As many pseudo-economists among us know, money is just a piece of paper we hold in our wallet or more likely a number in a computer hard disk. They are worth what we think they are worth because there are enough people around who believe the same. Of course, paper money has its advantages. The most obvious is efficiency in trade exchange. Which explains why it is 'so popular' and every government wants to issue its own currency. But it takes no brain for one to also appreciate that it takes little to issue a piece of paper or to buy a hard disk. In fact, it costs the US government a few cents to issue a Dollar. Of course, it would be lesser for all those who counterfeit it.
And so, for centuries men in high places of power had been building up and taking advantage of this phenomenon known as Seignorage. The logic is that as long as there are enough fools out there that believe that my dollar is really worth a dollar, I can continue printing and exchanging one piece of my paper for a real tangible product. (For example, if the shoemaker from China is stupid enough to sell me his shoe for a piece of my paper so be it. Who do you think is the happier?) But the more credible ones learnt over time that you can bluff everyone some of the time but not forever (for money to work you cannot bluff only some people, hor, must be able to bluff most or all of them.). So, to ‘backup’ their credibility they used to commit themselves to delivering a specified amount of something of real tangible value like gold every time a holder of their paper wishes to ‘call on them’. But it is part of human greed that all of them will try to stretch their luck a bit (hey, that’s easy ‘money’ man, no need to really work) and issue more than they can really backup with real gold, and hope only a few really calls on them. Of course, if you have a big stick and is in desperation you can always whack any small guy that tries to do so and avoid delivering your gold (so Saddam, now do you really want your oil paid in Euro?).
And it is with this knowledge that there are some smart men that will think of ways to make money out of these greedy issuers. And so we hear of stories where certain people will induce and help governments to print more and more money for a fee or a share of the money issued. But these fellas are smarter that we folks. Very soon after that, they actually call on the issuers for the gold they are committed to deliver (while we all stupidly held on to the papers or our bank statements) and they tuck away those gold bars in a safe somewhere and wait for the day when that currency crashes due to ‘over expansion of money supply’ (economic jargon, but it essentially means ‘when the bluff gets too big’). These people are generally known as ‘financiers’ or ‘bankers’ (everything has to sound nice to customers, otherwise how to sell them crap?).
Quiz 1: where is 80% of the world’s known gold reserves held? Wonder why and how it got there?
Clue 1: No, not Fort Knox you old parrot. Fort Knox is for issuer type people. If you haven’t figured out by now, issuer types tend to lose gold not gather them!
Clue 2: In WWII the Japanese Army has special units specially assigned to seek out the richest families in occupied territories to get at their gold, the colonialists demanded gold for the opium they sold to the Chinese and they give themselves long term mining contracts before they leave their colonies (Iraq, does this sound like Bush-it again?)
Quiz 2: who are the top issuers and financiers in history?
Quiz 3: when do you know people are beginning to call their bluffs?
Hey, I don’t have answers to these questions. I am just another conspiracy theorist selling another quack! Only fools will buy such stories....
p.s. but if you do think I may have a point and has an idea on what to do to protect my wealth, pls let me know. I am still scratching my head on this one. Thanks in advance.
Background to Seignorage
The economic phenomenon Seignorage is well known to many economists but not all. I first learnt about Seignorage from an economist friend only a few years ago during the Asian Financial Crisis (which started in 1997 just after HK’s return to China) when the US seems to be booming along happily. Those were the times when I saw on TV the supreme arrogance of the IMF chief standing hands folded and over the shoulders of Suharto as the latter signed away whatever he had to in a desperate attempt to stay in power, of a certain cowboy US vice president Al Gore insulting his Malaysian hosts in front of their international guests, and of the international media (international only because enough fools around the globe parrot after them) gleefully writing about the end of the Asian miracle and their widespread KKN (Korrupsi, Kolusi, Nepostisme in Indon) as the cause of the crisis.
At that time, the Dow Jones was trading at an average P/E ratio of 40 while the Asian markets were trading below 10! My simpleton logic told me that people should be buying into Asia instead of running away. Dumbfounded, I decided to ask an economist friend of mine (Liew holds a master degree on Economics from the US, was my classmate from primary one and worked for a stock broking house at that time but later joined the Monetary Authority of Singapore).
His reply was that the Americans were different and their management are disciplined enough to cut losses when an investment gets bad. That’s why people are willing to pay a ‘premium’ for their stocks.
I disagreed with him and said that I do not believe the Americans are any different from anyone else in the world (I had the advantage of having worked in JP Morgan and saw how they operated). I suspect it has something to do with the US Dollar which gave them an advantage but could not explain it.
