W. Schmidt, CFA, CEBS Schmidt Management Company
October 27, 2004
from 3 November:
Beach Country Florida: Turmoil the day after the election
continued widespread. Name calling between various factions was at
a high level. Courts were bracing for the onslaught of lawyers
representing several groups. Ida Been, a retiree from New Jersey,
was incensed, "Can they never get it right!" Having to
be restrained from striking Ms. Been was a red-faced man, loudly
proclaiming, "The whole thing was a reprehensible mess."
Yes, it was. Ms. Been's poll watcher team was to get the Krispy
Kremes and the attacking gentleman's to get the Dunkin Donuts. The
orders had been reversed. As for the voting, a replay of the
Millennium Bug seemed evident.
article is the second in a series on moneyization [See
Part 1]. We do recommend reading the previous one for background
understanding, available usually in the archives of most sites. The
shifting tide of global money is the focus of our attention. Just as
anyone fishing needs to be aware of the tides, so does the investor.
Otherwise, the "portfolio ship" may be dashed on the rocks by
the rising and falling of the tidal wave of monies. In this one we also
define moneyization and further expand your knowledge base.
and knowledge are the two most powerful tools of investment. A well-worn
metaphor is that of providing the fish or teaching someone to fish. Anyone
can scour the internet for that occasional investment idea that works, or
that greater number which do not succeed. More important are the skills to
recognize and perceive the meaning of shifts in the world of money.
Recognition of the danger in the twin deficits of the U.S., the federal
and the trade, was the first learning step. The
second learning step is knowing of the massive shift, on a global basis,
of money that is beginning.
proceeding on to our assignment, let us reflect on the current situation.
The format for the following table is intentional. One of our goals is to
get more investors to think in ounces and Euros, rather than the
old-fashioned custom of U.S. dollars. Several reasons exist for wanting to
adapt your way of looking at the money world. This
table is formatted in the way the world will come to look at relative
values of monies, in Gold and Euros.
I: Currency Valuations
IN GOLD (OZ)
For those with a math mind, we may have to quote currencies in Gold Oz. 10-3. That may be the currency
measure of the future.
no good economic nor financial reason, around the world more than 150
different national monies exist(Cohen,2004 ). Since only one is really
required to conduct all business done on earth, the number is certainly
excessive. Agreement on quoting of money values even makes little sense.
At the bottom right of page C-1 of The Wall Street Journal is a
snapshot of the money values. The Euro is quoted in dollars. The yen is
quoted in number of yen per dollar. British pounds are quoted in dollars.
Canadian dollars are quoted in Canadian dollars per dollar. And for those
with a memory, the Swiss franc no longer merits front page coverage as
presumably hard currencies are no longer relevant in the financial era.
plethora of national monies means that one may need to be exchanged for
that of another if transactions for goods and services are to occur. Not
content to let a system exist to simply provide for required economic
transactions, the financial community felt compelled to transform it into
an opportunity to trade. Some trading does serve economic purposes,
providing liquidity and pricing information. Most trading simply generates
fee income for brokers, and provides the opportunity to have periods of
great success (manias) alternating with financial meltdowns (panics).
of national monies, foreign currency trading or Forex, is now a massive
undertaking. A recent estimate puts the value of trading on foreign
exchange markets at US$1.9 trillion per day(World,2004). Add to that
another trillion dollars worth that trade over the counter, and the world
is shaking the dice with almost three trillion dollars of transactions in
Forex each day. Equity and bond markets are sideshows compared to such
activity. And remember, most of this money churning adds no value to the
economic well being of the world.
doubt exists that trading of this size is not necessary to facilitate the
daily exchange of goods and services in the world. Most of this
activity is done by bright, young college graduates with massive computers
running questionable mathematical algorithms that have been back tested
over the past twenty minutes of trading. Perhaps knowing that the
financial security of the world rests each night on the success of this
combination makes you sleep well. Others, though, might have a more mixed
reaction. (Remember the space mission that failed cause part of the team
was working in metric and the other in English measurement?)
the meltdown in this trading frenzy occurs is no longer the question.
