Rechareable Money - and why paper money is Out!

Replaying 1929?

From: May 29, 2001

Rechargeable Money: An Alternative to Fractional Reserve Banking

Counterfeiters to go bonkers: Let's make Rechargeable Money [tm]!

This week, I'm keeping my comments brief, as work is eating a big hole in my life - in 13-hour chunks - but the rant has to be about the future of coins. Let me start with a couple of little snippets about coins from my life and Elaine's.

Now, Elaine's pretty thrifty, and she has noticed that some things seem to go up faster than others, but understands her spending habits have something to do with what she notices. "I didn't drink coffee, and a didn't drink pop, so I didn't notice things like soft drink prices going up." Well, I have to admit, many thousands of dollars in dental work ahead of her, that I do drink coffee, did drink pop, and yeah, coins keep getting larger to buy the same stuff...the effects of inflation. "You know, now that you mention it, I sure noticed postage stamps going up and when pay phones went from 25 cents to 35," she continued. Again, the point about coins and inflation is clear.

Now, let me rewind about six years (or was it seven?) to a trip I took to Mexico. I noticed when I was in country, that the old "peso" had been replaced by something called the "nueve peso", or "new peso" to this patron (OK, to this gringo, but, I'm trying, right?). What Mexico did was kinda cute from a monetary standpoint. They said, "Look, it's taking a gazillion pesos to buy anything, so why not simply invest a New Peso that is 100 (or was it 1,000) times more in value than an "old peso". Sure enough, the stores I was in at the time, and this was Puerto Vallarta, as best I recall, had all of their prices marked in "N.P." for new pesos.

Now, let's fast forward to this week. A few members of congress are seriously considering doing away with the U.S. Penny. Yup. Despite all the bull-puckey you've been hearing about inflation being under control - and under 4% a year, come to think of it - there's actually a move afoot to axe pennies.

Now, mind you, I'm not terribly fond of pennies, as they are dirty (copper corrodes), they weigh a ton, and you can't buy anything but tax with them. The days of one cent candy are gone. And, despite the fact I divorced a penny once, I still think some pennies are worth keeping.

You've heard me say thing, time and time again: "It's a crazy world when you can trade pieces of paper with ink on them, for perfectly good rum." I stand by that and note that following last week's rant about the money supply inflation issue, that the learned chairman of the Fed hisself referred to the growth of M-2 in his most recent pronouncements.

But back to coins of the realm. What is a coin? It's something that is easier to keep whole than paper money. You see, with paper money, as happened in Weimar Germany (1920-30-something) they gave up on coins and went purely with paper. They could add zero's to paper. And so, in a country laden with LaserJet's, it's easier to print stock certificates, money (if you have a color InkJet) and any other paper security you choose. But the number of places that can counterfeit a good Susan B. Anthony is a pretty finite group.

I've put some thought into counterfeiting, as I thought a new part-time job might be interesting, but I gave up on the idea. Why? Well, the power system here in California is not that dependable, and I don't want my foundry enterprise getting ruined because the ISO pulls the plug. I haven't gone looking for places to get coins minted, but besides those "Franklin Mint" guys, I can't think where else to go. The number of blacksmiths working the waterfront of the City by the Bay seems to be pretty small.

"Does anyone else have these crazy thoughts about counterfeiting pennies and nickels?" asked Elaine, somewhat innocently. Well, no. For one thing, where would you go to get the copper? None of the coins are all aluminum, or all stainless, so you quickly get into a metallurgical morass.

But now to the point.

It occurred to me this week, in a blinding flash that we are now at a unique point in world history. We can put computer chips in coins, to track their ownership and their spending patterns, so that we could really trace money (like we do ducks and whales) and maybe (like them) we could learn more about its habits. But no, what do we do? We print crap on printers and then put little strips of magnetic stuff in them that won't tell us much of anything.

Picture, if you will, the perfect coin. It has a history of where it was spent, the registration of its present owner (so you couldn't be robbed of it) and it would be impossible to clone at home or at the Kinko's down the street. You'd need a forge, a chip manufacturing plant, and in what I call the "George Coin", the coin itself would periodically have to be recalled by the government to be recharged.

Recharged?

Sure. It's how you prevent counterfeiting. Just like paper money wears out, the "rechargeable coin" concept would allow the government to put into the coin whatever value it wanted, and smart dispensers would read and accept them.

Now, if we had "George's Rechargeable Money" back when Elaine was buying nickel stamps (ooops, she's not that old, I mean dime stamps) then she would still be able to buy a stamp for a single coin, instead of fumbling through her purse for the right combination of "dumb money".

OK, so much for this week's rant (with a copy to my Patent Attorney as notice of first use of the concept and phrase "Rechargeable Money" (Larry Graham's, phone number on request). On to the charts.

