Therefore, throughout economic history we always have long-term structural reform. Do not expect either gold or oil to always be a valuable component.
First, they sold their car.
Then, they downsized from a house to a small apartment.
Next, they cut meat from their diets. And now, they skip meals to ensure survival.
This is the story of Vanessa Posada and her husband Adolfo.
They live in Venezuela. And their money simply doesn’t go that far anymore.
Falling oil prices have sent the economy into free fall. Per experts, the inflation rate is 720% and rising.
And today, an estimated 93% of Venezuelans don’t have enough money to buy food.
It’s a sad story… especially considering that Vanessa did everything right.
But that’s not enough to save her from government money gone bad.
Consider that at the beginning of 2014, one Venezuelan bolivar equaled roughly 16 cents. Today, that bolivar will supposedly get you just 10 cents – a 38% decrease.
But that’s the official rate… the one no one pays attention to.
Today, one bolivar will actually get you just 0.000625 cents.
Put another way, at the beginning of 2014, you needed 6.25 bolivars to get $1. Today, using the black-market rate, you need 16,000 bolivars to get that same $1.
That means Vanessa’s bolivars are worth 99% less than just three years ago.
This story shows how governments can inflate a currency away. And it can leave those using that currency in a dire situation.
There’s a way Vanessa could have protected herself from government-driven inflation.
I’ll show you that in a moment. But first, don’t think it can’t happen to you.
Government Money: It’s Not Really Your Money
Venezuela is an extreme case. Folks tend to dismiss it. They think it can’t happen in their country.
But there’s no shortage of extraordinary situations going on in developed economies, too.
Take Switzerland, for example.
She completed her university studies. Then she got a job as a schoolteacher. And she later got married and had a child.
The gold-silver ratio from 1800 to 1915. In the 1870s, numerous nations around the world dropped bimetallism in favor of a gold standard (France was a noteworthy exception). Thereafter it quickly became obvious that silver had been vastly overvalued at the official exchange ratio. It was essentially a subsidy for silver miners. Once a pure gold standard was adopted, mild consumer price deflation became the norm, as economic productivity grew faster than the supply of gold. Contrary to what virtually all central bankers nowadays assert, this had no negative effects on the economy whatsoever. On the contrary, the four decades following the adoption of the gold standard produced the biggest and most equitable real per capita growth the US has ever seen – such growth rates were never again recaptured. Of course, at the time government spending represented between 3% to 4% of total economic output, i.e., government was but a footnote in most people’s lives. The reason why governments subsequently sabotaged the gold standard was precisely that they wanted to grow without limit. [PT]
Eight Spanish silver reales, or “pieces of eight” which consisted of 387 grains of pure silver (the coin on the upper right is a Mexican piece of eight, with Chinese chop marks). These coins were minted by the Spanish Empire since 1598 and were of the same size and weight as the German Thaler, which in turn was standardized across all German territories since the 15th century. These coins were legal tender in the US until 1857 and for a long time were the by far most widely used coin. The Coinage Act of 1792 established that the new US dollar was to be equal in value to Spain’s pieces of eight, but people soon found out that the US Mint used a slightly different standard of fineness (0.9 instead of 0.8924), which meant that about 1% more silver was needed to mint a dollar. This made them reluctant to bring silver to the mint, hence the Spanish coins continued to dominate in daily life. Spanish reales were actually the first world currency, and it worked splendidly for almost 300 years (incidentally, over the time of its existence, this was the least debased coin in the Western world, which explains its popularity). People would cut the coin into 8 pieces (“bits”) of equal size for smaller transactions and to make change – prices on US stock exchanges were quoted in fractions based on these 8 bits for a very long time. The United States Assay Commission which kept an eye on the quality of the production of the US Mint was one of the few bureaucracies to ever be disbanded – in 1980. This is actually testament to the stickiness of bureaucracies – gold coins had been out of circulation since 1933 and silver coins since 1965 (a rudely debased half dollar existed until 1970). [PT]
Gold quotes in India – gold traded for as much as Rs 49,000 per 10 grams or US$ 2,294 per ounce
