A proposition making the rounds these days holds that those old standbys—gold, silver, and Swiss francs—have seen their day. It's never said quite what will replace them, but presumably these reconstructed prophets of doom envision revitalized dollars and dollar-based investments.
The dollar, until recently, has been uncharacteristically strong. It still stands well above its low point of fall 1978. And with recession here at last, one can imagine an end or at least an abatement of the great American inflationary trend. Recession may not feel very good, but the traditional ones have tended to strengthen the currency. Credit contraction and slow economic growth do mean less greenbacks in pursuit of goods and services. So the purchasing power of each unit should zoom.
Relative monetary restraint, high American interest rates, foreign perception of the United States as a safe investment haven, along with oil-related transaction demand for bucks, all seem to make a pretty good case for a return to super-star status for the dollar—and for the demise of "hard money." After all, what is a "hard currency" any more? The German mark, the Swiss franc, the Japanese yen? They've been outperformed over the last year by the British pound and French franc. The Germans and Swiss and Japanese seem to be afflicted with the inflationary disease like the rest of us. And what's worse, their balance of payments are shot to hell, courtesy of OPEC. Their interest rates, the touchstone of all hot money movers, are paltry. And they're in the shadow of an increasingly obnoxious USSR.
What about gold and silver? Having already exceeded the cost-of-living explosion by a factor of 8 in the case of gold and 11 in the case of silver (using the relatively "low" prices of $530 and $15), how much more can we reasonably expect from them?
Recession is supposed to bring a subsiding of inflation—isn't it? What's more, the precious metals markets have been discredited and the bulls routed, with a little help from regulators and short-side manipulators. And brave Paul Volcker is restoring dollar supremacy, right?
Let's take another look. First of all, to believe the recession is going to cure inflation and smite "hard money" is to swallow the discredited Phillips curve whole. Inflation may come down a bit as unemployment rises, but it won't come down that much and, in any event, only temporarily.
Moreover, look what's happening in fiscal and monetary policy. Only several months after Congress, the White House, and the Federal Reserve were beating their breasts in unison by pledging credit and budgetary restraint, we hear quite a different chorus. True, Volcker is continuing to moderate the growth of money, but to the growing chagrin of legislators and administration minions at the Treasury. While mobs chanted "loan shark" in demonstrations outside the Fed building, certain Treasury officials took to the telephones for some late-night rumor mongering against the Fed chief. In a call to one newsman, an official troubled himself to connect Volcker's name with a "scandal" in approving a $1 billion loan to the Hunt brothers to help them "restructure" their silver debts.
Volcker, of course, let himself in for that smear. While it seems highly unlikely he is involved in anything underhanded with the Hunts, Volcker revealed his own slipping monetary grip when he jumped to the silver suzerains' aid.
That action followed closely his opening of a special $3 billion discount window to aid farmers and small businesses. At the same time, Carter ran to the aid of the housing industry. Meanwhile, Congress busied itself with the Chrysler bailout. The bread line of corporate mendicants could lengthen further. For good measure, the House upped fiscal 1980 spending by $24 billion.
All of which does not auger well for triumph over inflation. Nor does it give cause to believe the outward flow of depreciating dollars will slow. In February, the red ink on trade set a monthly record of $5.6 billion. The entire world economy may slump, but there is no assurance that the dollar will somehow benefit.
Then there's the growing level of chaos in the world, not just in the Middle East, but in the Far East and even in our Caribbean back yard. Terrorism, Soviet imperialism, and a disinclination by the crumbling Western alliance to do much about it is bullish for "hard money," particularly for precious metals and stones, but quite possibly even for noninflated foreign currencies. At times, the dollar has benefitted from such crises. But increasingly the United States is being isolated.
As our allies go their own way in foreign policy, seek accommodations with OPEC and the Russians, and take an America-be-damned attitude in trade, as well, the dollar will be less in demand and less likely to be supported in time of need. Europe and other regions have already demonstrated, with the European Monetary System, for example, a desire to insulate themselves from the dollar as much as possible.
In the long run, the precious metals and precious stones are going to be the real assets worth holding, although the Swiss are making a game battle of it by reducing their inflation rate back to four percent. All currencies are apt to come to grief in the end, but the true "hard" assets should do well.
Even in a deflationary cycle, they should maintain more of their value than other things. They'll have recognized, barterable value. In times of exchange controls, confiscatory taxation, price controls, and other government ukases, they have the qualities of anonymity, portability, and concentration of wealth to keep them in demand. No matter what the level of inflation, the level of unpredictability will give them a rock of Gibraltar quality that should help their owners preserve capital.
Meanwhile, there is no reason why anyone should have all his assets in un-dollars. It's always smart to take advantage of investment targets of opportunity. Select stocks and real estate, for instance, can become good speculative buys to watch for as interest rates fall and these markets stagnate.
But, like it or not, "gloom and doom," gold coins, dehydrated food, and shotguns are very much alive. And it's probably wishful thinking to hope that a Reagan administration would make much of a difference.
Steve Beckner is a free-lance financial writer, the editor of Deaknews, and the author of The Hard Money Book.
This article originally appeared in print under the headline "The Death of Hard Money?".