WHEN GOOD MONEY GOES BAD
by The Mogambo Guru
Junior Mogambo Ranger (JMR) Ben writes that we can witness "Gresham's Lawin action, and what other countries will be facing with this rampantworldwide inflation." In case you forgot, Gresham's Law is popularly known as, "Bad money drivesout good money." In effect, people will hoard valuable money but willspend (and thus get rid of) money that is relatively more worthless. The case in point that JMR Ben thoughtfully provided was a link to thenews.bbc.co.uk report titled "Sharp Practice of Melting Coins." It seemsthat inflation in prices in India (due to the Indian central bank creatingso damned much money and credit every freaking day, just like all theother stupid central banks of the stupid world) has made the rupee almostvalueless, but the little bit of metal in the coins is so valuable that"Millions of Indian coins are being smuggled into neighbouring Bangladeshand turned into razor blades."How much more valuable is the metal in the coin? The conversion ratio is aone-rupee coin can be made into seven razor blades, worth 35 rupees! The natural result of Gresham's law in action is "an acute shortage ofcoins in many parts of India."Naturally, coping mechanisms spring up, such as, "Shopkeepers askcustomers to buy more to make it a round figure so that small change doesnot have to be given out", shopkeepers giving "toffees or cigarettes tomake it a round figure", and even issuing cardboard scrip. The most surprising, astonishing and terrifying thing was the actual,in-your-face admission of further government debasement of the money! Myeyes pop from my head in disbelief as I read that "The mints tookcorrective action - scaling down the metal content of the coins - but thathas not stopped the shortages." If the Indian mints wanted to take "corrective action" against theinflation that is rendering the coins worthless as money, they would stormthe central bank of India and stop them from creating so much money andcredit!And it is not just Indians, but according to a fax from Junior MogamboRanger (JMR) Andrew G. of a Globe and Mail article, inflation in Canada ismaking them think of ditching the penny. The metal in the Canadian pennyis worth so much more than the one-cent face value of the coin thatpennies are, just like in India, being hoarded. To make up the shortfall,the Royal Canadian Mint was forced to increase production of pennies to1.4 billion last year, enough pennies to represent "63 percent of totalcirculating coin production."This phenomenon of disappearing coins must be happening almost everywhere,too, as all currencies are being debased by their central banks, and coinswith a low, fixed denomination on them are doomed as the buying power ofthe coin falls below the melt value of the metal in the coins.And sure enough, the article notes that "Australia [stopped] makingone-and two-cent coins in 1990. New Zealand stopped making them threeyears before that. France, Norway and Britain are among the othercountries that have eliminated low-denomination coins."So inflation is hitting everywhere, literally rendering money increasinglyvalueless, and yet the governments allow the banks to just keep printingmore and more of it! This is insane!Bill Bonner of DailyReckoning.com doesn't want to talk about what or who(looking directly at me) is insane or not, but astutely notes that "if youcould really get rich by printing more currency, Zimbabweans would all beas rich as Midas, since the Mugabe government runs the presses night andday." And to underscore this point, Junior Mogambo Ranger (JMR) Phil S.forwarded the latest Cathy Buckle letters from Zimbabwe. She lives there,coping with the highest inflation (over 5,000% at last estimate) in theworld, the most stupid, corrupt and demonic government in the world, andwhere prices are now (according to Ms. Buckle) "going up by an estimated10 percent every day."But Ms. Buckle does not want to be drawn into a boring discussion with TheMogambo about inflation in the theoretical abstract, but sticks to thehorrific specifics and says, "Because of the oppressive, iron-fistregulations from Harare, individuals are only allowed to withdraw one anda half million dollars at a time from the bank - even if they have justdeposited a hundred times that amount the same day. The bank charges a'handling fee' for the withdrawal of amounts of one and a half milliondollars or less, but you cannot withdraw more without applying forpermission from the Reserve Bank in Harare."Aside from the fact that the Zimbabwe dollar and the U.S. dollar were on arough parity a decade or so ago, "To put all these figures inperspective," she explains, "you have to stand in a queue in the bank forfour days in a row - each day drawing out the maximum amount, each daypaying the 'handling fee' - in order to purchase one tank of fuel for yourcar." One tank of gas!And if you want to hear some good news of belated smarts as pertains tomoney and how fiat money in the hands of an irresponsible governmentalways becomes worthless, Julian D.W. Phillips in The Gold Forecasternewsletter notes that "Italy has no plans to sell any gold, which isunsurprising given the very poor history of the Italian lira. They toohave seen several currencies come and go in the last one hundred years, sothey have few illusions about the joys of compound interest. After all,adding noughts to a currency doesn't make them more valuable; it's thebuying power that counts."Until next week,The Mogambo Gurufor The Daily ReckoningMogambo sez: For those of you who question my smarts ("You're an idiot!")and wave your little clinical reports around ("And I can prove it!") whenI say that gold will explode upward in price because gold ALWAYS explodesupwards in price in the bust that follows the boom, I present theMarketWatch.com headline, "Gold rises on safe-haven buying, dollarweakness."This is how it always is at the beginning of the bust after the long boom;people get tired of running back and forth between stocks and bonds whenthey seem to lose money every time as both stocks and bonds will trenddownward in price as the asset boom deflates and consumer prices rise, andthey finally say, "I'm getting slaughtered here! To hell with this! I'llbuy what people always bought at times like these, when stocks areoverpriced, and bonds are overpriced, and houses are overpriced, andgovernment spending and size is huge, and everyone is up to their ears indebt, and there is nowhere else to go; I'll buy precious metals!"That's why I know, with absolutely no doubt in my mind whatsoever, thatthe big moves in gold and silver are ahead. It's how history repeatsitself. And it always does, as it seemingly must.