Fiat

Not that

Not that

As I frequently muse upon the shape of the curve, one almost certainly oncoming contour is the eventual cessation of the US dollar as the world’s reserve currency. Whether this is a positive or not depends on perspective.  Some wail in lament at the prospect, others exalt in a worse-is-better hope, and many assume “fiat currency” must be a little-known negro point guard. For these latter, a brief primer before we become an opiner.

Fiat Currency
From Investopedia: Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith. Fiat is the Latin word for “it shall be.”

Because fiat money is not linked to physical reserves, it risks becoming worthless due to hyperinflation. If people lose faith in a nation’s paper currency, like the dollar bill, the money will no longer hold any value.

Most modern paper currencies are fiat currencies, have no intrinsic value and are used solely as a means of payment. Historically, governments would mint coins out of a physical commodity such as gold or silver, or would print paper money that could be redeemed for a set amount of physical commodity. Fiat money is inconvertible and cannot be redeemed. Fiat money rose to prominence in the 20th century, specifically after the collapse of the Bretton Woods system in 1971, when the United States ceased to allow the conversion of the dollar into gold.

As an aside, the 1971 dollar/gold decoupling was a temporary measure. One to be reversed surely in the 13th Nixon administration following the 2016 election. Here is a video of the speech.

“I have Directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold.”

Here is what the guy on the dollar thought of that idea:
“Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.”
–George Washington, in letter to J. Bowen, Rhode Island, Jan. 9, 1787

And while pixels surpassing the national debt can be devoted to this subject, I am more interested in peering toward the approaching turn. But first…

Reserve Currency
The US dollar is the medium for a huge percentage of international trade as well as the denomination of commodity exchange. If you are a person in one country who wants something from a person in another country, you will need dollars. Corporations need dollars. Countries need dollars. And because of this need, the dollar is far stronger than the underlying US economy would support natively. But this reserve status does not endure. And some are already contemplating it.

Reserve%20Currency%20Status

All of which is a lengthy preamble to answering the question of…so what? Would losing reserve status trigger a system crash disrupting the Kakistocracy and thus offer opportunity for a societal reset? I thought this table was instructive in addressing that:

el2011-25-3

First note that losing reserve status would equate to an extraordinary devaluation of the dollar. Speculating on the degree of which is likely where this analysis will fall upon the shoals. Though it would be very substantial in any event. And it would also not be experienced consistently across the spending continuum. Dollars would have to be converted into relatively stronger currencies (or new reserve currency) when making purchases abroad, and so imported goods are where the pain would be most acute.

In the table above import content by category is found in the second column on the right.  And at 13.9% America’s is…surprisingly small.  Though that is because services represent 2/3 of all spending.  And as any senatorial dominatrix can attest…services are performed locally.  The largest import content areas, and thus those most sensitive to dollar devaluation are in order…

Energy: 34%

Clothing: 34%

Household Equipment: 28%

Cars: 27%

Food is at the overall average of 13.9%.

Obviously these areas are of hardly equal elasticity.  I could remain in textiles for the rest of my life without another additional purchase.  Not so much true for food and energy.  Though without adjusting for these effects, and regarded holistically, a 50% global dollar devaluation would immediately manifest as $5/gallon gas, 1/3 higher clothing and household item costs, a lot fewer imported car sales (remember Camrys are made in Kentucky), and a sizeable increase in food inflation.

Going places and eating things will become much more dear.

And though my cheerful, optimistic demeanor makes me loath to dash the hopes for a depression with cold water, I just don’t see a ragnarok from this event alone. America doesn’t appear to import enough for a devaluation to catalyze the type of hard reset that many of its proponents envision.  And further there is an “up” side depending on where one’s perception of that direction lies.  The export business would become dramatically more lucrative in America.  Businesses involved in the industries below would prosper immediately as their products under a defenestrated dollar became much cheaper for purchase abroad.

  1. Machinery: $213,108,199,000 (13.5% of total exports)
  2. Electronic equipment: $165,604,449,000 (10.5%)
  3. Mineral fuels including oil: $148,426,743,000 (9.4%)
  4. Vehicles excluding trains and streetcars: $133,640,479,000 (8.5%)
  5. Aircraft and spacecraft: $115,380,944,000 (7.3%)
  6. Optical, technical and medical apparatus: $84,281,276,000 (5.3%)
  7. Pearls, precious stones, precious metals and coins: $72,830,232,000 (4.6%)
  8. Plastics: $60,836,970,000 (3.9%)
  9. Organic chemicals: $46,510,903,000 (2.9%)
  10. Pharmaceutical products: $39,742,717,000 (2.5%)

The demand driven by increased affordability to foreigners–those outside the country–of these items would lead to significant growth induced hiring of Americans that could to some extent defray the burden of more expensive equipment, fuel, and food.  More good jobs to pay for the higher costs.  But of course I am an extremist and that is comedy.  Employing actual founding Americans would be un-american, anti-semitic, and Hindu-phobic.  That’s why we have H1B visas and a long open border with Mexico…so we don’t resort to hateful hiring.

And so the actual result of ending reserve status of the dollar will be marginally more impoverished whites, more profitable exporting corporations, and more immis to do the many new jobs Americans won’t.

We’re going to need a bigger devaluation.

3 thoughts on “Fiat

  1. IOW, we really are doing better than we think. After all, 1M+ people are voting with their feet for the USA every year. The dollar is the best house in a bad neighborhood.

    So, “best” case, the rich stay rich and people like you and I manage to keep ourselves useful to large companies. We will definitely be living smaller (I already am) but absent some personal disaster, nothing that’s going to put us in the street. Further down the food chain though, I don’t see how people avoid getting hammered, between automation and equalizing of wages with the rest of the world’s. Worst case, there’s another Minsky moment, and too many desperate, angry people, and not enough productive activity left to support more money-printing. We’ll see.

  2. Fiat currency is a wonderful idea that can unleash the latent power in an economy powered by a high IQ population. But it requires an honest government that does not look upon it’s own population as sheep to be fleeced. So I bought gold and silver as a hedge. Shame really.

    The value a currency ought to posses lies in the productivity of the people that create it, and the goods and services that they are willing to exchange for it.

    Rise Caucasia.

    Caucasia could have horseshit as a currency but I would exchange my gold for shit to live there.

  3. Loss of reserve currency status would also likely cause a sharp spike in US interest rates, as many foreign countries invest in US government bonds in hopes of earning whatever pittance the Fed permits them on their dollar holdings. Without a need for dollars the oil sheiks and Chinese oligarchs would likely race to dump much of these holdings, depressing prices and spiking yields. The result would be to dramatically worsen the fiscal picture for USG (especially states and cities, which can’t just print money to pay their debts) overnight, and probably spark another housing crash into the bargain. I suspect a 3-4% overnight surge in the yield curve would be enough to force Chicago to lay off a big part of its public workforce, with results I’m sure you can predict. We’d also seem instantaneous crises in Social Security and Medicare funding. Europe has given us a lot of good examples of what happens when you try to cut down public employee pensions and entitlement programs; as you say it’s hard to know exactly what the results will be, but I think large-scale rioting in major cities is a pretty safe prediction.

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