Current currency

What, exactly, is money? And what does it mean to “save”?  Does this help?

A penny saved is a penny earned.

An old proverb, often attributed to good ol’ Benjamin Franklin.  Another, older version is:

A penny spared is twice got.

An old 17th century aphorism, collected by George Hebert.

That’s back in the days when a penny actually meant something.  Now Canada, whose dollar trades roughly on par with the US dollar, has ceased minting pennies.  The US should soon do the same, but they won’t — penny wise and dollar foolish, I suppose; it costs about two cents just to mint a penny.

Once upon a time, long ago, logic prevailed.  People who worked hard and saved their money were rewarded with the glories of delayed gratification.  By saving their money they could build a house,  buy a car, build a business.  They could fund an education.

But that was long ago, before central banks, currency manipulation, and before the PIIGS.  For 100 years now savers have been punished by central banks who have the authority to conjure up money from thin air.  Savings now not only don’t grow, they are slowly nibbled away, like Hemmingway’s Old  Man and the Sea.  To work and amass a respectable sum of money is a de facto surrender of those funds — slowly, almost painfully — to faceless government bureaucrats a thousand miles away.

This year alone, the US Federal Reserve Bank will “create” over one trillion dollars — partly in purchase of government bonds, and partly in purchase of mortgage backed securities.  And Mitt Romney called the Chinese “currency manipulators.”  HA!.  The yuan is up 10% against the dollar in the past year.

Even the Swiss panicked, devaluing their franc (CHF) this past year, since a currency strong in relation to others leads to expensive (and hence weaker) exports.  Next the Japanese, under Abe, are creating yen at Indy 500 pace, and the yen is down 15% against the dollar in the past few weeks.

It is indeed a race to the bottom.  Many times in economics there are winners and losers.  In this game, it is the saver who loses.  And the debtor (mostly national governments) wins.

But now, over the past weekend in Cyprus, any veil of fairness and even-handedness has been violently ripped away.  As a condition of EU and ECB (European Union / European Central Bank) bailout, Cypriot bank deposits will be summarily and immediately “taxed” between 6.5% and 9.9%.  Simply extracted.  Banks are closed, to preclude runs on the banks.

No story is simple and clean and easy to tell.  Cyprus — that weird sort of two-state island, but not really a two-state island, that was somehow allowed into the euro-zone — is an off-shore banking center that would make the Grand Caymans proud.  They’ve attracted lots of dodgy “dirty” money, particularly from crony-capitalist Russian magnates — so certainly there are “black hats” among the losers.

Nonetheless, here is a bald-faced signal that the world’s general governance is unfriendly toward savers.  The euro dropped 1% today, March 18, as savers (i.e holders of euros) fled to US Dollars and gold.  Imagine saving for your child’s braces, or your grand-child’s college education, house down payment, engagement ring for your financee’.  And governments around the world are either printing money faster than you can save it, or confiscating it directly from your deposits.  What would you do?

What happens in a world where no one wants to hold on to money?  We buy things faster than we ought.  We invest in other instruments faster than we ought.  That’s what “they” want.

At this writing, Cyprus could still deny the EU and ECB their “down payment cum confiscation.”  Banks are closed until Thursday (another 3 days).  We shall see.   To deny Brussels their “cut” would certainly risk eviction from the euro-zone.

On another front: a remarkable new party has sprung up in Germany, populated by intellectuals and economists, that favors dissolution of the current multi-nation euro; and — if that can’t be done — perhaps Germany should return to the Deutsch Mark. Oh, fun.



4 thoughts on “Current currency”

  1. Steve Rolfe

    The subject of “what is money?” is actually very intriging and much more complicated than one would think. Joe, I would enjoy that conversation with you.

    And, for all the problems of our current system, previous systems had bigger problems. We, United States citizens, are very lucky that our currency is the Reserve Currency for the world. It makes us much less sensitive to the currency problems.

    It should be pointed out that for all the weakness of the American economy there is still a strong net inflow of money to the United States meaning the world thinks the dollar is stronger than other currencies.

    China’s currency, of course, is undervalued against the dollar. But, China manages its currecy valuation for many reasons because it can, which of course the US does when it can. It should be pointed out that when the Chinese currency goes up in value by 10% the Trillions of dollars it owns in American bonds go down by 10%. This is a good thing for the US. It means we get to pay them back with 90 cents for every dollar they paid for those bonds. It does mean that things imported from China will be more expensive, but then again it means that things made in America are 10% less expensive than before helping American manufacturers.

  2. Lee Webb

    This 10% (or less for smaller accounts) “haircut” is basically a “wealth tax”. I’ve been IN FAVOR of this for a long time, as a means to pay off the U.S. debt. There’s HUNDREDS of TRILLIONS of wealth (if you count ALL property as well as savings) in this country, and, as long as it’s only ONE TIME, our country could actually be solvent again (no more $600B/yr interest payments). We should also pass an iron-clad (is there such a thing?) balanced budget amendment. I don’t feel one bit sorry for the rich Ruskies — they can easily afford it.

  3. Nicholas Hall

    Savings is a precursor to effective investment, good investments help decide the direction a society moves in. So clearly private savings must be stopped if government is to be the one to engineer our future.

  4. Joe Post Author

    Hi Steve, money is anything that can be used for exchange. Could be loaves of bread, dried fish, a penny nail (pun intended). Let’s say you make and stock pile rye bread and I make whole wheat bread; and our loaves are valued roughly the same in the market. Then someone named Bernie shows up with a huge supply of whole wheat bread — my loaves are now not worth as much. You could “buy” (exchange) for more than one of my wheat loaves for one of your single rye loaves.
    With regard to China’s currency going up with respect to USD by 10% (that was a Swag, I don’t know the number), I fear you missed my point, so I didn’t make it well. The flip side is our currency went down ~10% … in other words WE ARE the currency manipulators (at least over last year with respect to China).
    You final points are spot on. They support a case for a “race to the bottom in currency value.”

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