The Gresham Squeeze


Dave’s picking up a pattern recognition on the Putin plan from Russia’s preferred propagandist

If the Euro is already a divorced currency and it only serves to satisfy the transactional nature of the double coincidence of needs and is no longer and never was designed to be a store of wealth, then according to Gresham’s Law, the Euro will drive out the dollar.

If Gresham’s law is reversible and if the money is a technology meme is being circulated by global financial powers as a coordinated agenda, then could technology disintermediate the dollar under Gresham’s Law.   This would be possible only if both conditions a) the reversibility of Gresham’s Law and b) the reduction of friction in transactions to a level sufficiently low for Gresham’s law to reverse itself, we realized.

If Gresham’s law was reversed due to a reduction in friction brought about by technology, then the dollar would be squeezed out simultaneously by the “bad money” of the Euro and the “good money” of technology forcing the dollar out of circulation simultaneously.  This would cause a hyperdeflationary cycle to set in causing a collapse in asset values as measured in dollars.

Here’s what some folks at the research department at the Fed (Minneapolis and Kansas City) and NYU had to say about that question in their research paper:

Valued money increases welfare because it allows agents to uncouple the role of capital as a medium of exchange from its role as an intrinsically productive asset. Under the optimal monetary policy (the Friedman Rule), fiat money provides just enough liquidity so that the incentives to invest in capital arepurely technological and agents choose to accumulate the same capital stock a social planner would implement.

If this sounds a little esoteric to you, then consider this idea for a money.  Take a look at the money being attracted to the capital in the form of technology when you look at stocks such as Facebook, Zynga, Groupon, LinkedIn and let’s not forget Apple.  Is it fair to say that “the incentives to invest in capital are purely technological?”  If you consider the perspective of this paper written by the Fed, where they examined the likelihood that warehouses filled with copper or silos filled with soybeans would disintermediate the dollar as a form of exchange, you can see fairly easy how technology wins out, at least from a frictional (not fractional) standpoint.

Consider the following statement and how it aligns with Dave’s take on the Mervyn King divorced currency strategery.

… uncouple the role of capital as a medium of exchange from its role as an intrinsically productive asset.

Sounds like the same basic idea of separating the double coincidence of needs from the store of wealth aspect of money… no?  Dave’s been thinking about two things.  He’s been thinking about the fact that the Euro is essentially a divorced currency that was never designed to be a store of wealth whose sole purpose was transactional. Dave’s also been thinking about the money is a technology meme to the point where he figures he ought to be receiving his free subscription to The Economist magazine in the mail very soon.  But here’s the part that has Dave stumped.

1.  If the Euro is “bad money” relative to the U. S. Dollar (as a store of wealth), then according to Gresham’s Law the Euro will drive out the dollar.  Dave is starting to believe this may be just what is happening as the velocity of the dollar slows and more little old ladies cash in their certificates of deposit and stuff the proceeds into a mattress like so many jars filled with pre-1965 Roosevelt dimes.

2.  If the money is a technology meme is true (or at least a form of divorced money ala the Euro) and this would be tough to argue with when you consider the price of a share of Apple or the price paid by Zynga for that mobile phone picture drawing application last week from OMGPop.  For this to actually manifest itself Gresham’s law would have to be reversible and via mobile technologies we would need an environment with near friction-free transactions where you don’t even have to pull your wallet out.  I think I wrote something about Larry Summers and friction last week.  Are you doing your homework or expecting Dave to figure everything out for you?

3.  If you consider the prices of real property and the divergence between the cost of renting and cost of buying and the cost of building new housing Dave can’t make a bit of sense out of that market.  Dave’s sense is that it is where the lack of velocity (care of Grandma’s C.D. strategery) and the Euro-imposed U. S. dollar deflation (dollar cash hoarding as more than just an obsessive/compulsive cable TV disorder) have built their nest and lined it with Benjamins.

If Dave’s thesis is correct, then what the dollar is being subjected to is A Gresham Squeeze from both ends of the fiat spectrum.  Let’s say you have a Groupon coupon on the right squeezing in on the dollar as a form of alternative currency efficiently distributed and bringing a velocity and value to money (albeit for cupcake purchases primarily) that Grandma would hardly notice if she didn’t have such a sweet tooth.  While on the left, you have the Euro driving the dollar into hiding quicker than you can drive an aircraft carrier through the Suez Canal.

What caused Dave to start thinking about all this?  Mainly a guy named Victor the Cleaner.  Here’s what Victor wrote;

We have seen that the problem of the gold standard was not fractional reserve banking, nor mismatch of maturities, but rather the presence of credit denominated in a weight of gold. This leads to an undervaluation of physical gold in terms of the currency and renders the speculation against the system trough Gresham’s law profitable. Furthermore, in a crisis of confidence, the run on the bank (better: run on the physical gold) is the optimum strategy.

The solution is therefore to embrace Gresham’s law and to separate the store of value from the currency: Freegold. See, for exmaple, FOFOA’s The Return to Honest Money.

The idea that the flaws of the gold standard cannot be fixed by better regulating the banking system, was also discussed in FOFOA’s Reply To Bron and in the discussion section at FOFOA’s blog starting here.

Does Dave agree with these theories?  Not exactly.  Does Dave believe that there is an organized effort from both outside and inside the United States Government to create a “multi-polar world?”  Will this multi-polar world be one where a combination of fractionally-based gold currencies will be married to technology while breaking the sovereign bonds of confidence that the dollar has been based on in the past?  Would you describe that as a world of “more flexibility?”  Please allow the President of the United States to knowingly highlight on a hot mic the difference between a pre-election and post-election nuclear world as explained to Russian President Medvedev.

There is one thing Dave would say definitively and that is that the value of the U. S. dollar is a direct reflection of the perceived ability of the U. S. military to maintain equilibrium in the Anglosphere through the steady flow of oil. How long will that last? Dave will answer that question with a question. Which is quicker, building a Keystone Pipeline or launching a BRICs currency designed to disintermediate the U. S. Dollar?

 

Here’s a link to Victor’s website and the complete article: http://victorthecleaner.wordpress.com/2012/03/18/how-credit-suppresses-the-gold-price/

Here’s a link to the entire research paper from the Fed: http://artsci.wustl.edu/~econgr/macro/papers/Lagos_Rocheteau_JETforth.pdf

Dave’s previous takes on the reversability of Gresham’s law:

http://tradewithdave.com/?p=8587

http://tradewithdave.com/?p=6582

http://tradewithdave.com/?p=9012

3 Responses to “The Gresham Squeeze”

  1. [...] Here’s Dave’s previous takes on the reversability of Gresham’s law: http://tradewithdave.com/?p=9772 [...]