8/16/2011 Portland, Oregon – Pop in your mints…
The markets seem to be enjoying a relative calm after the record setting volatility they experienced last week. It turns out that one would have hit a home run by buying the VIX as the debt ceiling debate was dragging on. We’ll keep that recommendation tucked away for a later date as the conditions which created last week’s tremors still exist and continue to intensify.
A headline caught our eye today, from Bloomberg: German, French leaders propose European ‘economic government’
This caught our eye because it is further confirmation of what we have long suspected here at The Mint. Specifically that giving up the right to coin currency (seigniorage) essentially means giving up a nation’s sovereignty. Any sort of puppet government may be set up to give the appearance of sovereignty. They may even give the people the right to vote for their own government. No matter how the government is chosen, the puppet will move in accordance with the way its strings are pulled.
In practice, the monetary authority becomes the sovereign.
We have further speculated that the current sovereign debt crisis in Europe would serve to erode the sovereignty of the governments being bailed out. It now appears that even wise users of the Euro, such as Germany and the Netherlands, will have to give up the illusion of budgetary authority to save the currency. Think of it as guilt by association.
What happens next in Europe will be the true test of the Euro’s ability to exist. Can Greeks and Spaniards manage finances to German standards? Can they alter their production and consumption patterns to the German standard? If the answer is yes, then we will have confirmation that a shared fiat currency (and by default fiscal policy) is all that it takes to break down borders and achieve world peace.
If the answer is no, then the Euro, the latest entrant in a long line of doomed experiments in fiat currencies is…doomed.
The leaders in the Eurozone are dealing with a problem that has no solution. What is unfortunate is that they are taking a considerable amount of time and other people’s money in a vain attempt to solve it.
The problem is simple enough. A fiat currency, such as the Euro, is a faith based currency. One needs faith that the currency will maintain its value and continue to be accepted in trade. The bedrock of this currency faith is that credits must be created which are repayable in the currency. This gives people, who naturally want to improve their circumstances by attending to the most urgently felt need, the incentive to productively trade in the currency.
If the currency is something tangible and can be produced in sufficient quantities, this is all that is required for something to be accepted as currency in society. Production and circulation of the currency would occur organically as the needs of the economy dictated.
- The Euro’s faith based currency is doomed
On the other hand, if the currency is a fiat, faith based currency, such as the Euro, much heinous effort is required for it to be accepted as currency. The first requirement is a decree that all taxes must be remitted in the fiat currency. This is what Jesus referred to when he told the spies of the Chief Priests to “give to Caesar what is Caesar’s and give to the Lord what is the Lord.”
Once it is decreed that taxes will be remitted in the fiat currency, the fiat currency must be produced in sufficient quantities without the guidance of the free market signals (known today as monetary policy). Finally, the system of taxation and redistribution of the tax revenue (known today as fiscal policy) must be perceived as either inconsequential or fair in order for those subjected to the fiat currency regime to continue to assent to using the currency.
The Eurozone’s incurable ailment is that its single monetary policy cannot respond to the multitude of fiscal policies that are operating in the currency zone. If the currency were tangible, production in the economy would properly adjust and fiscal policy would be less pervasive and dictated by reality. But because the Euro is simply a faith based currency, fiscal and monetary policy have no chance of harmonizing themselves.
The Euro is doomed and its handlers must at least suspect it by now. Their only hope is to quickly form a unified fiscal government in the Eurozone which is what in theory they are doing. In practice this may be nearly impossible.
The US Dollar faces a similar problem which has been slower to manifest itself because its problem is on a global scale.
As Jesus said, the fiat authority only owns the coins, scraps of paper, or electronic bits that consist of money. True ownership of real things, and especially people, ultimately is the Lord’s.
How important this simple teaching will be in the years to come.
Stay tuned, Trust Jesus, and Stay Fresh!
Key Indicators for August 16, 2011
Copper Price per Lb: $3.99
Oil Price per Barrel: $87.14
Corn Price per Bushel: $7.14
10 Yr US Treasury Bond: 2.21%
FED Target Rate: 0.10% TIGHTENING? NOT!
Gold Price Per Ounce: $1,787 PERMANENT UNCERTAINTY
MINT Perceived Target Rate*: 2.00%
Unemployment Rate: 9.1%
Inflation Rate (CPI): -0.2%!!! PULL OUT THE HELICOPTERS!!!
Dow Jones Industrial Average: 11,406 TO THE MOON!!!
M1 Monetary Base: $2,140,300,000,000 RED ALERT!!!
M2 Monetary Base: $9,404,000,000,000 YIKES!!!!!!!