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The End Of Money.

What's implicit there is that if the dynamics that "saved" the fiat regime were to reverse course, well then the untethered system could face an existential crisis.

Ok so recently, Deutsche Bank’s Jim Reid decided it was about time someone sat down and penned a 94-page epic tome on the history of financial crises. So that’s what he did.

And as part of that War & Peace-ish manifesto, Reid also made a list of the “possible candidates” for the next crisis.

That note was easily one of the better pieces of research we’ve seen this year and although it’s impossible to do it justice with blog posts, we did endeavor to pen two missives based on short excerpts. Those two posts can be found here:

In that latter post, we talked at length about the extent to which an unanchored system (i.e. a regime not tethered to a universally accepted, finite store of value like a precious metal) is a double-edged sword. It provides the flexibility to respond to crises, but that flexibility involves adopting polices that will invariably sow the seeds for the next meltdown. The entire thing hinges on the extent to which the response to the previous crisis can be unwound (i.e. the countercyclical ammo replenished) by the time the excesses (the “boom”) that response created lead to the next bust.

But there’s a problem with that. It can’t work forever because implicit in the arrangement is that the booms and busts will get larger over time. At some point the bust will be so large that it overwhelms our ability to lean against it with the tools afforded us by an untethered system. Or, perhaps more accurately, it ensures that our attempts to counter busts will become increasingly absurd until we’re forced to resort to some iteration of helicopter money. Allow us to excerpt a few passages from our previous piece, because dammit, that post was pretty well-written. Here’s what we said:

While we can observe an increased frequency of crises in a world that’s abandoned the gold standard and while we can draw common sense conclusions from that observation, there’s still the old “correlation doesn’t always equal causation” problem to contend with. That is, “yes” it is likely that the lack of discipline which invariably accompanies an unanchored system contributes directly to the incidence of busts. But it is certain that a constrained system lacks the flexibility to respond to busts when they occur. So if even one crisis out of a dozen isn’t attributable to the adoption of an unanchored system (i.e. a system not based on gold), then by tethering our fate to an archaic concept we may be unnecessarily ensuring a complete collapse from which there is no recovery. Hence Deutsche’s “double edged sword” metaphor.

The worry now however, is that in this latest iteration of responding to a crisis with intervention and money creation, we have exhausted our capacity to leverage (figuratively and literally) the flexibility afforded by an unanchored system to rescue us from the abyss. There’s a cruel irony inherent in that. Each time we respond to a panic with the tools afforded us by a system based not on some finite store of value, but rather based solely on the “full faith and credit” of governments and their printing presses, we almost always exacerbate (in one way or another) the imbalances that led to the very crisis to which we’re responding. The inevitable result: a rolling boom-bust cycle that snowballs with each turn, ensuring that each new crisis and each crisis response is even more spectacular than the last.

The only way this can go on in perpetuity is if we assume there is no limit on the extent to which we can leverage (again, both figuratively and literally) the flexibility inherent in an unanchored (i.e. a fiat-based) system. If the busts keep getting bigger, it will of course be painful and harrowing, but if the capacity of the fiat system to respond with ever larger money printing programs is limitless, then theoretically we will just boom-bust our way along forever until finally we’re all losing everything once every six months only to have central bankers make us all millionaires the very next day by topping up our bank accounts with newly-created money.

There’s something conspicuously missing from our analysis as presented in those excerpts. Specifically, a mention of the impact structural disinflation has on the ability of an unanchored system to respond.

“The basic premise is that a fiat currency system – the likes of which we’ve had since 1971 – is inherently unstable and prone to high inflation all other things being equal,” the above-mentioned Jim Reid writes, in a brand new piece expanding on his original work. He continues: “However, for the current system to have survived this long perhaps we’ve needed a huge offsetting disinflationary shock.

And there it is. The missing piece of the puzzle that allows an inherently ridiculous system to persist. A disinflationary shock serves to short-circuit the mechanism that, in the absence of a countervailing force, would invariably translate unchecked credit creation and thin-air-money-printing into hyperinflation.

To be sure, Reid brings this up in his original post, but the argument is the backbone of the new piece. Here’s Jim:

In “The Next Financial Crisis” we suggested how China’s fairly sudden integration into the global economy at the end of the 1970s and a very favourable once-in-a-lifetime shift in demographics from around 1980 onwards could have contributed to the modern boom/bust culture that has made financial crises more regular in recent decades. The argument is based around a view that a positive labour supply shock from China and developed countries’ demographics between 1980-2015 has allowed inflation to be controlled externally as the surge in the global labour supply at a time of rapid globalisation has suppressed wages. With inflation controlled externally it has allowed governments and central banks the luxury of responding to every crisis and shock with more leverage, loose policy and latterly more and more money printing. Its not usually this easy as inflation would have normally increased with such stimulus and credit creation. It could be argued that this external disinflation shock has perhaps ‘saved’ fiat currencies after the runaway inflation of the 1970s in the immediate aftermath of the collapse of the Bretton Woods quasi Gold Standard from 1971 onwards.

What’s implicit there is that if the dynamics that “saved” the fiat regime were to reverse course, well then the untethered system could face an existential crisis.

But before he gets to that, Reid reminds you that contrary to the popular narrative, inflation is not “low” by historical standards. To wit:

Figure 1 shows our global median inflation index back over 800 years and then isolates the period post 1900 where inflation exploded relative to long-term history.


Figure 2 then shows this in year-on-year terms and as can be seen, in the 700 years before the twentieth century inflation and deflation were near equal bedfellows with only a gradual upward creep in inflation as new precious metals were mined or governments periodically punched holes in existing coins and thus slightly debasing the currency.


The message: this is relative. “As someone that has studied economic history it always amuses me to hear that we live in times of extremely low inflation when history would suggest these are relatively high inflation times,” Reid writes, delivering what is probably an uncomfortable reality check to anyone who isn’t steeped in eight centuries of econ data. Here’s how Reid explains our current situation:

What has happened though is that we saw a 35 year disinflationary period start in 1980 that took inflation down from the extremes at the start of that decade to what we think will be the secular lows around the middle of this decade.

Ok, so getting back to the question of whether we can continue to depend on the disinflationary shock that’s allowed the current system to persist (and that gives us the flexibility to respond to crises with inflationary policies), Reid’s answer is “perhaps not.”

“We think that the effective global labour force exploded from around 1980 due to natural global demographics and China opening up its economy to the outside world at the end of the 1970s,” Reid writes, adding that “in the two decades we have data for prior to 1980, real wage growth was much higher than the post 1980-period.”


Hopefully you can see where this is going. The idea here is that if the supply of labor falls and growth stays on trend, wage pressures rise. And while that’s great for workers in terms of helping to mitigate the disparity between capital and labor, it could imperil the fiat system. Here’s Reid:

The problem for the current global monetary system is that over the last 45 years it has relied on governments and central banks being able to turn on the stimulus spigots at the drop of a hat when a crisis has come. This has enabled each crisis to be dealt with via increasing leverage rather than creative destruction type policies. For this to be possible you’ve needed an offset to such stimulus to prevent such policies being inflationary. Fortunately (or unfortunately if you believe it’s an inherently unstable equilibrium) the external global downward pressure on labour costs ensured that this has happened. So what would happen to the global monetary system if labour costs started to reverse their 35 year trend? If central banks had their current mandates of keeping inflation around 2% then they would be duty bound to tighten policy more often regardless of the external environment. However, such an outcome is probably unrealistic given how much debt there is at a global level.

And so, inevitably, central banks would need to act to ensure that yields didn’t skyrocket (do quote Donald Trump: “DO SOMETHING!”). That would mean still more QE, and around we go until all vestiges of control are lost.

Then comes the end game:

Eventually, it’s possible that inflation becomes more and more uncontrollable and the era of fiat currencies looks vulnerable as people lose faith in paper money. Once the value of debt has been eroded the debate would likely be live as to what replaces fiat currencies as surely the backlash would be severe against the system that allowed us to get to such a situation.

Reid goes further to lay out the counter arguments, not the least of which is of course that technology represents a powerful source of structural deflation. That entire argument can be summed up in one visual:


But at the end of the day, the question for us is this: what does it say about a system when the feasibility of that system rests entirely on there being a disinflationary offset that allows something inherently dubious (fiat money) to remain some semblance of viable?

Something to think about.


And no, this post should not be seen as an endorsement of Bitcoin or as a call to buy physical gold, because although everything said above might leave you inclined to think that we’re believers in cryptocurrencies and shiny yellow metal as “stores of value”, regular readers know that’s not our position.





13 comments on “The End Of Money.

