize that the era of one great currency is passing.
In that transition era, financial turmoil is likely.
The dollar's value will face growing risk of rapid depreciation.
In terms of what we learned in the last article, the
Gold price of the dollar will go down. That development
pushes up the dollar price of Gold. From a strategic
or longer term standpoint, a shift to Gold by dollar
denominated investors and businesses is essential for
Genius is not required to recognize that
a Gold Super Cycle is unfolding, likely to carry it
well over US$1,200. Once though an investor recognizes
the need to own Gold, picking the day to buy is the
next decision. That task is the hard one. Tactical considerations
are always tougher than long-term, strategic decisions.
As the graph below, from my weekly TRADING THOUGHTS,
suggests, learning to buy low is possible. Just remember,
do not buy when prices are up and enthusiasm is high
on any given day. And finally, if one does not buy Gold
one can not benefit from the Super Cycle. Trading a
few stocks once or twice will not get it.
References for Your Personal Research
Berge, A. & Borensztenin, E.R.(2003). The Pros and
Cons of Dollarization, In Salvatore, D., Deon, J.W.
& Willett, T.D.(Eds.), The Dollarization Debate(pp.72-101).
New York: Oxford University Press.
Cohen, B. J.(2004). The Future of Money. Princeton:
Princeton University Press.
Corbo, V.(2003). Is It Time for a Common Currency for
the Americas?. In Salvatore, D., Deon, J.W. & Willett,
T.D.(Eds.), The Dollarization Debate(pp.102-110). New
York: Oxford University Press.
De Nicolo´, G., Honhohan, P. and Ize, H.(2003).
Dollarization of the Banking System: Good or Bad?(IMF
Working Paper 146). Washington, D.C.: International
European Central Bank(2004a). Frequently Asked Questions:
EU Enlargement and Economic and Monetary Union(EMU).
Retrieved August 10, 2004 from http://www.ecb.int/ecb/
European Central Bank(2004b). ECB: The Euro Area. Retrieved
August 19, 2004 from http://www.ecb.int/bc/intro/html/map.en.html
Helleiner, E.(2003). The Making of National Money. Ithaca:
Cornell University Press.
Hysteresis.(1993). In Random House Unabridged Dictionary(2nd
ed.). New York: Random House
International Monetary Fund(2004).Retrieved from http://www.imf.org/external/np/sec/ pn/2003/pn0390.htm
Oomes, N.(2003). Network Externalities and Dollarization
Hysteresis: The Case of Russia(IMF Working Paper 96).
Washington, D.C.: International Monetary Fund.
Tandon, A. & Wang, Y.(2003). Confidence in Domestic
Money and Currency Substitution. Economic Inquiry,41,407-419.
Retrieved March 25, 2004 from ABI/Inform Complete.
World forex trading hits record.(2004, Sep 29). The
Financial Times, p.1.
Ned W. Schmidt, CFA,CEBS
Click to email me: email@example.com
The VALUE VIEW GOLD REPORT is available
by regular mail or email. By regular mail, an annual
subscription is $99, domestic or foreign. TRADING THOUGHTS
is weekly, minimum 45 times per year, and distributed
by e-mail. Email subscribers to THE VALUE VIEW GOLD
REPORT receive TRADING THOUGHTS as part of a $99 e-mail
package subscription to THE VALUE VIEW GOLD REPORT.
TRADING THOUGHT is not available by regular mail. To
receive TRADING THOUGHTS along with THE VALUE VIEW GOLD
REPORT click on link below or send your check or credit
card information to: Schmidt Management Company, PO
Box 846, Boca Raton FL 33429. Fax orders can be sent
to 215-243-7161. Our phone number to place an order
is 561-447-0874. Under no circumstance will subscriptions
be cancelled or refunds issued after the receipt of
your first issue.
Ned W. Schmidt,CFA,CEBS
is publisher of THE VALUE VIEW GOLD REPORT. That report
now includes a weekly message, TRADING THOUGHTS, to
help investors identify timely points for buying Gold
and Silver. You can join him for the Gold Super Cycle
His monumental report, "$1,265 GOLD", which
has now been read in 12 countries, has 255 pages and
98 graphs, is available at www.amazon.com
or from the author. Ned welcomes your comments and questions.
His mission in life is to rescue investors from the
abyss of financial assets and the coming collapse of
the U.S. dollar. He can be contacted at firstname.lastname@example.org.