{"id":78,"date":"2008-05-27T09:38:26","date_gmt":"2008-05-27T16:38:26","guid":{"rendered":"http:\/\/chasingeden.com\/?p=78"},"modified":"2008-05-30T10:16:13","modified_gmt":"2008-05-30T17:16:13","slug":"fiat-currency-vs-gas-food-and-home-prices","status":"publish","type":"post","link":"http:\/\/chasingeden.com\/?p=78","title":{"rendered":"Fiat currency vs. Gas, Food and Home prices"},"content":{"rendered":"\t

I keep hearing all this crap from the media about rising\u00a0food prices<\/strong>.\u00a0 And then they talk about the price of gas<\/strong>.\u00a0 And then they talk about the falling home prices<\/strong> (which aren’t really falling, but simply returning to a more reasonable level after being inflated themselves).<\/p>\n\t

But they always talk about them separately<\/strong>, as if they had nothing to do with each other.<\/p>\n\t

They are very<\/strong> related…and the relation is to the value of our money, which is a fiat money issue<\/strong>.\u00a0 It is related to ramping up the printing press, and a crisis in the faith of the value of the dollar.<\/p>\n\t

Remember that fiat money has no value other than the agreement that it can be exchanged for things.\u00a0 The US dollar is worthless if everyone decides we don’t want to use it for payments anymore.\u00a0 At that point the govt must enforce its use, prevent by law the exchange of the dollar for something of hard value….and then the govt usually collapses some time after that.<\/p>\n\t

So….what does this have to do with anything?\u00a0 The recent rise in prices is\u00a0caused by the devaluation of the dollar<\/strong> (a fiat money, printing press issue), not by any smokescreen the government or media may be reporting.<\/p>\n\t

Here is the thought exercise:<\/p>\n\t

The government is printing more dollars (through low interest rates), making each dollar worth less.\u00a0 We see this, and the international community sees this.\u00a0<\/p>\n\t

It is in everyone’s best interest to convert the value of your dollars into another store of value (gold, the Euro, real estate, etc.)\u00a0that is more stable.\u00a0 Every day you hold dollars, they are worth less…so you convert the dollars to\u00a0something of hard value.<\/p>\n\t

What do you choose?\u00a0 The first option for the international community is\u00a0probably another currency, because it is a quick, easy way to convert value….and we see this:\u00a0 Major currencies all appreciating versus the dollar.\u00a0<\/p>\n\t

But what happens when other central banks also depreciate their currency, or there is a crisis of trust in the fiat money system in general<\/em>?\u00a0 Easy:\u00a0 We choose a hard store of value…something that doesn’t represent<\/strong> something of value (like a bill or coin), but actually IS<\/strong> valuable (like food, oil, real estate, etc.)<\/p>\n\t

What is the most popular hard store of value ever???\u00a0 Real Estate.\u00a0 You cannot turn up the printing press on land.\u00a0 Unlike paper bills, they’ll never make any more:\u00a0 the supply side is fixed.\u00a0 In uncertain economic times, land is\u00a0a certain store of value.\u00a0 And that’s what we saw:\u00a0 Housing (and thus real estate) prices shot through the roof.\u00a0 People liquidated their dollars\u00a0(which were very cheap anyway due to low interest rates)\u00a0and bought a hard asset.\u00a0 We did it, and the international community did it.<\/p>\n\t

So the “fall” in real estate values is not a fall so much as it is a return to more reasonable levels after a real estate bubble created by the process I described above.<\/p>\n\t

Now lets look at Food prices:\u00a0 Do you think there are suddenly more people eating?\u00a0 Or that crops are failing all over the world?\u00a0 No.\u00a0 We buy most of our food from abroad, the dollar is worth less, so it takes more of them to buy food.<\/p>\n\t

Now let’s look at Gas prices:\u00a0 Is there a supply side issue?\u00a0 Is less oil being pumped?\u00a0 No.\u00a0 Is there a sudden rise in demand?\u00a0 Not enough to justify the current rise.\u00a0\u00a0 Here is the price of oil in gold instead of dollars:\u00a0 our currency is plainly losing value<\/a>.<\/p>\n\t

Part of it is our dollar is worth less, so the price is rising.\u00a0 On a\u00a0related\u00a0note, oil is priced in dollars as an international commodity, so the price\u00a0cannot rise the same as non-dollar\u00a0denominated assets.\u00a0 So why the sharp rise?\u00a0 Is inflation THAT<\/strong> bad?\u00a0 I’m not exactly sure about this one…but it may be oil speculation.\u00a0 The movers\/shakers on the international scene are looking for safe stores of value for their money.\u00a0 Currencies are being devalued (can’t invest there),\u00a0real estate prices have already been run up (can’t invest there)….so what’s the next hard store of value to move to…..commodities (oil, metals, etc).\u00a0 So the next bubble would be in commodities.<\/p>\n\t

Is there anything we, as regular people, can do about the government devaluing our dollars?\u00a0 Not really unfortunately.\u00a0 For those with the determination, it is possible to denominate your savings accounts in other currencies, or gold….but I think most of us are stuck with inflation.<\/p>\n\t

Update 5\/30:\u00a0 Here is an interesting article that makes the point I’ve been getting at with historical examples (which I was too lazy to lookup):\u00a0 Fiat currencies always fail<\/a>.\n<\/p>\n","protected":false},"excerpt":{"rendered":"

I keep hearing all this crap from the media about rising\u00a0food prices.\u00a0 And then they talk about the price of gas.\u00a0 And then they talk about the falling home prices (which aren’t really falling, but simply returning to a more reasonable level after being inflated themselves). But they always talk about them separately, as if […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_newsletter_tier_id":0},"categories":[1],"tags":[28,42,41],"jetpack_sharing_enabled":true,"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p3IMYj-1g","jetpack-related-posts":[{"id":62,"url":"http:\/\/chasingeden.com\/?p=62","url_meta":{"origin":78,"position":0},"title":"Inflation, the Printing Press, Theft and the Jedi Mind Trick of Fiat Money","author":"kellio","date":"March 28, 2008","format":false,"excerpt":"My two geek hobbies are happiness research and economics. I post about them often. Today I'll talk a about economics and money as it relates to the big, bad looming\/imminent debt crisis. I've written before about Fiat money. 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