  1. Good piece. I think it matters less whether gold and bitcoin are actually a dubious hedge against the downfall of fiat than what the balance of sentiment is for the issue. That’s just Trading 101 (or maybe 102). The reality, whatever it is, matters in the long run but we’re also all dead in the long run.

  2. Since neither Bitcoin nor gold have any utility (as Buffet says), they too are just as perspective driven as any fiat currency. Of course Bitcoin is dependent on a functional internet and enabling an or at least distracted governments. When paper fiat currency fails, Bitcoin and gold will be just as useless.

  3. If not cryptocurrency or gold, then where to in fiat collapse?

  4. Actually, Buffet hasn’t liked gold as an investment because it has no yield, which isn’t the same thing as having no utility.

    Of course gold has utility. It has highly efficient conductive properties and the ability to favorably impress women. Fiat has no utility unless your government forces it on everyone as legal means of exchange and people are confident in that. If the confidence disappears, then the fiat loses value and usefulness, and people turn to something else.

    Historically, people have turned to gold and other tangible assets to preserve value in a crisis. Thus, history shows that gold can be an effective hedge against government.

    Whether bitcoin has any real value doesn’t matter so long as there is confidence in it. In that regard, it’s the same as fiat.

    • Irb – Buffet is correct. Gold has no significant utility. It has no use value (not unlike BitCoin.) Less than 10% of the market for gold is as a functional industrial commodity. (Same reason gold technically is not a commodity – due to its lack of significant utility). Most, if not all of that 10% has other material replacements. Consequently and relatively, gold has no real critical utility.

      If all the gold on the planet was sucked up by an alien space based vacuum cleaner overnight – absolutely nothing would happen to human life of a critical or limiting nature. Well – beyond a few rappers flipping out regarding the loss of their bling.

      • Whether or not gold has utility, it has value based on its market price for millennia.

        As for gold’s utility, yes it’s indeed mostly used in just jewellery and “bling”. And indeed gold has no broad utility like a commodity, but it does have some tremendous, specialized utility as I suggested before in very specialized applications that demand superb electrical conductive properties combined with corrosion resistance. For example, a tiny amount of gold is used in your smart mobile device and larger amounts are used in computers and particularly super-computers, without which there’d be no quantum computing and AI which is the way of the future. So gold does have some value and utility, albeit narrow. Otherwise it’d cost $0 per oz instead of almost $1300 per oz.

        The end of money, yes for fiat paper. But the end of gold, probably not. Gold has been a form of money for millennia.

  5. H, Hope you answer Jay’s question!

  6. I’m not H obviously, but I’ve spent a few years thinking about this very question because it relates indirectly to my professional interests regarding population bottlenecks related to finite critical resources in humans, and specifically how to “hedge” against things that might cause a human population collapse. An global economic collapse (That results in no adequate method of exchange, beyond barter.) in which the global major fiat currencies become substantially valueless, or even just significantly less valuable, certainly qualifies as a potential human population collapse initiator.

    To answer the question “How to hedge against an economic crisis” you have to load your crystal ball(s) with the expected scenarios/results of a collapsed economic system. It doesn’t hurt to examine historic examples of similar collapses – though none are of adequate scale and sufficiently comparable technical and economic contexts to provide much other than very general insights.

    First you have to restrict your examination to the exact type of collapse that you expect to address. For example, are we talking about a major national collapse (in our growing global economy a rapidly diminishing probability ) or the much more probable global economic collapse where interconnected/inter-dependent national economies collapse internally and externally (i.e. the US import and China’s export economies – both of which are over borrowed in debt).

    Basically, anything that interrupts the use of the US’s national cash flow/exchange function and that last much more than a week or two could collapse not only the economy, but the nations civil and infrastructure as well. Once the ability of any company or institution loses its ability to pay its employees with a functional currency (one that doesn’t change the average workers purchase abilities too drastically) the national distribution of critical resources (food, energy, water, shelter, communications, normal law enforcement, health care and others) all slow and come to a stop very rapidly. People who aren’t being paid simply don’t go to work. Sure they might give it a couple of weeks to see if things will return to normal, but then they first leave to find new paid work – or more self-preserving activities.

    Considering that the average American family has less than a weeks worth of groceries on their shelves, their local stores only a little more – assuming they can access and continue to distribute from their regional warehouses and that those warehouses are receiving products from suppliers. Things will head “south” a lot faster than most folks and especially the disaster preparedness folks think possible if the US dollar has little to no value.