Rather than waiting for the big meltdown, people around the world have
reacted to the long series of mini meltdowns that have already occurred.
In the previous article the dismal record of national monies was reviewed.
On a broad basis, national monies have been a good way to destroy wealth
for a lot of people. But, people learn from their mistakes. Around
the world a massive shift of wealth away from weak currencies has
individuals and businesses will not hold national monies that develop
Any currency, including the much worshiped U.S. dollar, will not be
retained if doubt develops over the likelihood of it serving as a store of
value. These groups have been burned too many times. What's the old saying
about fool me once?
the world a move to concentrating wealth in fewer national monies is
readily evident. The
work of the International Monetary Fund on 85 countries suggests that a
significant move on the part of consumers and businesses out of their home
monies has already happened. At the end of 2001, on average 34% of bank
deposits in these countries were denominated in foreign monies rather than
their home money (De Nicolo�, Honhohan & Ize, 2003). Roughly a
third of bank deposits have been shifted to presumably more stable monies.
That level of a shift is far from insignificant for not included is either
foreign currency in their pockets or bank deposits in a foreign nation. Further,
this situation demonstrates both a willingness and an ability to shift
easily among national monies.
early research literature on these shifts, desiring to gain an
understanding of this development, is filled with attempts to empirically
measure the extent to which citizens of certain countries had shifted from
domestic money to foreign money. These efforts, largely due to measurement
problems, were not adequate or especially successful. Early discussions
referred to this phenomenon as dollarization, as much of the early
identification of the phenomenon was in Latin America. Motivations for
these studies were generally the money related economic problems of
individual countries. Citizens in these countries had been buffeted by
inflation, devaluation, depreciation, confiscation, nationalization, and
politicians for decades. The barrel of a rifle could not get them to hold
their home money.
Hysteresis became a common term in the literature to describe the phenomenon observed
in that research. Inflation rates and past depreciation in the exchange
rate were largely used as explanatory variables for dollarization.
However, when inflation moderated and currencies regained relative
stability, the citizens did not shift back to the domestic money (Tandon
& Wang,2003;Helleiner,2003). The term, hysteresis, was borrowed from
the physical sciences as it describes a situation that continues despite
the removal of the forces causing the initial reaction (Random
this point on though, the term "moneyization" will be
used rather than "dollarization." The latter term implies that
dollars are the money being substituted for the domestic money. Such is
not always the case, as British pounds, Swiss francs, Japanese yen and now
the Euro are acceptable foreign monies in many places as substitutes for
local money. Obviously these monies are not dollars which makes the term
inappropriate. In a similar vein, use of the term "currency" is
not appropriate for only a portion of the world's money supply is in the
form of currency. Substitution has increasingly taken place in the form of
monies and financial assets, rather than currency.
the best effort to quantify the level of moneyization has been done by and
for the International Monetary Fund, and was referenced above. Concern for
these financial developments stems from the impact on a country's ability
to conduct monetary policy. A consequence of moneyization is that the
value of a country's money is likely to be more volatile on foreign
exchange markets (Berge & Borenztein,2003;
This condition has serious implications for the future volatility of the
U.S. dollar, but that will have to wait for a future article. Many
national monies, including perhaps the U.S. dollar, are caught in a
circular flow of negative forces that suggests they are more likely to
become something viewed in a museum rather than in the wallet.
move by individuals and businesses to stronger monies, or de facto
moneyization, is only one aspect of the process. De juro
moneyization is also occurring. Table I summarizes the move by nations
to replace their national monies with others. This table is certainly not
complete in present form for many of the neighboring countries to the
European Union are moving either to the Euro, pegging to the Euro, or
experiencing de facto Euroization. While certainly somewhere a nation
created a new national money, not since the dissolution of the former
Soviet Union have monies been created in any number. Please note that this
effort certainly does not attempt to be the definitive source of national
money creation and destruction.
Table II: Countries Denationalizing Money
vote is not going well for the U.S. dollar!
