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There is an interesting twist here that relates to the reflexivity (reflexivity, that thing Soros likes to talk about) of the value of gold. Precious metals may start off being precious because they are rare and beautiful materials that are easily crafted into decorative shapes. Girls like it. Guys like it. But then, because it doesn't decay it's value increases because it starts to be used as a standard trading commodity! Because that pile of gold can be converted into a house or food for a year or a farm, etc. that pile of gold increases in value. Indeed, pretty quickly this reflexive value eclipses intrinsic value, to the point where the gold itself doesn't matter except as a placeholder. We can then jump to fiat currency. The key question is: how much real wealth can that pile of fiat money be converted into? The details vary (e.g. you can negotiate a better price) but fundamentally the real-world convertibility of a currency requires a functional, working market: the US dollar is powerful because you can easily and stably convert it into a basket of real goods. Indeed, the sheer size of the US economy means that this basket is unusually independent of demand, and can meet essentially unlimited demand in real goods. I mean, you could probably buy $100M of US corn today and not have any real effect on the supply. (Yes, you could overwhelm almost any single commodity market with $36B. Luckily Bill Gates did not decide to blow it all on bottled Coke, otherwise the world would be totally without Coke for probably a good two weeks!) It is the physical, political, social, and legal environment that defines the machinery with which money is converted into real goods. Indeed, one could even justify US geopolitical goals (which pretty much boil down to "become invulnerable") as making possible the ultimately stable marketplace, which further strengthens the currency. The problems arise, of course, when the machinery itself becomes perverted. We can define market perversion as "adversely affecting the machinery that converts money into real goods". There are a wide variety of such perversions, ranging from patent trolling (which perverts the R&D market), to the increase in size and complexity of the legal system to the point where prosecution is itself punishment (which also dampens innovation and reduces risk taking). This is partly why it is important to have a healthy middle class and not have too much concentration of wealth: if wealth is concentrated enough, then the wealthy wed with the machinery, and the perversion becomes systematic. We already see that with telecom and the FCC, banks and the SEC. |