Currency Devaluation or Market Crash

          This week, I want to share excerpts from and some of my comments on an insightful article penned by past RLA Radio guest, Mr. Alasdair Macleod.  Undoubtedly, many of you recognize Alasdair as the head of research at Gold Money. 

          Mr. Macleod’s article is titled “Waypoints on the road to currency destruction – and how to avoid it”.  (Source:

          I discuss this article in detail and offer additional proof of Mr. Macleod’s theory on the most recent “Headline Roundup” webinar that is presented live each Monday at Noon Eastern Time.  To get an invite to the webinar, just give the office a call and we’ll be glad to get you an e-mail with all the “Headline Roundup” login information.

          You can also visit and view the “Headline Roundup” webinar replay.

          This, from Mr. Macleod’s piece:

-Monetary policy will be challenged by rising prices and stalling economies. Central banks will almost certainly err towards accelerating inflationism in a bid to support economic growth.

-The inevitability of rising bond yields and falling equity markets that follows can only be alleviated by increasing QE, not tapering it. Look for official support for financial markets by increased QE.

-Central banks will then have to choose between crashing their economies and protecting their currencies or letting their currencies slide. The currency is likely to be deemed less important, until it is too late.

-Realizing that it is currency going down rather than prices rising, the public rejects the currency entirely and it rapidly becomes valueless. Once the process starts there is no hope for the currency.

          In essence, Alasdair is observing that central banks are painted into a corner and have two choices; one, protect their currencies and let their economies crash and burn or two, attempt to prop up their economies and markets via additional currency creation at the expense of their currencies.

          Mr. Macleod also notes in his piece that currency destruction and further devaluation can be avoided (emphasis added):

The few economists who recognize classical human subjectivity see the dangers of a looming currency collapse. It can easily be avoided by halting currency expansion and cutting government spending so that their budgets balance. No democratic government nor any of its agencies have the required mandate or conviction to act, so fiat currencies face ruin.

          The solution to currency devaluation is simply to balance government budgets so that currency creation becomes unnecessary.  In today’s world, this is much easier to say than to do.

          Despite the rhetoric from the Washington politicians that the nation’s fiscal woes can be corrected by taxing the billionaires, simple, basic math proves this doesn’t come close to solving the problem.

          A wealth tax far more draconian than the one being presently discussed does little to fix the deficit spending problem.  The truth is that the politicians could confiscate 100% of the wealth of all the country’s billionaires and the deficit spending would begin again within a few, short months.

          No matter how you slice it and no matter how many additional taxes you levy, the deficit problem cannot be solved by raising taxes.  Current levels of spending are just too far out of control.  And that’s the case before any new spending occurs which seems like an inevitability at this juncture.

          Mr. Macleod, in my view, correctly observes that ‘no democratic government nor any of its agencies have the required mandate or conviction to act, so fiat currencies face ruin.’

          The question that every “Portfolio Watch” reader should be asking is what does this ‘ruin’ look like and what steps can be taken presently to potentially protect one’s self?

          Mr. Macleod gives us some idea as to what this ruin may look like based on what has happened historically. 

If we consider the evidence from Austria before the First World War, we see that the economic prophets who truly understood economics became thoroughly despondent long before the First World War and the currency collapse of the early 1920s. Carl Menger, the father of subjectivity in marginal price theory became depressed by what he foresaw. As von Mises in his Memoirs wrote of Menger’s discouragement and premature silence, “His keen intellect had recognized in which direction Austria, Europe, and the world were pointed; he saw this greatest and highest of all civilizations rushing toward the abyss”. Mises then recorded a conversation his great-uncle had had with Menger’s brother, which referred to comments made by Menger at about the turn of the century when he reportedly said,

“The policies being pursued by the European powers will lead to a terrible war ending with gruesome revolutions, the extinction of European culture, and destruction of prosperity for people of all nations. In anticipation of these inevitable events, all that can be recommended are investments in gold hoards and the securities of the two Scandinavian countries” [presumably being on the periphery of European events].

          The events of the 1920’s led to the depression of the 1930’s.  An article, written by Richard Timberlake for the Foundation for Economic Education in 1999 (Source: explains (emphasis added):

 Other observers, for example, many Austrian economists, believe that all the trouble started with a central bank “inflation” in the 1920s. This “inflation” had to be invented because it is a necessary element in the Austrian theory of the business cycle, which seems to describe most Austrian economic disequilibria. Austrian “inflation” is not limited to price level increases, no matter how “prices” are estimated. Rather, it is an unnatural increase in the stock of money “not consisting in, i.e., not covered by, an increase in gold.”

Once the Austrian “inflation” is going, it provokes over-investment and maladjustment in various sectors of the economy. To correct the inflation-generated disequilibrium requires a wringing-out of the miscalculated investments. This purging became the enduring business calamity of the 1930s.

The late Murray Rothbard was the chief proponent of this argument. Rothbard’s problem is manifest in his book America’s Great Depression. After endowing the useful word “inflation” with a new and unacceptable meaning, Rothbard “discovered” that the Federal Reserve had indeed provoked inflation in the 1921–1929 period. The money supply he examined for the period included not only hand-to-hand currency and all deposits in commercial banks adjusted for inter-bank holdings—the conventional M2 money stock—but also savings and loan share capital and life insurance net policy reserves. Consequently, where the M2 money stock increased 46 percent over the period, or at an annual rate of about 4 percent, the Rothbard-expanded “money stock” increased by 62 percent, or about 7 percent per year.

          Money stock increasing at 7% per year resulted in inflation in the 1920’s followed by a painful deflationary period in the 1930’s.

          Here is why that is interesting.

          The chart above illustrates the Fed’s assets.  It’s important to remember that the Fed creates currency to buy these assets.  As you can see from the chart, the Fed has more than doubled the money it’s created in less than 2 years.

          By comparison, the 7% increase in the money supply from 1921 to 1929 is very mild yet the painful deflationary period of the 1930’s followed.

          What lies ahead given the current level of debt and currency creation?

          Mr. Macleod gives us an idea.

          My question for you is this:  have you adopted the Revenue Sourcing approach to managing your assets?

          Do you have assets that may perform well in a deflationary environment like the 1930’s as well as the inflationary environment that is likely to precede it?

          If not, time may be running short.

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