German-born theoretical physicist, Albert Einstein's definition of relativity is based solidly on the relationships or values determined by the laws of nature. Often we find the qualities of relativity extend to other parts of our lives and the universe as well such as economics. While mankind has developed certain ways to temporarily mask and confuse the truth, be assured that certain relationships should be considered the norm, history has shown time and time again that after we deviate from the so-called norm things tend to revert back to what has been established as a baseline. This is important because we exist in a world where the state of real value is always dependent on, or determined by a commodity or an item's relationship to something else such as supply or demand.
It is important to remember the global currency system world leaders have created is fairly closed and value shifts back and forth between the four major currencies that dominate the system with little ability to escape. The key issue here is the term "escape" in that wealth flowing into these "paper symbols of wealth also known as fiat money" often finds resistance into converting back into tangible assets. This results in wealth flowing into these "paper symbols of wealth" and when it does it tends to remain their far longer than it should because of the negatives of investing in tangible assets. These include drawbacks such as high "entry or exit" fees, costly maintenance or the risk such real-world assets will be damaged and ravaged by time or trends. This is why we find that money or currencies have become the way most people tend to place a value on tangible items.
|Factors Influencing Where To Place Wealth|
Currencies have become a major danger zone going forward, it is important to consider just four currencies make up the bulk of world reserve holdings so it is logical to look for a relationship between them to determine relative value. Assuming all other factors remain the same we then find that if the central banks controlling these currencies move in lockstep their values to each other should remain "relatively" constant moving within certain limits. Overall that has been the case even if a person were to argue otherwise and point to moves occurring over years. A generally accepted fact is a great deal of the value of "cash" is derived from a very important quality which is frequently forgotten, having cash which is relatively stable compared to many commodities and tangible assets translates into liquidity and flexibility to exploit opportunities. This means the holder of cash has an effective option to purchase more volatile assets if and when they become cheap. Thus, a willingness to hold cash has often been the simplest way to take advantage of markets in flux.
|Four Major Currencies Dominate The System|
The benefit of a currency system that accommodates trade easily allowing the exchange of goods and services has come to outweigh reality and truth in value discovery. As pointed out above, holding tangible assets has drawbacks which most people find difficult, confining, or somewhat limiting. The fact that tangible assets carry the negative attribute or quality of having to be insured, maintained, or at risk of being denigrated by time or trends tends to reinforce the illusion currencies and paper assets are more desirable and stable than they really are. Remember that fiat currencies do not have any intrinsic worth or extrinsic backing but are held aloft by faith their respective central bank or nation will control their value.
In many ways, currency can be considered a commodity and problems develop when governments and central banks overreach and break the link of trust and faith between their currency and its users. Central banks don't want us to see they have designed and put in place a false market that is more or less "fixed within limits" and not a rapidly "self-adjusting" system. All is well until it becomes clear to the masses they have been deceiving as to the real value of our currency. When the bond of faith is broken major conflict arises and central banks are punished as their fiat money is shunned and drops in value. The "master key" to our currency system is stability. Those in power have created the myth the currency balance can be maintained and that no currency of a developed nation can fail but history shows this not to be true.
All this is important because the "perceived value" of money and currencies holds great sway over what something is worth and its value. Recent claims that a false economy has disrupted the forces of true price discovery make this very important if you believe we will eventually convert or return to the norms of the past. I continue to believe the primary reason that inflation is not more prevalent is that society is pouring such a large percentage of wealth into intangible products or goods, this is because physical assets are often difficult to protect and oversee. This imbalance is a red flag that a readjustment period may soon occur. If faith drops in these intangible "promises" and wealth suddenly shifts into tangible goods seeking a safe haven inflation could soar.
|Fiat Currency Growth Has Surged (click to enlarge)|
As we have seen from the economic crisis of 2008 and following many other unsettling developments legal actions can continue to drag on for years. While the legal system ponders solutions chaos can assault markets. Major disruptions can result from major shifts in value and even more so in the world today where derivatives lurk just out of sight waiting to wreak havoc on our far too fragile economic system. One fact remains front and center and that is 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 many of the super-rich insiders will again be the big winners.
Feeding into this mix are opinions such as Jeremy Grantham's recent take on bubbles and his thoughts that we may only revert partway to what we consider the norm and that may be over many years. While he does not rule out the possibility the market may move upward, overall his view of what lies ahead is not all that jolly as he concedes that 15% to 25% bear markets can always occur. He also states that the probable "mean-reverting" paths he envisions will not bode well for pension funds at others looking out towards a 20-year horizon. While I value Grantham's opinion It is possible he is forced to understates the risk before us because of the constraints put upon him as a pillar of the old-school establishment.
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