Gold vs. Paper!

If there was not a problem with paper money, there would be no reason to own gold and silver.

If paper money was as good as gold and silver, then all the paper currencies that have failed throughout history would still be around.

They would still be valued. Valued like gold and silver.

But they are not. So it’s time to talk about Gresham’s Law again.

Gresham’s Law is an age-old economic principle that states: “bad money drives out good.”

When two types of money circulate, people will spend or pass on the inferior money like made-up, printed, unbacked paper or digital money, and keep for themselves or save the good money with its superior or more dependable value.

One of the best-known examples of Gresham’s Law in the American experience occurred when the US government began replacing real silver coins in the 196os with coins created to mimic silver. Nobody has to be taught Gresham’s Law, it is just elementary economic behavior. So people everywhere, even children began saving the real silver coins, which soon disappeared from circulation, while the ersatz silver coins circulated in daily commerce.

The worth of the real silver coins has of course gone up. The worth of the phony silver coins has gone down.

Something akin to Gresham’s Law is going on globally, too. The rest of the world, as represented by global central banks and foreign governments, are increasingly saving and holding on to gold for its superior value. At the same time they are dishoarding U.S. dollars.

Here’s an item that Bill Bonner spotted in The Guardian:

Trump’s Iran strikes accelerate the world’s drift from dollar dominance

The trade-weighted dollar, measured against a basket of global currencies, has lost 7% of its value over the past year…As Francisco Quintana, of Edinburgh Law School, puts it: “…t’s becoming more and more clear that it may not be the best thing to have such a huge dependence on the US, which is becoming less and less reliable.”

That kind of nails things down.  It’s sort of a global variation of Gresham’s Law.  Spend and dishoard dollars.  Hold and hoard the gold.

Makes sense for both governments and individuals.