financial wealth (though they are the holders of money and debt assets), and in most cases it causes assets to go up
in the depreciating currency that people use to measure their wealth in so that it appears that people are getting
richer.
You are seeing these things happen now in response to the announcements of the sending out of large amounts of
money and credit by central governments and central banks.
Note that you don’t hear anyone complaining about the money and credit creation; in fact you hear cries for a lot
more with accusations that the government would be cheap and cruel if it didn’t provide more. There isn’t any
acknowledging that the government doesn’t have this money that it is giving out, that the government is just us
collectively rather than some rich entity, and that someone has to pay for this. Now imagine what it would have
been like if government officials cut expenses to balance their budgets and asked people to do the same, allowing
lots of defaults and debt restructurings, and/or they sought to redistribute wealth from those who have more of it to
those who have less of it through taxing and redistributing the money. This money and credit producing path is
much more acceptable. It’s like playing Monopoly in a way where the banker can make more money and
redistribute it to everyone when too many of the players are going broke and getting angry. You can understand
why in the Old Testament they called the year that it’s done “the year of Jubilee.”
Most people don’t pay enough attention to their currency risks. Most worry about whether their assets are
going up or down in value; they rarely worry about whether their currency is going up or down. Think about it.
Right now how worried are you about your currency declining relative to how worried you are about how your
stocks or your other assets are doing? If you are like most people, you are not nearly as aware of your currency risk
and you need to be.
So let’s explore that currency risk.
All Currencies Have Been Devalued or Died
Think about holding currencies (which is the same as holding cash) in the same way as you would think about
holding any other assets. How would you have done in these investments?
Of the roughly 750 currencies that have existed since 1700, only about 20% remain, and of those that
remain all have been devalued. In 1850 the world’s major currencies wouldn’t look anything like the ones today.
While the dollar, pound, and Swiss franc existed back then, most others were different and have since died. In
1850 in what is now Germany, you would have used the gulden or the thaler. There was no yen, so in Japan you
might have used a koban or the ryo instead. In Italy you would have used one or more of the six possible
currencies. You would have used different currencies in Spain, China, and most other countries. Some were
completely wiped out (in most cases they were in countries that had hyperinflation and/or lost wars and had large
war debts) and replaced by entirely new currencies. Some were merged into currencies that replaced them (e.g., the
individual European currencies were merged into the euro). And some remain in existence but were devalued, like
the British pound and the US dollar.
What Do They Devalue Against?
The most important thing for currencies to devalue against is debt. That is because the goal of printing
money is to reduce debt burdens. Debt is a promise to deliver money, so giving more money to those who
need it lessens the debt burden. How this newly created money and credit then flow determines what happens
next. Increases in the supply of money and credit both reduce the value of money and credit (which hurts
holders of it) and relieve debt burdens. In cases in which the debt relief facilitates the flows of this money
and credit into productivity and profits for companies, rising real stock prices (i.e., the value of stocks after
adjusting for inflation) happens. When it sufficiently hurts the actual and prospective returns of “cash” and
debt assets so that it drives flows out of these assets and into inflation-hedge assets and other currencies,
that leads to a self-reinforcing decline in the value of money. At times when the central bank is faced with the
choice of a) allowing real interest rates (i.e., the rate of interest minus the rate of inflation) to rise to the detriment
of the economy or b) preventing real interest rates from rising by printing money and buying those cash and debt
assets, they will choose the second path, which reinforces the bad returns of holding “cash” and those debt assets.