2012 The End of Paper Money

World war 3 has begun but few people recognized it because it is a war not fought with guns and bombs but with currency manipulations. In a world with a shrinking wealth pie, Government scrambled to keep their economies competitive. Sadly, rather than look at long term solutions, most Government goes order the quick fix , which is to devalue their currency. A country exports more when it makes products that are desired by the rest of the world. China produces low cost goods at rock bottom prices by having low wages, ignoring pollution and seizing peasant lands for peanuts . Germany produces expensive quality goods likes its BMW cars through design and manufacturing discipline. But a country with high wages and not enough quality goods and services will end up earning less. This is not bad as lower earnings will result is lower wages and eventually the country will be competitive again.

The problem is the citizens cannot take the pain of earning less . To make up for the deficit in export earnings , the Government spends more. Everyone is happy as the gravy train continues to roll. The problem is that Governments borrow or print money out of the air to sustain the increased expenditure without raising taxes. Raising taxes would mean the people have less to send which is what the Government wants to avoid! But for the time being it is party time until Government either can no longer print money or borrow .

They cannot borrow because lenders are too nervous and believe the borrower would not be able to pay them back. This is amazing as we are not referring to an individual or company but a Government. This lack of trust means lenders are willing to lend only at high interest rates but high interest rates mean the Government would be even less likely to repay debts. This leaves the second option of printing money. Unless the currency is used outside the country, the printed money would return to the country causing inflation . Inflation is when too much money chase after too few assets.

Inflation is political dynamite where there is a large section of the population who are poor. Food prices goes up and the poor starts to protest as they find they can afford less and less food. When a country is awash with money, the rich can borrow more to invest in stocks and properties. The rise in stock and properties benefit the rich while the poor earns the same but has to pay more for food. From China to Africa, political instability is one of the side effects of inflation especially when it is not matched by rising wages at the lower end.

Even in America, the Occupy Wallstreet movement is a protest by the average America against rising cost of living. The US Government wants China to revalue the yuan upwards but this will ake imports more expensive. When before there is a choice of the more expensive locally made product or the cheaper imported product, there is no choice for the Americans since most of the consumer products they want are imported. A rising yuan will increase the cost of imported goods which means inflation will be higher. The American will have to pay more for his clothes, shoes, computers and TVs. They will be unhappy and will express their unhappiness at the coming Presidential elections.

There is no short term solutions and in democratic countries where elections are held every four years , no politician wants to commit suicide by adopting painful long term solutions. So the money printing and the debasement of fiat currencies on a global basis continues until one or more countries get knocked out. Greece for example cannot continue its party since it cannot borrow excessively anymore. America may find that quantitative easinf increases the cost of living and becomes politically untenable. I think the world will continue to debase paper currencies as this is the only option left for Governments.