The discovery of currency was a major revolution in the economic capacity of human beings.
Currency enabled people for the first time to have something that could be a store of value and a measure of value.
Let me give you an example: A date farmer produces an amount of dates. He needs a cow, but, there are not available for the time being, so he sells his dates and receives some money in the form of gold or silver coins of standard weight and content which stores the value of his dates until such time as he can exchange it for a cow.
This concept allowed a great development of trade across vast areas of the earth. People were able to carry relatively small amounts of gold or silver to exchange for goods all across the globe.
Nations and states vied with one another to mint coins of gold and silver of standard size and weight.
Much later the Chinese were the first to conceive and implement paper notes to be used in lieu of actual gold or silver coins.
This was later adopted by Europeans and helped expand their economic growth because it facilitated trade by doing away with the need to carry large amounts of relatively heavy gold or silver coins replacing them instead with slips of paper.
This concept then spread to the rest of the world where it is now the norm.
It is important to point out that for centuries paper money represented a fixed amount of gold or silver.
For example, the US dollar had a statement printed on it to the effect that “the US Treasury promises to pay the bearer of this note one silver dollar”.
This meant that paper money represented a real and known quantity of gold or silver actually in the treasury of the state issuing the said paper money and, in theory, was capable of being paid to the bearer of the paper notes.
This state of affairs lasted until the US convened a conference for all the major industrial powers in a place called Bretton Woods in the US.
In that conference the US convinced all the other powers of the benefits that would accrue to them if they abandoned the gold standard.
The US needed to do that because their gold reserves had been severely depleted by the war in Vietnam and were no longer able to cover the dollars they printed with the gold in their reserves.
From then on the US dollar dropped the promise to pay the bearer a silver dollar; instead it now promises to pay “one dollar” so it will merely replace the paper dollar with another paper dollar. This meant that the paper currency of a state no longer was backed by a real amount of gold or silver, but rather, it was backed by the economy of that state.
This proved a great benefit to advanced industrial countries like the US who could then print vast amounts of paper money backed by the power of their industry, commerce and scientific advances, as well as their formidable military strength.
The problem is that this enormous increase in paper money led to an equally enormous growth in conspicuous consumption on the part of the US and a huge growth in military expenditure far beyond the actual capacity of their economy to sustain.
This led to greater and greater indebtedness of the US financed essentially by the savings of the world.
The US now has absorbed up to 80 percent of global savings in both public and private debt.
Currency today reflects not only the true strength of an economy, but, equally importantly it represents the faith other people have in its policies. These policies are not only its economic policies, but, the sum total of its political, industrial, educational policies and so forth.
In short, currency prices today are expressions of faith.
The US today seems to serve one function — that of the consumer of everything the rest of the world is able to produce. However, it pays for all this consumption by borrowing everything from the rest of the world.
There is no doubt, that to the casual observer, the policies being pursued by the US are a source of great anxiety and incertitude; its irresponsible plunging into depths of debt hitherto unheard of and its chaotic and incomprehensible militarism disturb the world and are leading to a growing loss of faith in the US.
This loss of faith manifests itself in the slow unraveling of the dollar’s value against other currencies.
It is important to note that most monetary authorities around the world and finance professional in the private sector (bankers, fund managers, etc.) are trying very hard to calm people down and reassure them that everything will be all right.
They are like the crew of a sinking ocean liner who are desperately trying to prevent a panic among the passengers while they quietly prepare the life rafts that will bear them away — leaving the unfortunate passengers to get better acquainted with sea turtles, sharks and other denizens of the ocean deep.
The upshot of this long article is to warn you all of a coming financial tsunami that is going to affect the whole world.
This is a consequence of irresponsibility and grave policy errors by all the world financial bodies, public and private. This crisis will be financial rather than economic and will probably not last very long. I believe, however, that it will be devastating to those who are unprepared.
I would like, therefore, to offer some advice that may be of use to you to help you tide over the crisis period until the world economy rebalanced again.
Try over the next few years to increase your holdings as much as possible with real assets.
Real assets are those with real intrinsic value not dependant on financial manipulation. Examples are gold, silver, real estate (especially productive real estate such as agricultural land) and stocks in public utilities such as electricity and water.
Do not regard this as an investment policy; rather, it is a floatation device for when the ship finally sinks.
