Suffering The Profanity Of Plentiful Cheap Money

September 7, 2019 at 3:00 pm.

Authored by MN Gordon via EconomicPrism.com,

What if the savings in your bank account lost 55 percent of its value over the last 12 months? Would you be somewhat peeved? Would you transfer some of your savings to another currency?

That was the favored approach in Argentina – where the official inflation rate’s 55 percent. But no more. On September 2, President Mauricio Macri resorted to capital controls to preserve the central bank’s foreign exchange reserves and prop up the peso. What gives?

Just fifteen months ago Macri secured the biggest bailout in the International Monetary Fund’s history. Now Argentina’s delaying payment to its creditors and is rapidly approaching what will be its third sovereign default this century. On top of that, Macri’s Peronist rival Alberto Fernández will likely take his job come election day in October.

Alas, for Macri and his countrymen, a painful lesson is being exacted. You can’t solve a debt problem with more debt. Eventually the currency buckles and you’re left with two poisons to pick from: inflation or default. With Macri’s latest capital controls scheme he’s choosing to take swigs of both.

Make of Argentina’s woes what you will. Central bankers in the United States are also guilty of programs of mass money debasement. They may have a bigger economy to better mask their malice. But despite what the MMT delusionals say the day of reckoning always arrives – and always at the worst possible time.

Indeed, the U.S. dollar hasn’t lost 55 percent of its value over the last 12 months. However, according to the Bureau of Labor Statistics’ own inflation calculator, the dollar’s lost 55 percent of its value since 1988. In other words, it takes $1 to purchase what $0.45 could buy during President Reagan’s last year in office.

No doubt, a 55 percent loss spread out over 30 years is much better than a rapid devaluation over 12 months. But that doesn’t mean it isn’t highway robbery. And we all know the unofficially price inflation rate is much, much higher. What to make of it?

To answer this question – and many others – we’ll take a gander back nearly 300 years…to a near forgotten episode of mischief and mayhem…

Bad Money

William Wood was an English retailer of iron goods. Some years were better for business than others. But somewhere in his dealings he, like Lockheed Martin and many others, stumbled upon a very important secret. That having friends in high places makes all the difference. Thus, in 1722, the English Parliament granted him a patent to coin copper money for use in Ireland.

The Irish, without question, found Wood’s patent to be unadulterated malarkey. For one, the Irish Parliament didn’t approve it. Second, it opened the Irish currency up to debasement. Third, this was yet another instance of political and economic exploitation by the English.

Jonathan Swift, the noted political satirist, wrote a series of pamphlets to unite his fellow Irishmen and defend the constitutional and financial independence of the Irish kingdom. Swift wrote under the pseudonym M.B. Drapier – hence the seven pamphlets are collectively called The Drapier’s Letters.

Swift’s grievance with Wood wasn’t that there wouldn’t be enough money; but rather, there would be too much of it – and that it would be of inferior quality. Swift recognized that a flood of new lower grade copper coins into the Irish economy would drive the more valuable silver coins out of circulation. Plus, since the coins wouldn’t be minted under Irish authority, there would be no way for the Irish to control their quantity, and rampant price inflation would follow.

This is known as Gresham’s Law, which commonly stated is: “Bad money drives out good.” More specifically, if a circulating currency consisting of both “good” and “bad” money, with both forms required to be accepted at equal value under legal tender law, the currency quickly becomes dominated by the “bad” money.

This was seen in the United States in 1965 when the quarter was first minted from a copper-nickel composition instead of silver. Leading up to this, the Federal Reserve had inflated the U.S. currency so that the silver content of a quarter was more valuable than a quarter dollar. True to Gresham’s law, pre-1965 silver based quarters rapidly disappeared from circulation.

Today, if you want a pre-1965 quarter, you can buy one from a coin shop for about $3.50. Consequently, while still of the same face value, the quarter’s lost over 92 percent of its actual value since 1965.