    What modern analysts don’t get is that more than 85% plus population work force was agriculture based at the time of The Great Depression. Additionally, most families had family gardens at least part of the year. Meaning that most folks had direct access to local food production and while they may have been many hungry – few starved. It is also interesting to note and refer back to the fact that gold did not stop or help the masses out in the The Great Depression. And while gold was confiscated late in The Great Depression, it wasn’t gold or FDR that ended The Great Depression. Arguably perhaps, it was Adolf Hitler that ended both the Post WWI depression in German and The Great Depression in the US – as he brought about WWII and the vast increases in US military and war materials export trade to Europe. Today less than 3% of the population /work force is involved in agriculture. That agriculture is regionally product optimized. For most US citizens, the family garden is near non-existent or largely ornamental. Again, the average American family has access to less than a weeks food supply if they are unable to go to and or buy food from their local suppliers. While “armies travel on their stomachs” – nations and civilizations simply dissolve on hunger.

    So, essentially today in hedging – it boils down to determining specifically what you are hedging against. You might be hedging for an economic downturn (Savings and Loan Crisis – late 1980s, The Dot.Com bubble late 90s-2000, The Credit Default Crisis 2005-8). Assuming the fiat currency does not collapse and that critical finite resource distribution is not interrupted – small denomination gold may have local exchange value over paper currency. However, since the markets will not collapse – just as in previous downturns investing in critical finite resource based and or undervalued financially secure equities is also a functional and profitable hedge. That is – assuming what your are actually hedging against turns out to be an initial Stage 1. of a slow moving, but growing major global economic collapse.

    Cryptocurrencies may serve individuals well to hedge their personal risk exposure considering their portability advantages. There are scenarios wherein one must flee local risks. However, cryptocurrencies are very sensitive to economic systemic risk related failure. One of the first casualties of critical finite resource distribution interruption is energy. It is very probable that the grid and the internet will collapse as unpaid (unpaid with functional cash value) workers fail to show up and maintain production and service in any extended economic crisis and or collapse.

    Millennials whom have had internet access the majority of their lives – are the most at-risk of underestimating the physical and mechanical frailties of the grid, the internet and the services it provides – and especially concerning cryptocurrency risks. Cryptocurrencies at their most basic level represent a pure gamble that the grid and internet access – is forever.

    Consequently, BitCoin has very low probability in providing a durable hedge other than in minor inflation moves and or personal economic crises. A good hedge has to be accessible and simple. Cryptocurrencis are neither and especially in a major economic and or physical crisis. What’s the appropriate millennial colloquial? “Not, feeling me, Bro? Ask yourself how many BitCoin transactions do you think are going on in Puerto Rico today – and that’s just a minor regional collapse.

    I think my conclusion and a lot of others is that the ultimate hedge against a major economic collapse is to:

    First invest in a serious and well considered study and understanding of what a true economic collapse would be like. There are lots of treatises on the subject on the internet – some good ones, lots of terrible ones. You’ll have to drag out those forgotten critical thinking skills as you read them. You should also consider that economic collapses don’t necessarily have to come directly from the collapse of a major fiat currency. Pandemics, wars, major EMP events (coronal discharges or weaponized) and anything else that interrupts the grid and modern electronic financial transactions – put the global economy at serious risk – and us.

    Unfortunately, most of the estimated 3 million plus (probably a lot more) – Preppers in the US (a new target market for people selling ebook how-to publications, online survival materials and or “impenetrable” bunker designs) in the US – don’t have a realistic expectation/clue or accurate vision of what an economic collapse means or would look like. Consequently, they have little idea of how to prepare and or “hedge” it. What to do?
    Basically we should all be prepared for regional natural disasters – and those should include situations that cause extended critical resource deprivation, possible rampant civil disorder and an absence of law enforcement.

    Second and consequently perhaps the most valuable hedge against an economic collapse is to invest in your ability to adapt to your specific local risks in and economic collapse. The conditions following a major collapse are unimaginably larger than you or your ability to “hunker your bunker” or at your brother-in-laws hunting camp. Consider that anyone with visible resources and or the defenses of those resources – is generally going to be a shit magnet for those that have lost everything and nothing further to lose in taking it away from those protecting it.

