During times of war or financial crisis, central banks and governments can feel the need to jump start economic activity by manipulating their country's currency. Even as far back as 60 AD, leaders were taking measures to artificially shape the economic landscape via currency intervention—and sometimes outright currency manipulation. The Roman emperor Nero debased the standard denarius, the currency of the Roman Empire, to help finance the rebuilding of Rome after a major fire, as did Emperor Septimius Severus, in order to finance his military. These leaders intentionally lowered the value of the denarius by reducing its precious metals content, which was in this case, silver. By reducing the silver content of the denarius, Nero and Severus were able to make more coins from the same amount of precious metals.
But debasement isn't the only method of currency intervention that governments and central banks have at their disposal, especially today. They can influence interest rates, print more money, and adjust reserve requirements, along with a host of other approaches in order to control the landscape of the economy.
While holding physical cash may give you a feeling of stability (after all, it's something you can see and touch), today's paper currencies may not be as strong as you've been led to believe. If you've been under the impression that the days of carting around cash in a wheelbarrow ended after World War II, think again. Venezuelans may not be using wheelbarrows, but they're certainly facing a severe level of inflation. Citizens of India, too, are facing a cash crisis. And in the U.S.? The dollar's purchasing power has declined by at least 85 percent since 1971, writes Peter Ferrara. The volatility of paper currencies is no longer a thing of the past. Read on to learn more about the currency troubles facing two advanced economies and how you could avoid being burned by cash's unpredictability.
“Venezuela's currency is so devalued it no longer fits in ordinary wallets”
As noted in the above Washington Post headline, inflation is out of control in Venezuela, to the point that citizens are carting around massive stacks of paper currency in boxes and backpacks. Crime is spiking, stores are changing their prices on a daily basis, and prices for everyday goods are skyrocketing on the black market, all while Venezuela's economy is set to contract by 10 percent this year.
Why is Venezuela experiencing such economic hardship? The country depends on oil exports for 95 percent of its revenue and unfortunately, oil prices and production have both fallen drastically. Venezuela's currency, the bolivar, has plummeted alongside both due to inflation and devaluation.
What's inflation? Inflation occurs when a unit of currency depreciates so much that it takes more currency units to buy the same amount of goods or services than it did in the past. In short, when inflation occurs, you get less stuff for your money than you used to be able to get.
A year ago, one U.S. dollar equaled 175 bolivars. Now, even the largest denomination note of 100 bolivars is equivalent to less than 3 U.S. cents, writes Reuters. Inflation in Venezuela is expected to reach 720 percent by the end of 2016 according to the International Monetary Fund, which will only worsen the situation for the Venezuelans who spend entire days waiting in line for basic food items and who fearfully cart around huge wads of bolivars in backpacks and handbags.
At this point, higher oil prices are “unlikely to solve the economic, humanitarian, and political crisis” facing Venezuela, reports USA Today, especially given the fact that the Venezuelan government has prioritized meeting debt payments above improving conditions for its citizens. While the exchange rate gap between the dollar and the bolivar isn't as gut-wrenchingly wide as it was during the height of German hyperinflation in 1923 (when one trillion marks was equivalent to one dollar, cites PBS), Venezuela's currency is scarcely on the road to recovery.
India's surprise cash ban has led to chaos, confusion, and even hunger
In an unscheduled televised address on November 8, 2016, India's Prime Minister Narendra Modi gave the nation just four hours’ notice that 500 and 1,000 rupee notes would no longer be legal tender, reports BBC. The decision was made in an effort to crack down on corruption and illegal cash holdings, curb tax evasion, and bring billions of dollars of unaccounted cash back into the economy. Three weeks after the announcement, ordinary Indians are struggling to cope. The 500 and 1,000 rupee account for roughly 86 percent of all cash in circulation in India, writes Time, and debit or credit cards aren't an option for the majority of the population. Even if they were, most small businesses in India don't accept them.
To make matters worse, there are serious doubts that enough new currency exists to even facilitate an exchange of all the 500 and 1,000 notes in circulation. And even if there were an adequate number of notes, the majority of Indians don't have easy access to a bank or ATM at which to make their exchange.
“If only the list of issues stopped there,” writes Time. Since the announcement, officials have repeatedly tweaked “regulations about who can withdraw how much money and in what circumstances, and where the old notes can still be used. The upshot is widespread public confusion in an already chaotic situation.”
In uncertain times, increasing cash reserves and reducing exposure to fickle financial markets “obviously makes sense,” says John Mauldin of Mauldin Economics. However, from an economic and historic perspective, there are many reasons why gold could prove to be a better performing asset than only holding cash. Read more about the advantages and disadvantages of holding cash over gold and call 1-844-307-1589 for quick answers to your toughest gold questions. Account Executives are standing by to help you learn more.
Overnight, the economic landscape for 1.25 billion Indians changed. Many citizens are stuck holding money that no shopkeeper or store will accept. Unable to access exchange locations or an exchange location with an adequate amount of new currency, some Indians are literally begging for credit at food stalls in order to eat, as reported by Time. Even though these citizens have money in hand, it's effectively useless…and was rendered such in just a matter of hours.
In the U.S., “the dollars of today are worth less than yesterday's”
While the U.S. isn't facing a currency crisis like Venezuela or India, the dollar may not be as stable and predictable as it once was. A particularly noteworthy event was when President Lyndon B. Johnson signed the Coinage Age of 1965. Under the impression that he needed to reduce the country's dependence on silver, Johnson signed an act which “stripped U.S. coins of silver and made legal tender out of base metal slugs,” reports The Wall Street Journal. Before he signed the act, “the value of the dollar was almost exactly the same as it had been in 1792…and on average it had been remarkably steady for the long span.”
Afterwards, however, the dollar started sinking and “by 1980 the dollar—so long valued at 0.77 ounces of silver—plunged to 0.02 ounces of silver,” continues The Wall Street Journal.
“The dollars of today are worth less than yesterday's and those of tomorrow will be worth less than today's. We are now, all of us, running faster and faster at unsustainable levels on a treadmill towards inevitable disaster,” says Robert Schoon via Kitco, whose sentiments are supported by Peter Ferrara, former Associate Deputy Attorney General of the United States under President H.W. Bush. According to Ferrara's estimates, a dollar saved in 1971 was worth a mere 12 cents by 2012. With this information in mind, does cash seem like the only efficient way to store wealth?
Analysts expect gold to climb on weak U.S. dollar in 2017
Currency manipulation contributed to the fall of some of the world's greatest classical civilizations, yet governments and central banks around the world continue to print more money, devalue existing currency, and cause hard-working citizens to struggle with debt and anxiety. The economic landscape could change overnight, just as it did in India. Without notice, your store of cash could be rendered unusable. At Credit Suisse, analyst Anit Soni expects the price of gold to climb to $1,450 per ounce in the first quarter of 2017, on the grounds that president-elect Trump's “inflationary and protectionist policies will pressure real rates and weaken the U.S. dollar, both of which are good for gold prices.” The U.S. has only had a completely paper-based currency for about 45 years, while gold has been a medium of global exchange for more than 5,000 years. Call 1-844-307-1589 to learn how you may be able to turn your paper money into gold, a long-standing safeguard for wealth. Account Executives are standing by to take your call.