Posts Tagged ‘fiat’

Can “weak US dollar” be partially blamed for rising oil prices?

Thursday, May 8th, 2008

Yesterday, we questioned the validity of using fiat money as a unit of measure for the value of a commodity. Today, we will look at idea that the “weak US dollar” is one of the scapegoats for rising oil prices.

Frequently, we hear from the media explaining that one of the ’causes’ of rising oil prices (and by extension, inflation) is due to the “weak US dollar.” But notice one thing: oil prices had been rising in all currencies, not just in terms of US dollar. This leads us to one basic principle: everything else being equal, a falling US dollar has no effect on oil prices measured in non-US currencies. Of course, in the real world, everything else is not equal- oil prices rises to different degrees in terms of other currencies too, including the Australian dollar. In that case, can the rising in oil prices in terms of non-US currencies be attributed to supply/demand fundamentals?

But wait a minute! What is the meaning of “weak US dollar?” Can we interpret the meaning of “weak US dollar” to mean that the supply of US money and credit has been expanding at a faster rate than the supply of its non-US counterparts? Well, consider this fact: the supply of non-US money and credit has been expanding at an arguably greater rate than the supply of their US counterpart. For example, Australia’s money supply increased 21.6% (see Australia?s monetary growth update?February 2008) while the US money supply was estimated to be significantly below that figure (the US no longer publish figures on their M3 money supply). Putting aside the argument of which nation’s money supply has been increasing at a faster rate, this is the basic point: the supply of fiat money and credit of all nations have been increasing. In other words, high oil price is not just a problem of the “weak US dollar.” As we said before in What if the US fall into hyperinflation?,

Now, in this age of freely fluctuating currencies, the currency?s value is a relative concept. For example, a falling US dollar implies a rising Australian dollar. Therefore, one way to ?maintain? the value of the US dollar relative to the Australian dollar is to devalue the Australian dollar. Perhaps this is the route that central bankers will concertedly take to instil ?confidence? in the US dollar in order to create the illusion that the US dollar is still a reliable store of value? Well, they can try, but growing global inflation and skyrocketing gold price relative to all currencies will be tell-tale signs of such a dirty trick.

We can include oil prices in the last sentence of the above-quoted paragraph. Thus, we believe that global monetary inflation is one of the major contributing factors in accentuating the rise in oil prices, in addition to the fundamental supply/demand factors. It is an error to blame it on the “weak US dollar.”

In the next article, we will connect monetary inflation with oil price speculation.

What is the future of silver?

Monday, March 3rd, 2008

Today, we will continue from The behaviour of silver and gold prices and explain what we believe the future of silver ought to be. The assumed knowledge of today’s article will be Why should you invest in gold?. As we explained before in our previous article,

But please note that since there is a difference between what we think should be and what the market thinks is the case, then there will be a difference between what we think ought to happen and what will happen.

If you think we may sound a bit too verbose with this explanation, it is because we want to make it absolutely clear that we are not making any claims on the future of silver prices, especially in the short to medium term. This is because no matter how logical our deductive reasoning is (assuming that it is sound in the first place), there is no guarantee that the market will behave rationally. As Keynes famously said, “The market can remain irrational longer than you remain solvent.” Therefore, bear that in mind. Investors have lost money because they forgot that (including Warren Buffett, who suffered a loss in a bet against the US dollar).

Anyway, here comes the meat of this article: Will silver regain its monetary status once again, as a junior partner of gold?

First, why was silver ever money in the first place? In A brief history of silver and bimetallism,

As we said before in Properties of good money, a commodity has to be sufficiently rare to qualify as money. But it cannot be too rare. Silver, the less rare sister of gold, was useful for smaller transactions because gold was too rare for further smaller sub-divisions.

Now, assuming that gold will one day function as money (i.e. play an important role in the global monetary system), will there still be a need for silver to function as small change money? The answer to this question is the crux of what we believe the future of silver ought to be.  We believe the answer is “No.”


Obviously, even if gold is going to function as money in the near future, it is highly unlikely that no one will carry physical gold in their wallets. The inconvenience of carrying physical gold was real even more than 100 years ago. That is why, as we said before in Entrenched perception on the value of paper money, warehouse receipts for gold, which existed in the form of paper, was invented. Warehouse receipts for gold slowly evolved into today’s fiat paper money.

Today, we have a very powerful technology that can solve the convenience and sub-divisibility problem (see Properties of good money) associated with gold money- computers. All we need is a trusted central repository of gold (perhaps today’s central bank can change its institutional role for this purpose) and let computer systems keep track of ownership and transfer flow of gold money. In other words, the gold is physically kept in a secure central location while the finer sub-divisions and change of ownership of gold money is recorded as bookkeeping entries on computers. No physical movement of gold is necessary. In a sense, this is already happening with fiat paper money today. Much of today’s commerce is happening in the form of electronic transactions, with relatively minuscule amount of physical cash involved. Therefore, it should be possible with gold money. If those who still have doubts of such a possibility, we would like to point out that this idea is already implemented at We have no doubt it is possible to be implemented on a national and international scale.

In this case, will there still be a need for silver? If not, silver is better off being a purely industrial commodity.