February 3, 2009
A recent story reported about counterfeit £1 coins out of London made me reflect upon the enormous irony of the story given that our current economic woes have been caused by an unsound global fiat currency system in which all currency is backed by nothing. It made me think, “Is there really any difference between “real” and “fake” money?” Though mass production of counterfeit £1 coins in the UK has been a problem for years now, apparently the counterfeiters have stepped up their game in recent months. At the end of September, 2008, the Royal Mint reported that random samples of £1 coins in the UK determined that 1 out of every 50 £1 coins was fake, an astonishingly large percent. However, the most recent assay conducted by the Royal Mint at 31 locations in the UK has determined that 1 out of every 40 £1 coins is fake, with the total amount of estimated fake £1 coins in circulation in the UK now at 37.5 million pieces.
Currently, all major Central Banks have massively increased their monetary base by hundreds of billions of dollars in relatively short periods of time, with some increases in the trillions of dollars. In order to be able to do so, it is obvious that there are no limiting inputs in the “production” of money other than printing presses, paper, ink and manpower. The news of the surge in counterfeit £1 coins has come on the heels of a recent announcement by the British Government that they will revoke a 165-year old law that requires them to publicly account for their balance sheet on a weekly basis. Among the most vociferous complaints registered against the repeal of a key section of this 1844 banking law was the following sigh of resignation: “there is nothing to stop an unreported and unmonitored flooding of the money market by the undisciplined use of the printing presses.” With the Bank of England cloaking its printing of the Pound Sterling in secrecy, the only logical conclusion of this action is that further debasement of the Pound Sterling is on the BOE’s agenda for 2009, even though their most recent actions created a rapid and steep 30% drop in value (against a basket of international currencies) at the end of 2008.
However, the Bank of England is not the only Central Bank to conclude that running the printing presses overtime to pull their domestic economies out of trouble is the preferred solution even though this “solution” will have some serious blowback consequences in the future. The Bank of Japan, the European Central Bank and the US Federal Reserve have all demonstrated a proclivity towards massive expansions of the monetary base, an action that will eventually lead to massive expansions in monetary supply and an ultimate race to the bottom in currency debasement. So with Central Banks literally taking actions that will eventually destroy the purchasing power of all major currencies, it is no stretch of the imagination to conclude that the “real money” they are currently printing will soon have far more deleterious effects on the purchasing power of said money than the comparatively small percentages of “counterfeit money” that leak into the system.
To truly understand the flaws of our current unsound monetary system, let’s consider other counterfeit markets in which the real item always truly has significantly more intrinsic value than the fake item. Consider a fake Louis Vuitton handbag versus the real good. The fake item will undoubtedly be made of inferior material and may fall apart quickly due to poor stitching and production values. Or consider a fake gold coin that is really a steel coin covered with a thin layer of 18 karat gold. The real 99.99% pure, fine troy ounce gold coin will be worth 100 times more in value. Or consider a fake Patek Philippe Calibre 89 watch versus the real thing. The real Patek Philippe Calibre 89 watch has 1728 unique parts that account for its precision timekeeping. A fake one will most likely not have more than 30 to 50 unique parts. In every instance, the intrinsic value of the real item is worth many multiples more than the fake item.
Now consider a fake £1 coin or a fake $100 US dollar bill versus the real thing. The real £1 coin is a mix of copper, zinc, and nickel. So usually is the fake, or if it is made out of a different mix of metals, the intrinsic value is still nearly equivalent. A fake $100 US dollar bill is printed on paper and ink. A real $100 US dollar bill is printed on special US Treasury cotton paper embedded with red and blue fibers, but other than that, the intrinsic value of both the fake and real $100 bill is just the cost of paper and ink. The only difference is that the Central Bank that prints the real one tells you that you can use it to buy goods whereas the fake one is not good for buying anything.
But there was a time this wasn’t true. There was a time when Kennedy US silver half dollars were 90% silver, and that is why mint condition 1964 Kennedy half dollars sell for $11 a piece today. The intrinsic value of this coin would be worth much more than a “counterfeit” Kennedy half dollar with zero silver content. The 1964 Kennedy US silver half dollar that was taken out of circulation was sound money. There was also a time in the 1800’s when US dollars could be converted to gold. During this time, there was an enormous difference between the intrinsic value of this paper money that could be converted to gold and “counterfeit” paper money that was backed by nothing. In fact, if one were to ask what action is likely to debase the value of all paper currencies more, the action of Central Banks today or the action of all money counterfeiters in the world, one would have to conclude that the answer, by an overwhelming margin, is the action of Central Banks.
With great irony, counterfeiters are performing a huge public service to many currency speculators by scaring them away from currencies that will suffer severe debasement from the actions of Central Banks that print “real” money. When Central Banks create new “real” money out of thin air, one would be wise to view the introduction of this new “real” money into our system with as much, if not more, suspicion as one would view counterfeit money. True, this introduction of new “real” money needs to make the transition from our monetary base into our monetary supply to create rapid inflation, but it is my firm belief that this transition is coming. In February, 2000 US Congressional testimony, then US Federal Reserve Chairman Alan Greenspan commented, “We believe if you have a debased currency you will have a debased economy. As I’ve said earlier, the difficulty is defining what money truly is.” Likewise, if you have a debased economy, the culprit often is a debased currency. And this is exactly our problem today. All major global currencies have an intrinsic value of virtually nothing and can only be exchanged for another major fiat currency with an intrinsic value of virtually nothing.
[tags]dollar crisis, unsound money, dollar crash, counterfeit money, counterfeit one pound coins, global economic crisis[/tags]