Later when I read that the Arabs and other countries contributed US$90 billion to the US for the Iraq war of 1990 for weapons that the US had already paid for, and realized that the Asian Crisis happened a few months after HK’s return to China (property prices in HK dropped 60% then thanks to the British policies before that), I also wondered if they also figured in the picture.
At that point in time I sensed that Liew saw that I might have a point but he also could not explain it. But a few months later he sent me an e-mail on the topic of ‘seignorage’ and said that that may be what I was looking for. Obviously he was bothered enough by my views to do some research.
However, that incident bothered me. It seemed that even supposedly ‘experts’ on economics may not really understand how the world really works. The reasons that Liew gave me initially were based on the concept of ‘some people are better than others, that’s why their stock markets commands better value’. Although it was clearly a subjective and somewhat ‘racist’ view, even professional economists like Liew seem happy enough to use it to explain something they clearly do not understand. To be fair, they were just following after the international media which were then saying that the Asian Crisis was caused by KKN.
That to me was a real life example of the power of the media and the folly of the human race. Thinking outside the box and independent thoughts are indeed rare.
1 comment:
http://slate.msn.com/id/2111504/
Euro Trash
Even drug dealers are giving up on the dollar.
By Daniel Gross
Posted Tuesday, Dec. 28, 2004, at 3:20 PM PT
Currency of choice
The dollar's decline against the euro shows no sign of ending. Clearly, currency traders have made a long-term judgment about the relative value of the currencies of the Old and New Worlds. That sounds bad enough. But now there are signs that we're losing some of the most devoted fans of the greenback: drug dealers, Russian oligarchs, and black-market traffickers of all kinds.
James Grant, of Grant's Interest Rate Observer, whose animadversions about the dollar and other subjects are as droll as they are pricey, highlighted the latest indignities to befall the once-mighty dollar in his Dec. 17 issue. (Alas, it's not available on the Web.)
People the world over—central banks, companies, and individuals—like to hold the dollar. It's stable, liquid, easily convertible, and never goes out of style. The dollar is popular in the official global economy—the money that changes hands through computer terminals, checks, and wire transfers. But it has also been extremely popular in the world's vast cash economy. For American tourists, Chinese smugglers, Ukrainian arms dealers, and African dictators, the dollar has long been the currency of choice. The fearful and shady, those who subsist on tourism, and residents of countries with unstable domestic currencies love the greenback. Citing Federal Reserve estimates, Grant writes that "between 55% and 70% of the $703 billion of U.S. currency outstanding circulates outside the 50 states."
The United States benefits greatly from the fact that the dollar is the world's reserve currency. Many of the $100 bills circulating throughout the globe are essentially loans that we never have to pay back. Americans use them to buy goods, services, or other currencies. But many of those bills never return to our shores to be redeemed for anything we make or produce. Instead, they stay under mattresses in Bogotá, circulate in Iraq, and are stashed in bank accounts around the world.
But among a subset of global cash connoisseurs, the dollar is losing ground to the euro—and it has nothing to do with concerns over U.S. multilateralism. First, the euro zone has been expanding with the addition of new countries and the continued integration between Eastern and Western Europe. So there are simply more people who accept and use euros now. Since 2002, the growth rate of euros in circulation has far outpaced that of dollars. Add in the euro's recent strength against the dollar, and the case for Eastern Europeans and euro-neighbors to use euros becomes more compelling. In the 1990s, the dollar was remarkably popular in Russia, where residents had long been deprived of coveted Western imports. But between January 2002 and August 2004, Grant notes, the percentage of private Russian currency transactions employing the dollar fell from 94.1 percent to 84 percent while the euro's share rose from nothing to about 15 percent.
Finally, in the past two years, euros have also become easier to carry, store, and hide than dollars. Generally, the largest denomination of U.S. currency readily available is the $100 bill. But in the past two years, the European Central Bank has started to print 200-euro and 500-euro bills. These larger bills thus allow for the concentration of wealth in smaller packages. At today's rates, a 500-euro note is worth $682.
So if you wanted to, say, hide cash by swallowing it temporarily, euros would the obvious (and more comfortable) way to go. And indeed, as Grant notes, in October a drug mule traveling from Spain to Colombia was found to have an unexpected form of contraband in his stomach: $197,000 in euro notes. The same month, Fidel Castro declared that the dollar, which is tolerated as a means for Cuban-Americans to support their relatives in Cuba, was officially currency non grata and that the euro was most welcome.
For most products, losing international drug cartels and corrupt Third World dictators as customers would seem to be a desirable outcome. But these guys represent part of our long-standing and faithful base. If you think pundits are fretting about the slumping dollar now, just imagine what might happen if we start to lose the arms dealers.
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