1 Date of joining EU. Euro adoption date to be determined.
(European Central Bank,2004a) 2International
the 15 nations originally joining the European Union, the naturally
stubborn United Kingdom and Sweden do not use the Euro. Denmark pegs its
currency to the Euro (European Central Bank,2004b). The alignment of
nations for entry into the European Union has grown in recent times. As
these nations bring their internal policies into conformity with EU
standards the dates for adoption of the Euro will be determined.
are being made by periphery countries on the future character of their
national monies. Additionally, a de facto shift to the Euro is observed in
these countries. Russia is the second largest holder of U.S. dollars in
the world(Oomes,2003). A reasonable expectation would be that Russia
may experience a shift to the Euro purely for trade and travel related
reasons given the close proximity to the European Union and the volume of
trade and travel between the EU and Russia. The impact of such a large
shift in money ownership could prove interesting. An
important learning step is that the citizens of all the nations in or near
the European Union are already, or will be, selling dollars and buying
far we have observed a string of massive currency crises over the years
that have cost people hundreds of billions of dollars of wealth. People
have responded by moving out of the questionable monies created by their
own nation. Governments too have been busy, dumping their national monies,
moving to the Euro as a better alternative. The world of tomorrow will be
one of fewer national monies. The survivors will be those monies in which
investors have confidence and in which they want to be invested. The next
step to consider is the coming clash of two major currencies, the dollar
and the Euro. Momentum, it will be argued, is on the side of the Euro. And
besides, who in the world does not already own too many dollars?
Dollar denominated investors and businesses need to recognize that the era of one
great currency is passing.In that transition era, financial turmoil
is likely. The dollar's value will face growing
risk of rapid depreciation. In terms of what we learned in the
last article, the Gold price of the dollar will go down. That development
pushes up the dollar price of Gold. From a strategic or longer-term
standpoint, a shift to Gold by dollar denominated investors and businesses
is essential for financial survival.
is not required to recognize that a Gold Super Cycle is unfolding, likely
to carry it well over US$1,200. Once though an investor recognizes the
need to own Gold, picking the day to buy is the next decision. That task
is the hard one. Tactical considerations are always tougher than
long-term, strategic decisions. As the graph below, from my weekly TRADING
THOUGHTS, suggests, learning to buy low is possible. Just remember,
do not buy when prices are up and enthusiasm is high on any given day. And
finally, if one does not buy Gold one cannot benefit from the Super Cycle.
Trading a few stocks once or twice will not get it.
For Your Personal Research
A. & Borensztenin, E.R.(2003). The Pros and Cons of Dollarization, In
Salvatore, D., Deon, J.W. & Willett, T.D.(Eds.), The Dollarization
Debate(pp.72-101). New York: Oxford University Press.
B. J.(2004). The Future of Money. Princeton: Princeton University
V.(2003). Is It Time for a Common Currency for the Americas?. In
Salvatore, D., Deon, J.W. & Willett, T.D.(Eds.), The Dollarization
Debate(pp.102-110). New York: Oxford University Press.
Nicolo�, G., Honhohan, P. and Ize, H.(2003). Dollarization of the
Banking System: Good or Bad?(IMF Working Paper 146). Washington,
D.C.: International Monetary Fund.
N.(2003). Network Externalities and Dollarization Hysteresis: The Case
of Russia(IMF Working Paper 96). Washington, D.C.: International
A. & Wang, Y.(2003). Confidence in Domestic Money and Currency
Substitution. Economic Inquiry,41,407-419. Retrieved March 25,
2004 from ABI/Inform Complete.
Forex trading hits record. (2004, Sep 29). The Financial Times,
W. Schmidt,CFA,CEBS is publisher of THE VALUE VIEW GOLD
REPORT. That report now includes a weekly message, TRADING
THOUGHTS, to help investors identify timely points for
buying Gold and Silver. His monumental report, "$1,265
GOLD", with 255 pages and 98 graphs, is now widely known,
and is available at www.amazon.com
or from the author by clicking HEREThis work has now been read by investors in over twelve countries
around the world. Ned welcomes your comments and questions. His
mission in life is to rescue investors from the abyss of financial assets
and the coming collapse of the U.S. dollar. He
can be contacted by Email.