More US States Seek New Gold and Silver Currencies

From the CNN,

A growing number of states are seeking shiny new currencies made of silver and gold.

Worried that the Federal Reserve and the U.S. dollar are on the brink of collapse, lawmakers from 13 states, including Minnesota, Tennessee, Iowa, South Carolina and Georgia, are seeking approval from their state governments to either issue their own alternative currency or explore it as an option. Just three years ago, only three states had similar proposals in place.

"In the event of hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System ... the State's governmental finances and private economy will be thrown into chaos," said North Carolina Republican Representative Glen Bradley in a currency bill he introduced last year.

Unlike individual communities, which are allowed to create their own currency -- as long as it is easily distinguishable from U.S. dollars -- the Constitution bans states from printing their own paper money or issuing their own currency. But it allows the states to make "gold and silver Coin a Tender in Payment of Debts."

The world does not operate on a vacuum. People act based on purported ends, or that people responds to incentives shaped by perpetually changing conditions—impelled by the environments, the markets, political policies or social relationships or on a blend of these [certainly not based on mathematical variables and equations].

If national governments continue to relentlessly debauch their currencies, then people will seek refuge in alternative currencies that would preserve their hard earned savings.

The function of money can be seen even in the prison environment where in absence of conventional money, exchanges takes place through spontaneously designated commodity medium by the inhabitants (not authorities).

Returning coins to circulation have even reached mainstream US politics as 2 senators have introduced a bill that would replace dollar bills with coins.

And this aligns with the actions of 13 US states above, who seems to realize of the growing fat tail risks of inflationism.

Swelling grassroots recognition of such risks seems to prompt for noteworthy changes on the fringes of the mainstream political spectrum.

Perhaps we will reach a tipping point where the periphery transforms into the popular. And this should apply not only to the US but importantly to the world.

Commodity Currencies as Refuge from Crisis?

“This time is different is a phrase” which I usually loathe. But applied to safehaven or refuge assets during a crisis, “this time has indeed been different” as Gold, the Swiss Franc and the Japanese Yen has replaced the US dollar, as discussed here.

Now a report from Bloomberg says that today’s market rout has seen gains in commodity currencies which may become alternative havens.

The currency havens are disappearing as Switzerland and Japan intervene in foreign-exchange markets, while U.S. and European debt loads undermine credit ratings.

The biggest beneficiaries in the $4 trillion-a-day currency market may be Norway’s krone and the Australia and New Zealand dollars, according to Frankfurt Trust, which oversees about $23 billion. All have debt that is less than 48 percent of gross domestic product, compared with about 60 percent in the U.S., 77 percent in the U.K. and 79 percent in Germany, according to data compiled by Bloomberg.

The Swiss franc and Japanese yen, which had become favorites of traders skittish about holding dollars and euros, became perilous after the Swiss National Bank unexpectedly cut interest rates and Japan sold its currency. The yen weakened as much as 3.2 percent on Aug. 4, according to Bloomberg Correlation-Weighted Indexes. The U.S. came within days of defaulting and Italian and Spanish bond yields approached levels that spurred bailouts of Greece and Ireland.

“You want to stay away from the euro and dollar because this is really an ugly pair and there are alternatives,” Christoph Kind, the head of asset allocation in Frankfurt at Frankfurt Trust, said in a telephone interview last week. “I like currencies like the Australian and New Zealand dollars, the Swedish krona and the Norwegian krone. They are AAA-rated countries with a currency they can manage and handle, and they have pretty liquid markets.”

Charts below from Yahoo Finance

One day does not a trend make.

While Norway krone (NOKUSD) and Sweden’s krona (SEKUSD) are headed up and above yesterday’s close (red horizontal line), this isn’t true with Australia (AUDUSD) and New Zealand’s (NZDUSD) dollar both of whom appear to be rebounding but are significantly below their respective previous closes. Before I forget, the charts above represent a one day window.

The Increasing Role of Commodity Currencies as Forex Reserves

Here is more proof of the declining role of the US dollar as the de facto international currency reserve.

From BCA Research (bold emphasis mine)

In addition to the dollar, four currencies – the euro, British pound, Japanese yen and Swiss franc – have accounted for the vast majority of FX reserves. For most of the last decade, it was these currencies (especially the euro) that benefited from the dollar’s relative decline in global reserves. But there has been a new development to central banks’ diversification strategy; since early 2009, central banks have been looking to what the IMF simply classifies as “other currencies”. From 2% in early 2009, “other currencies” now account for almost 5% of total reserves; the holdings of these alternative currencies increased by $300 billion over a two year period. While the IMF does not provide any further information, we speculate that it largely consists of the commodity currencies: the CAD, AUD, NZD and perhaps the SEK and NOK. For these relatively small economies, $150 billion of annual capital inflows is an enormous amount to absorb. Bottom line: Central banks in emerging economies will continue to shift a portion of their new reserves into non-dollar currencies.

So diversification away from the US dollar continues to deepen.

But this time this has not been limited to currencies of other major economies, but more evidently to currencies which are backed by commodity production-exports.

With gold knocking at the recent highs and copper also within striking range to the recent highs (oil has been creeping higher while silver still consolidating after an explosive run), the likelihood is that given the persistent crisis in major economies, which are constantly being resolved by the printing press, we should see a more expansive role for commodity currencies as international foreign reserves.

The other way to view this is that the growing role of commodity currencies signifies a symptom known as “flight to real value” to a disease known as “inflationism”.