Friday, 20 February 2009

Is debasement of the currency inevitable?

The current mechanics of the world's credit system lack all credibility and morality and the only thing which is holding, what remains of it, together is the rule of law.
A questioner asked in a recent blog posting - How smart is it to place one’s total faith in contract-based assets that are denominated in a fiat currency?
One could easily answer - not smart at all.
But the way that the question is posed it runs two separate issues together that could be addressed separately.
Imagine for a moment that we did not have the "luxury" of debasing the currency because it was tied to a gold standard for example. As a society/economy we would then almost certainly have to face the question of how to dishonor contractual based claims on assets and IOU's within a proper legal context and framework of re-negotiation. A kind of collective or social bankruptcy process could be undertaken where assets/debts could be written down and re-structured, somewhat like a collective Chapter 11.
Governments would not like such an adult process to occur because it has the risk of revealing far too many skeletons in far too many closets to be put in full view of the public, who governments believe should be kept in the dark on such matters as much as possible.
But such a re-structuring or re-organization of existing debts and creditors would have to be seriously contemplated in the situation where the true value of existing obligations could not be easily inflated away.
Of course, in the world we actually inhabit, debasement of the currency - which is tenable precisely because it is a fiat currency with no inherent value of its own - is the way we will almost inevitably be going.

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