Readers who remember the Cold War and the fall of the Berlin Wall find today’s renewed interest in “democratic socialism” baffling. Socialism is not a bold reimagining of society. It’s an old sugar high for voters, but bad policy.
“The first one free,” say the dealers at the podium. What comes after has a long, dismal track record: failure, repression, shortages and armed thugs.
Failed political systems are only one half of the historical cycle. Baffling, too, is the other half of the panacea: bad money. This one comes around more frequently.
Money backed by a government decree – rather than gold, silver, or another apolitical asset — loses purchasing power over time. And eventually goes away:
While world reserve currencies may last for hundreds of years, including decades as top dog, the average fiat currency lives for about a generation (Source: River)
Most fiat currencies die quickly. Some in horrific bouts of hyperinflation.
Reserve currencies last much longer.
For a time, the rest of the world needs them for trade, debt, savings and central -bank reserves. An “exorbitant privilege,” France’s finance minister under Charles de Gaulle called it.
The British pound holds the historical record of sustaining trade advantages for more than two centuries. Originally named for one pound of silver, a “quid” would be worth $1,230 if it were still backed by the metal.
The U.S. dollar has enjoyed its privileged status only since 1944, backed by gold for 27 years under Bretton Woods, then by oil for the remaining 55.
In that 82-year run, the U.S. has been able to export significant inflation to the rest of the world. Its purchasing power at home? The dollar is on a collision course with history, destined to rival the pound.
Measured against gold, the dollar has lost 87% of its purchasing power since Nixon closed the “gold window” in 1971. A dollar in 1971 would be worth $8.25 today.
Still, because the dollar is the world’s reserve currency, America can borrow more easily, run larger deficits, and export some of its inflation abroad. Foreign countries, banks and companies need dollars — among other things, to invest in the U.S. stock market — so they absorb U.S. debt and monetary excess longer than they otherwise would.
Under the last two presidents, central banks have undergone a historic, structural shift away from the U.S. dollar toward physical gold. The yellow metal has replaced the U.S. dollar and Treasurys as the largest official reserve asset for the first time since the mid-1990s.
Grey Swan members frequently ask whether we still like gold after January’s pullback.
The answer is ‘yes.’
As an investment, gold is boring when confidence is high. Stocks, real estate, technology and credit all look more exciting.
Gold becomes important when confidence in paper money and political institutions weakens. It is not someone else’s liability. It does not require a functioning government to retain value.
In the long arc of history, the dollar is losing its reserve status, even if no obvious replacement has emerged yet. China is not ready. Dollar 2.0 is not ready. Regional currencies are not ready. The dollar may remain the least-bad paper money for a while. But that does not make it sound.
Today’s Grey Swan Pro looks at an oversold small-cap resource stock with operations in North America rich in silver, copper, gold, and a key metal critical to national defense — details here.
~ Addison
P.S. Last week on Grey Swan Live!, we returned to one of our favorite themes: Argentina’s economic turnaround. While DOGE met the Washington establishment and the establishment won, Mieli’s Argentina has truly taken a chainsaw to the administrative state.
Our man on the ground, Joel Bowman, author of Notes From the End of the World, provided a key update on what’s likely to happen next in Argentina, as well as a foreign perspective on what’s happening in the U.S. ahead of the midterm elections – election integrity or not. Replay is up on the site.
