Monday, January 01, 2007

Silly article of the month

"The foremost reason is that when nations choose to eliminate their smaller coinage or degrade the metal content in their coins, it is commonly a tell-tale sign of the currency’s devaluation. To discontinue production or shift metal content would be a blatant admission of the loss of purchasing power of the dollar, and it is beneficial to hide this so as not to damage the dollar’s reputation, even if it means losing millions in minting costs.

Currently, the dollar’s position as the world’s reserve currency is very precarious. Several central banks around the world, including Russia’s, Sweden’s and Qatar’s, have announced they are reducing dollar holdings. Most recently, even China has indicated that it will reduce its dollar holdings.

The fact that pennies and nickels are now worth more for their metal content than their 1-cent and 5-cent face value is undisputable proof of how much value the dollar has lost since its founding. This is not good news for the U.S. dollar, whose reserve currency status is largely built upon confidence that it will remain a stable store of wealth."

These statements completely misunderstand the modern fiat currency system our government employs. The ReCapitulator despises laws made for these purposes, but the conclusions regarding the stated weakness of the dollar resulting from a (historically ephemeral) rise in commodity prices are not valid. Specie money backed by commodity is degreaded when the commodity in question (gold, silver, whatever) is degraded...but the dollar is not pegged to any commodity or metal. Stating that the difference between the commodity price levels (which are priced in dollars) and the face value of coinage is certainly not "undisputable proof" of the dollars weakness "since its founding". This is more of a commodity arbitrage type of argument as opposed to an argument supporting prospective dollar weakness, and the ReCapitulator reminds his readers to be extremely skeptical of commentary predicting dollar weakness based on same.

No comments: