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Saturday, July 11, 2009

The Myth of Fiat Currency Diversification

A comedian on the Communism Channel was saying "Inflation is a problem! You should diversify! Buy Euros and stocks in corporations outside the USA!"

All countries have a fiat debt-based monetary system. The Federal Reserve inflates the dollar, with the profits going to politically connected insiders. Similarly, central banks in other countries inflate, benefiting insiders in those countries.

When a comedian says "The dollar is going down in value relative to the Euro!", they really mean "The dollar is inflating faster than the Euro!" A dollar investment will underperform gold over time. Similarly, the Euro and other fiat currencies will underperform gold over time.

When you buy shares of stock in a US corporation, you don't get full allodial title. You can't prevent management from paying themselves huge salaries or squandering resources. The corporation has a State-licensed monopoly/oligopoly, and the cost of inefficiency is passed on to customers as higher prices and shareholders as below-inflation returns. If you buy shares in a non-US corporation, you have the same problem. All large corporations have the same inefficiency; it's an inevitable consequence of the Principal-Agent problem, when someone controls resources that they don't own. For this reason, the stock market will underperform true inflation over time.

All countries have a corrupt economic system, as bad as the USA or worse. Buying paper assets in foreign countries is just as pointless as buying paper assets in the USA.

You'll never see a mainstream media source say "Buying gold and silver, and taking physical delivery, is your best protection against inflation." They'll advise gold mining stocks, foreign currencies, foreign stocks, but never physical gold.

1 comment:

One Angry American said...

This is completely true. I will add however that a gold-based currency is not the answer either. It needs to be a fiat system, but the money should be created by Congress with no "interest" And the the money supply must be, and this needs to be a constitutional amendment, set as an amount per capita and may only increase or decrease proportionately with changes in population. The currency value should be based on the value of gold, but not gold backed. Why? Because the central banks control two thirds of the worlds gold already.

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