The real danger of a meltdown in fiat currencies

 

I've said a lot over the years about the perils of fiat currency, the danger of the immense debt "overhang" to the US economy, and similar issues.  I'm hardly alone in that:  we've read a great deal from other commentators in these pages, saying much the same thing.  However, the inflation of the past few years has reinforced and re-emphasized the message, and highlighted the real danger to the world economy at this point.

Mark Jeftovic puts it in context.

We are witnessing a flight out of fiat, accompanied by a distinct twinge of “financial nihilism”, a phrase once coined by podcaster Demetri Kofinas.

While there may be no name for the global monetary system on which the world runs today, Russell Napier’s “Non-System” if you will, there is a term for the terminal phase we are in, and the entire world is in it.

Once again, it comes from the Germans – who gave us “Notgeld” (“emergency money”), from the Weimar chapter in history when cities and towns issued their own scrip in an effort to escape the ravages of hyper-inflation; this one is “Katastrophenhausse” – literally “Catastrophic boom”.

It was introduced into the lexicon by Ludwig Von Mises and has been popularized as “crack-up boom”.

The key characteristic of a crack-up boom is that people lose faith in money itself and scramble to convert their money into alternative assets – not because they need those assets, but because they want to get out of the currency.

This creates a self-reinforcing cycle where the increased spending drives prices higher, which causes more people to spend their money faster, driving prices even higher.

You may remember my (horrific) thought experiment analogy of the “burning balloon”:

A group of tourists embark for a hot air balloon tour in India (as I originally heard the story); just after the mooring ropes are released, the pilot sees that the canopy has caught fire and he, realizing the stakes, immediately jumps out of the gondola to safety.

However, this reduces the weight of the balloon, so its rise accelerates. The passengers who grasp what has just happened immediately follow the pilot, deftly jumping overboard while the balloon is still close enough to the ground to do so… however, that reinforces the feedback loop: the even lighter ballon is now rising faster – the lucky laggards who are next to figure it out abandon ship while they still can, which further accelerates the ascent of the fireball; however soon it will be too high to safely jump, and doom is assured for all those left aboard who did not act quickly enough.

Those are the dynamics of a hyperinflation.

Mises described it as a situation where the “masses wake up” to realize inflation isn’t temporary but rather that the currency is doomed to keep losing value. At that point there’s a rush to convert money into goods, any goods – what he called a “flight into real values.”

There's more at the link.

At present the rest of the world regards the US dollar as the best of the bad options available to them.  If they can't get gold, they get dollars.  Note that very few people trying to protect their assets rely on cryptocurrency like Bitcoin, because it's too volatile and unpredictable.  They want something they can be sure will hold its value, like gold, which has proven its worth over literally millennia.  If they can't get gold or other reliable hard assets, they go for whatever second-best option is available - and at this time, that's the US dollar.  Forget those who predict that Russian or Chinese money will be a safe haven.  How many people are falling over themselves to buy their currency?  Precious few . . .

So, the dollar's current strength is artificial, propped up by the lack of any better alternative.  However, what happens if the immense debt overhang suddenly comes crashing down?  The numbers are catastrophic in their implications.  Consider this graphic in a social media post from Mr. Jeftovic (click the image for a larger view):

In that post, he says, referring to the above image:

This is all about the denominator and it's about what we're using to denominate everything: fiat money.

Change your perspective to logarithmic mode and then look at the Y axis.

Now you're looking at the important part.

We've seen this movie before: in Zimbabwe, in Venezuela, in Yugoslavia and in Weimar Germany...

This is why "There is no top" isn't hopeium, it's a visceral understanding that our denominators - all fiat currencies - are breaking down at the same time .

Again, more at the link, and well worth reading in full.

This is my biggest worry about the current state of geopolitics.  We hear a lot of talk about how dangerous things are, that we may be closer to nuclear war than we've ever been . . . but that danger is actually secondary to what may happen if the world's fiat currencies melt down.  If world politics go to hell in a handbasket, they're going to follow.  It's as simple as that.

We live in perilous times.

Peter