    If you envision your government and the National Guard stepping in and keeping things in order, you aren’t envisioning a real economic collapse. Likewise you are not envisioning the appropriate extended time table (the rest of your life) that it most likely operating on. This year we have had the opportunity to see how the government has struggled to deal with at least four relatively simultaneous regional disasters and still on-going recoveries. (I read something this week about FEMA still not having paid all the claims on Hurricane Sandy from 20012). Imagine our government’s ability to deal with simultaneous nation wide disaster – especially under the “moron” leadership of the Trump Administration.

    Third and finally – at least in this context, you need to understand that hedging against a global economic collapse is not unlike like “Investing in an irrational market (You know the quote.) is investing in a market that can remain irrational – longer than you can remain solvent.” Hedging for the End of the World – is an investment in the most irrational market of all.

    In summary, any hedge has to be against specific types and levels of risks. You have to decide if are you hedging against cyclical financial and economic downturns – or, a complete global economic collapse and all of the additional potential risks of a complete civilization collapse that come with it – pandemics, invasions/wars, nuclear attacks/wars/ nuclear power plant melt downs from maintenance failures, evolving feudal societies and warlords and the removal of most modern technical advances from your life. The most valuable hedge investment against a global economic collapse – is what humans have done best as a species. The ability to avoid risks, make a plan on the fly – and adapt.

    Hedge accordingly.

    • “What modern analysts don’t get is that more than 85% plus population work force was agriculture based at the time of The Great Depression.”
      All nations have strategic food reserves for at least a year.

    • Good post. Some of my suggestions for hedging:…
      (Not an investment recommendation; due your own DD)

      1) In a significant but *not* systemic economic breakdown (eg, 2008-09):

      Cash, bitcoin(?), avoid debt.

      2) A major economic breakdown (eg:, 1920’s inflation in Germany or 1930’s depression in US):

      Gold coins, silver coins, pre-1965 silver dimes & quarters.
      Note: Don’t hold metal in an ETF, brokerage, fund or bank as these will fail. So will clearing houses.
      Note: For the same reason, don’t hold stocks in any form except physical share certificates or via direct registration with the company; ETF’s are a no-no.

      3) A massive collapse of the global economy and/or society (eg., the dark ages):

      Life skills, self-sufficiency, adaptability, pre-existing local network of people with diverse skills. Perhaps some widely-recognized metal coins, but in a severe crisis even these won’t buy food, which becomes the most prized asset.

      4) Mad max era:

      Gun & bullets for administration to self and loved ones.

      Bickering about politics or trump accomplishes nothing, because government will be irrelevant to improving our individual circumstances in a crisis of the magnitude that’s probably ahead. Anyway, with few exceptions globally, the politicians are there for themselves, not us.

  7. Bump… H’s important post above is a wake-up call. So indeed per Durwood, “hedge accordingly”.

    Cyclical technical analysis and the fundamentals show that a financial/economic crisis is building which will be more severe than 2008, so now is the time to prepare. The stage is set.. The longer it takes to unravel, the worse it’ll be (policymakers should have let the system flush & reset after 2008 rather than intervene and build bigger imbalances which will cause an even bigger reaction/crisis later). Just sayin.

  8. Related to this topic and how to prepare for the potential turbulence ahead in the economy & society, there’s a free website from Chris Martenson called Peak Prosperity to help you find your way. Chris practices what he preaches, having ditched his executive job and fancy digs in the swanky NYC suburbs of Connecticut for a rural home in Massachusetts where he and his family live self-sufficiently.

    The emphasis is on self-reliance, adaptability, sustainability and resilience like Durwood describes above. These are skills that will help you regardless of whether or not the bad times arrive. The site provides free info, videos, forums, meet-up groups around the world and more.

    I’m in no way connected with it, but I’ve seen him on RealVision and he seems enlightened and helpful, particularly relevant to this thread and some member posts above. Here’s where you can start:

    Good luck and I hope that helps someone.

  9. Provocative article — re Jim Reid’s comments, my own thinking about the past thirty five years is that it had to do with both the collapse of the gold-dollar linked Bretton Woods System, and more importantly, the deregulation and liberalization of finance that followed. His argument (based on your telling) makes it sound as if a return to sound money would correct matters — I do not think so. What makes more sense to me, and what I think it inevitable, is a rethinking of what finance does in the economy — it has lost its way over the past decades. An interesting argument is to be had over these points….and certainly it is difficult to dispel the notion that our fiat currency may not last…….

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