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  1. Chinspinner
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    Chinspinner Contributing Member Contributor

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    The end of the almighty dollar?

    Discussion in 'Debate Room' started by Chinspinner, Oct 21, 2015.

    I put this in the debating room because I could not see where else it belonged.

    Since the 2008 banking crisis I have been intrigued by the unsustainable way our economies operate. I am going to try to cut my thoughts on the subject down to the bare bones, which means I will skip details. I am also going to use the US dollar as my example, since, although Sterling is a far more majestic and aesthetically pleasing currency, alas its failure would not have quite the same ramifications: -

    Originally the value of money was linked to a commodity (gold). Because gold is rare (and immutable) there are generally not huge fluctuations in its value. A bank note was effectively linked to a given quantity of gold. This requirement was removed in the 1930s and basically gave The Federal Reserve carte blanche to print bank notes. This is a fiat currency and it is intrinsically valueless, other than by government decree or a complex web of IOUs.

    Now I'll jump forward to 2008.

    The 2008 crisis was debt driven, and had been a long time coming. Banks lent money to people who could not pay it back and, when this materialised, concerned customers withdrew their deposits, banks called in loans to cover these withdrawals, companies and individuals sold off assets to cover these loans (or folded), and so the cycle perpetuated.

    Banks loan out 90% of their deposits. So for every dollar deposited, 90c is loaned out. Then that 90c would be used to buy a house (or whatever) and the recipient of it would deposit the money. Then 81c of that deposit would be loaned out, and so on. In this manner $1 of printed money miraculously becomes $10 of debt. None of this money exists, and certainly not the commodities to actually give it intrinsic value.

    In response to the financial crisis, many countries resorted to quantitative easing, i.e. they printed more bank notes. This only resulted in exacerbating the unrealistic level of debt the banking system creates. i.e., they sought to solve a debt crisis by creating more debt. This ever-escalating debt is unsustainable.

    More money (real or not) results in inflation, as the money loses value. We have seen unprecedented levels of inflation over recent years.

    Which brings me on to the dead-cat bounce. It is a part of every crash. The initial crash occurs, and when investors feel that shares/ commodities/ whatever, have reached their new low, they buy them up resulting in a short-lived bounce. Then the scale of the over-valuation becomes apparent and the entire market drops to a new, much lower equilibrium. We are currently experiencing the bounce, and the fall is due to happen in the next five years.

    At this time there are no fiscal or monetary tools available to combat another recession. Interest rates are too low to lower further, printing more money will result in hyper inflation followed by catastrophic deflation as fiat currencies become entirely worthless.

    Many countries have sought repatriation of their gold deposits from The Federal Reserve since the 2008 crisis, the obvious reason for this is that they foresee the possibility of a shift to commodity backed currency, if the US dollar where to catastrophically fail.

    Which leads me to my original question, is this the end of the almighty dollar? But the question is wider than that; is it also the death blow to rampant capitalism?
     
    Last edited: Oct 21, 2015
  2. Kingtype
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    Kingtype Always writing or thinking things XD Staff Role Play Moderator Contributor

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    Well......

    I hear some folk call writing recession proof.

    Not sure if that's true but I heard it mentioned before.
     
  3. GingerCoffee
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    GingerCoffee Web Surfer Girl Contributor

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    No and no. :)
     
  4. Robert Musil
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    Robert Musil Contributing Member

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    Wait...what? Idk about the UK, but here in the States it's been quite the opposite. At the bottom of the recession, everyone here was terrified of deflation. We managed to avoid too much of that, but inflation has still been at historic lows ever since.
     
  5. Chinspinner
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    Chinspinner Contributing Member Contributor

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    Yes, the fear is currently deflation as the economy overheats and supply outstrips demand, as it was following the crash, as this would have been a downward spiral from which the economy might not have recovered. But following the 2008 crisis when money was printed we experienced inflation (printing $1 then creates 10x the money via the banking system, which then stimulates demand bringing us out of deflation into inflation, and the increased quantity of money devalues it further, resulting in greater inflation).

    Edit: I would add that the overall trend is inflationary, even if deflation occurs as we go from boom towards bust.
     
    Last edited: Oct 21, 2015
  6. outsider
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    outsider Contributing Member Contributor

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    I was hoping the thread title related to the demise of the 'dollar' fronted by this clown:

    Then happily, I recalled that day had come already.
     
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