Q&A of the Day – What’s the Safest Currency to Own?
Each day I feature a listener question sent by one of these methods.
Email: brianmudd@iheartmedia.com
Social: @brianmuddradio
iHeartRadio: Use the Talkback feature – the microphone button on our station’s page in the iHeart app.
Today’s Entry: I'm starting to buy books on the Weimar Republic and generally hyperinflation. Is there not a way we can assess cryptocurrency? Or what currency is most stable in the world?, because the US dollar is going to be junk in 5 years.
Bottom Line: We all know the saying about those who don’t know history. For that reason and aside from simply being a more informed person, studying up on the failed Weimar Republic, who’s fall led to the rise of Hitler and the Nazi’s in Germany is an instructive exercise. And it’s the ultimate exercise when considering what not to do during a time of especially high inflation...print more money. The Weimar Republic is the ultimate cautionary tale about what goes wrong when a government’s answer to a financial crisis, most especially its own debt crisis, is to simply attempt to print its way (literally at the time) out of it. For an idea of how out-of-control the situation became when the German government collapsed... Pre-WWI the exchange rate was 4.2 German Marks to every Dollar. Following the Treaty of Versailles at the conclusion of WWI, which came with huge financial burdens the German government had to account for related to their actions in WWI. The exchange rate shot up to 162 Marks per dollar. By the time of the financial collapse of the government in November of 1923, the Mark’s exchange rate reached an almost unimaginable 4.2 trillion to one ratio to the US Dollar. Effectively the Mark wasn’t even worth the paper it was printed on, and no one wanted it. This wiped out not only the German economy but the savings of every German as well creating financial desperation and a populous which in subsequent years became warm to the siren calls of Hitler and his Nazi regime.
In answering today’s question, first and foremost, there is no way to analytically assign any value to any digital currency. All cryptos have been willed into existence, there’s nothing which backs any of the tokens, and there’s no historical context for them representing a store of value during times of extreme economic adversity as posed in today's question. The blockchain that digital currencies are created from has enormous value and functionality, but that’s not what you’re buying when you buy cryptocurrencies. You’re buying an invented digital asset. In reality, cryptocurrencies have more in common with Ponzi schemes than they do with actual currencies. Those who were early on many of the leading tokens made huge money, however, a decade plus later most people who’ve purchased digital currencies have lost money on them. In terms of cryptocurrencies having a function in a global economic crisis brought about by, say the collapse of the US Dollar, the argument is effectively that it has replaced gold as an asset that retains value that’s not tied to any central bank or government entity. This is a completely untested theory however, so to attempt to employ it as a strategy is a risky one to say the least. At the end of this analysis, I’ll provide my thoughts about these types of considerations, but if stuff hits the fan worse than what we’ve ever seen in this country, I have an awfully hard time believing that people would want to trade hard assets that might help one survive for something that only exists online.
As for the safest and most stable (official) currencies in the world currently based on the financial wherewithal of the country behind them...
- Swiss Franc (backed by gold)
- Japanese Yen (8th largest gold reserve in the world)
- Norwegian Krone (Norway has no debt)
- Swedish Krona
- Euro (world’s #2 reserve currency)
- Singapore Dollar
- US Dollar (world’s reserve currency)
I’m going to stop there because this is instructive. With our country $33.5 trillion in debt and counting, despite being the world’s leading currency, the US Dollar isn’t as stable as six other currencies. This speaks to the relative distress of our currency, in addition to the potential risk the Dollar faces if the Chinese-led effort to oust the Dollar as the world’s reserve currency were to be successful. This exercise also highlights the benefit of two governments which still use a gold standard (Switzerland's is a hard standard, Japan’s is a loose one – each Yen is not backed by gold specifically but rather the country’s Treasury overall). And the real answer to your question lies within why those two currencies are currently one and two in overall stability. It’s also noteworthy that you have a country like Norway that has no sovereign debt. So, with a huge tease having already been provided, the answer as to the strongest currency is if stuff were to really hit the fan... You have probably figured out by now that it’s gold.
As Investopedia notes, According to Dictionary.com, the definition of currency is as follows: “Any form of money in actual use as a medium of exchange.” Therefore, gold applies. Gold is the only time-tested financial asset which has held value during historical economic collapses. That said I want to offer up a little food for thought before traveling further down this road. All throughout human history, and within every generation, there have been those who thought the end times within their lifetime. There still are today. It obviously hasn’t happened yet. All who’ve ever planned accordingly made compromised decisions which commonly hurt themselves and their families in the process. The demise of the US is different. Every world superpower throughout human history has fallen. However, in recent centuries it hasn’t meant the end of civilizations. Here are the most recent world superpowers preceding the United States. The British Empire, The French Empire, The Turkish Empire. You must go back to the Ghengis Khan’s Mongolian Empire to find a leading superpower that no longer exists. The reason that matters is what makes us different than say the Weimar Republic. Weimar could collapse without significant collateral damage in part because they held essentially no standing in the world at the time of their collapse. To illustrate the point, the collapse happened in 1923 – aka, the roaring 20’s here in the states and throughout the rest of Europe. Conversely, it’s not possible for the US Dollar to collapse within the next 5 years without the entire world economy collapsing along with it. Literally every commodity everywhere is still US Dollar denominated.
Currently the US’s debt to GDP ratio is the twelfth highest in the world – which certainly isn’t good – but consider this...the country with the 2nd highest debt to GDP ratio is Japan – which as you may recall has had the 2nd most stable currency as well due to their gold reserves. And Japan still hasn’t collapsed and isn’t collapsing in real-time. The point is that if the US Dollar is going down – there will be many more countries which would go down first, and you’d have a clearer indication of the peril the US and world would face as opposed to guessing at it.
History suggests it’s possible the US has peaked in terms of its influence. Modern history, as in the past 700 years, suggests that even if that’s the case we’ll still have an influential place in the world thereafter without a complete financial collapse as we’d be forced to course correct by virtue of nations around the world who’d collapse long before we’d get there. For these reasons if you’re inclined to want to hedge financially against a financial crisis, I understand. If you’re looking for the best bet historically to do it with, that’d be gold. But I’d caution against going “all in” on the world ending or the US collapsing a la the Weimar Republic.
There are actually fewer similarities to the US and Weimar despite our money printing (or digitizing as the case happens to be), than there would appear to be at first glance. Ever since the gold standard ended in the early 70’s there have been some that have talked of the similarities between Weimar and the US. Over the past fifty years those who’ve taken financial positions with that belief in mind, have been wrong and worse off financially for having done so...including with the holding of gold which has underperformed the average other commodity and the average stock since the end of the gold standard. That's all meant as historical food for thought.