Declining Confidence in Paper Currencies

The media has been all over the Cyprus story and particularly the proposed plan to tax savings account depositors.  The proposal is based on a sliding scale of between 6-10% of the value of savings deposits. Of course what many fail to acknowledge is that over the past several years, the U.S. Federal Reserve Bank printed trillions of dollars in new currency to fund government-sponsored bailouts of companies deemed “too big tofail” by politicians and regulators. Quantitative Easing (QE) on both sides of the Atlantic has helped drive inflation and consequent devaluing of dollars and pounds in a way not too dissimilar to Cyprus.

At the same time, the media has spun this bailout as being unique because it penalized ‘foreign’ (i.e. Russian) investors as opposed to Americans or Western Europeans. Despite this, there is something about the way in which Cyprus was handled that has scared many investors and ordinary savers.  The loss of wealth seemed too ‘direct’.

A friend of mine has pointed to Cyprus as well as the currency impact of QE as a reason to seriously look at precious metal investments.  Just Google “buy silver” or “invest in gold” and we are immediately inundated with precious metal investment schemes.  I told my friend to Google “gold or silver investment scams” and see what comes up.  He’s so excited about this new ‘opportunity’ that he discovered that somehow I doubt he took my advice to do the extra research.
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My excited friend and many like him also like to cite the LIBOR scandal. He does have a point in that scandals like this do not inspire confidence in the banking system.  Of course, there are also many articles pointing to similar LIBOR-type scandals that just have yet to be disclosed.  Backin 2011, MF Global which traces its roots back to 1783 England, declared bankruptcy.  There are some who see that collapse in particular as a bad omen of things to come given the weaknesses in the global system.American Tax Singapore

So my friend is absolutely convinced that a currency collapse is imminent. But even when we weed out the obvious precious metal scams, I am still skeptical of all this excitement around gold and silver investment.  My reasons have less to do with exotic financial and economic models, than plain old common sense.  I have 3 straightforward reasons why precious metal investment will not save anyone should our fiat currencies completely collapse.

Firstly, just have a look at a television series like Revolution.  With no currency,there will be no agreed exchange medium for simple, daily transactions.  In fact economic collapse necessarily means that orderly production and distribution stalls while a replacement is agreed and reintroduced.  In that interim period of chaos, as people struggle to obtain essential goods and services (such as food and water), the usefulness of metals with no intrinsic life preserving value is dubious.

Secondly, some argue that while my first point above may be true, once things settle down, governments will have little choice but to reintroduce precious metals such as gold and silver.  While this does make sense, it is unlikely that merely possessing title to wealth today will ensure that you will continue to enjoy control over such assets in a post collapse reality.  Without economic order, legal systems also tend to fall to disorder.  Rather, what is likely to happen is that those who control the military or police will eventually gain control of wealth such as precious metals.

Thirdly, there is the historical context.  While it is true that historically, every fiat currency has eventually collapsed, what makes today different is that the U.S.Dollar is currently the world’s reserve currency.  So whereas in the past, as one country’s currency declined, another rose to replace it, today’s dollar actually backs and is inextricably linked with all other fiat currencies.  So the collapse of the dollar equals the collapse of all fiat currencies which means that any interim period of disorder would not be short.

Nevertheless, I wish my friend and anyone else, all the best in their investments.  The most important step is proper research and verification to ensure that any scheme is licensed by the appropriate regulatory bodies.


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