Dollar Fetish

The Federal Reserve Note (also known as the “dollar”) is an arbitrary financial instrument signifying nothing, an IOU … zilch; it possesses no intrinsic value besides paper and in digital form, no intrinsic value whatsoever.

It’s funny how so many people around the world treat it as the ultimate measure of value. Funnier still how one can be, temporarily at least, knocked out the dream-like trance the dollar induces when one sees people actually treating the dollar as if it had real value, and nottreating it as crumbled up colorful paper with random units assigned to it. The world’s monetary system begins to appear like a bizarre fetish.

Zimbabweans wash dirty US dollars with soap, water
By Angus Shaw, The Associated Press -- Tue Jul 6, 2010

HARARE, Zimbabwe – The washing machine cycle takes about 45 minutes — and George Washington comes out much cleaner in the Zimbabwe-style laundering of dirty money.

Low-denomination U.S bank notes change hands until they fall apart here in Africa, and the bills are routinely carried in underwear and shoes through crime-ridden slums.

Some have become almost too smelly to handle, so Zimbabweans have taken to putting their $1 bills through the spin cycle and hanging them up to dry with clothes pins alongside sheets and items of clothing.

It's the best solution — apart from rubber gloves or disinfectant wipes — in a continent where the U.S. dollar has long been the currency of choice and where the lifespan of a dollar far exceeds what the U.S. Federal Reserve intends.

Zimbabwe's coalition government officially declared the U.S. dollar legal tender last year to eradicate world record inflation of billions of percent in the local Zimbabwe dollar as the economy collapsed.

This story also reveals something important about the process of (hyper)inflation.

One of the most useful visual conceptualizations of the structure of modern economies I’ve come across is John Exeter’s Liquidity Pyramid, which I first encountered reading the work of Trace Mayer (last week’s AltRight Radio guest.) Many of the Austrian-inflected economists (Peter Schiff being an excellent example) were thrown for a loop over the past two years when, contrary to their warnings about inflation, the dollar did quite well through the 2008-09 crash and, indeed, treasuries proved to be one of the best asset investments. How can this be when it’s obvious that 1) Washington can never actually pay its debts, and 2) the Fed’s monetary base chart looks like a hokey stick?

Liquidity Pyramid

Exeter's and Trace’s answer is that people are descending the liquidity pyramid towards assets with real intrinsic value and zero counter-party risk (gold is the ultimate destination.) For centuries, Western man has been ascending Exeter’s pyramid towards greater complexity and less intrinsic value: from metallic coins to banknotes to bank deposits to government debt mountains (bonds) to joint stock ownership certificates to futures contracts to options to exchange-traded funds and, finally, the unfathomable 1,600 trillion in derivatives that defined the Wall Street casino of the 2000s.

Due to “complexity overreach,” if you will, or perhaps the First Law of Thermodynamics, we are now witnessing a historic reversal of this centuries-long trend. Beginning with the evaporation of derivative contracts and mortgage-backed securities -- that is, the recognition that they could never be fulfilled -- investors began crashing down the pyramid, through equities, and towards treasuries.

Ultimately, they will descend through U.S. debt, too, into paper cash. That is, when investors finally wake up to the fact that Washington’s 13 trillion in debt can’t be repaid -- and its 70-100 trillion in unfunded liabilities really, really can’t be repaid -- physical cash will begin to have a greater value than interest-bearing debt. At one point in America’s coming financial breakdown, there will be mad dashes to ATMs, premiums paid for paper money, and maybe even careful washing of circulating greenbacks.

Dollars are money illusions, too, of course, and eventually even Zimbabweans will loose their fascination with them.