Sunday, October 5, 2014

Currencies Are IOUs

Glorified And Pretty IOUs
Currencies are IOUs, glorified and pretty pieces of paper printed and handed out by governments. Whether because of modern printing options or in an effort to thwart counterfeiters most of us will admit countries have raised the bar concerning the appearance of their currency. This has almost become a full blown beauty contest and taken our minds off what is really behind these pretty little tokens. A piece of paper with great power, based only on faith, they are mere promises of stored value and wealth, and the value of these promises can change in an instant. According to IMF data the US dollar is the world's most widely held reserve currency and accounts for nearly 33 per cent of global foreign exchange holdings at the end of 2013.

That ratio or share of reserves held in the American currency has been declining since 2000, when 55 per cent of the world's reserves were denominated in US dollars. IMF data also shows emerging market countries' share of reserves in "other currencies" has increased by almost 400 per cent since 2003, while that of developed nations grew 200 per cent.  This shows and confirms that while the US dollar remains supreme an erosion is well underway to reduce its impact on world finance. Below is a run down of the four currencies that comprise the bulk of these IOUs and the source of their influence.

     * The US Dollar the current world reserve currency, but it represents a country with growing
     * The Japanese Yen, currently falling, Japan has a massive amount of debt, its strength is a
        carryover from better days.
     * The Euro, a flawed currency backed by a union of mature countries with debt and failing
     * The British Pound, its strength is that it was the former world currency, it has no other.

All the above currencies appear to be issued by countries waning in economic power. Never, believe that a country cannot lower the value of its currency, this can be done by a bad investment, a currency swap, printing more money, and several other ways. This leaves little wonder as to why currencies are so open to manipulation. A country often benefits from a weak currency as it helps exports and often imposes a bit of austerity on its people by raising the cost of imports. The games central bankers are playing in supporting their own currency and the currencies of their partners, has reached a dangerous level, and may be undermining confidence in the whole system.  

While currencies are important chips in the commerce of government and the business of running a country a study of history has shown that in the past both leaders and governments have fallen with the demise of their coin. If people lose faith in this system it could just come crashing down around our ears. At a time when billions of dollars can be traded in just the blink of an eye imagine how fast things could go to hell. Unstable currency markets can be a precursor to massive shifts in value and a sudden drop in confidence. It is logical to think that in such a situation insiders would be the big winners.

Over the last several decades barriers between countries have fallen and economic systems have become more intertwined and co-dependent on one another. Sadly, since 2008 many of the really big earners are those who have benefited from the surging stock prices with much of their income coming from financial markets and gains in equities. The financial sector or what could be called the "intangible goods" part of our economy has flourished since a union of mutual need was strengthened after the crisis six years ago.

Those in power have joined with the banks to create the "Financial-Political Complex" that promotes the current financial policy and supports banks that are "too big to fail".  This is culminating in a massive growth in these IOUs and promises never before witnessed in the modern world. It has been pegged by many people in the real world and outside its control as a giant Ponzi scheme just waiting to collapse and I'm forced to agree with that assessment. When looking at the assets of the rich and many well to do people we find that much of the wealth people own is in paper and this is full of risk.

Many countries have accumulated massive debts that can only be paid off or addressed by printing more money and devaluing their currencies. This is unsustainable and little comfort should be garnered from assets or pensions being pegged to future inflation because promises can be broken and rules rewritten for what is called the greater good. The collapse of any of these currencies would most likely start with the weakest, the Yen or Euro temporary forcing wealth into the others. This would open the door for a domino reaction. A word to the wise and a word of caution, a person should not feel secure in this system based totally on confidence that has strayed into uncharted waters.

 Footnote; As always your comments are encouraged. World Central Banks have been on this murky path for a long time, please see the following posts. They deals with subjects like, when the system might start this shift, how Modern Monetary Theory has detached from reality, and how if a meltdown occurs many people will use it as a reason to adopt a new "world currency"

 Footnote #2  I plan to be moving away from the topic of currencies for the next several post because I have a backlog of about two hundred partially finished articles in the works. My recent pounding away at the vulnerability of  this stalwart of modern life is because I consider currencies as the "Trojan horse" of government weapons to fleece the average citizen of his wealth.

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