What if it cost you: a "Rechargeable [and perpetually inflation indexed] Dime" and was part of my new "Integrated monetary system"? (It promises to be way more efficient and not prone to the excesses of debt that accompany credit cards and other less honorable means of exchange.

Somehow, the idea of going to work in order to recharge your saved coins, or asking Congress to authorize the Fed to recharge money, sounds way far fetched. However, in light of second and third order derivatives in the debt markets, this idea seems incredibly simple - if not elegant. Of course, no banker in his right mind would support the idea, because if money was always inflation indexed, what would a bank provide? For this reason, or actually the lobbying power of banks to look out for their own, this is bound to be one of those great ideas that doesn't go anywhere.

But remember where you read it first when in 20 years someone says "Hey. Let's try rechargeable money!" Drug dealers would hate it. How would you periodically recharge illegally gotten funds? A limited history of ownership is included in the money..and so instead of prosecuting the innocent dealer, who is after all only making a buck, government could go after the buyers, who put the drug lords in business in the first place. So-called victimless crime, such as prostitution and drugs, would go back to where they came from, merely intimate social contract, without the opportunity for "big business". Undercover and covert ops? History. Any tin-horn dictator with an I.Q. over 50 wouldn't accept "traceable tender" [tm]

Any currency over $100 ought to be rechargeable, and certainly anything under $10 ought to be printed on paper.

Readers? RIGHT!

Letter of the week from a fellow who describes himself as "a simple country lawyer" who is anything but simple:

Hi George,

Just a quick comment on the markets and inflation.

IF the market top is in for the stock market speculative
issues (which I believe it is), the money flow should now be
directed more towards the "tried and true" as inflation
kicks up.

As you know from several years of following my various posts
across the Net I am NOT one who looks at stocks as the the
center of the investment universe, but instead strongly
believe that real estate (particularly Commercial Real
Estate), is the key to following the gigantic bubbles.

1929 was in the US, as 1989 was in Japan, marked by a
simultaneous speculative frenzy in both stocks and in real
estate. That is one reason the "bust" for each of those two
countries at those times were (are) so devastating. (the US
bust was exacerbated by the huge labor surplus from farm
mechanization as well as some very bad central bank
policies). [Not to be confused with the dotcom bombs and central banks of today! - George]

To put the size of how large a bubble can exist when real
estate gets involved, in Japan, for which figures are more
readily obtainable, at it's peak in 1989 had one prime city
block in Tokyo was worth more than all the real estate in
NYC........ and Tokyo real estate alone was worth more than
all the real estate in the US!! Currently, though there
are some localized real estate bubbles (mostly the Bay Area
and parts of NYC), the US is nowhere near a bubble phase in
real estate on a nationwide basis unlike 1929 or Japan in
1989.

The current situation is much more reminiscent of the US in
the 1960's at the height of the stock bubble, but with no
nationwide real estate bubble, and inflation starting to
nibble around the edges.

Just as the 1960's US stock market peak was not followed by
an immediate collapse of the economy, but instead redirected
a great deal liquidity towards real estate (leading to such
things as the Florida Real Estate Boom of the early 70's and
it's subsequent humongous bust in the 74-76 period - along
with a big Commercial Real Estate bust nationwide in the
74-76 period) I am seeing the beginning of a potential
similar move today. Stock Market Speculation may be dead
for awhile, but there is a great deal of liquidity out there
that is going to go somewhere, and real estate is a prime
candidate to receive it.

Asset class rotation is something that stock people have a
hard time emotionally accepting. I don't quite understand
why many stock traders have a hard time accepting asset
class rotation since many do believe in sector rotation
within the stock market but in my experience they do.....and
thus I know in advance many do and will emotionally disagree
with my comments herein.

Anyway on with my point..... With a cyclical peak in
Commercial Real Estate still several years out (per standard
cyclical analysis with data from the Foundation for the
Studies of Cycles supplemented by observation data over the
last 35 years) there is plenty of time for some speculative
excesses to now be directed in the direction of real estate.
If inflation is coming back, and coming back faster and more
vicious than in the "Guns & Butter" days of LBJ (a famous
Newsweek Cover), then a flight of liquidity into perceived
inflation hedges will come about as sure night follows day.
Real estate, particularly commercial real estate with it's
cash flow attributes, has always been one of those key
inflation hedges. Gold may also participate, but unlike
real estate gold traditionally doesn't pay it's holder any
cash flow for the privilege of holding it as inflation
rages around the homestead and thus in early inflation seems
to lag (in my experience).

The overall economy still looks to be on track to continue
forward, even with a break in the speculative stock market
bubble, just as it did in the 1960's after that market peak.
Without a simultaneous collapse of real estate AND stocks
there is just not enough liquidity drained out of the system
to cause a derailment of the entire economy.

Real estate appears to be a good inflation hedge, but don't
overstay the party.

Eventually as everybody piles into real estate the
assumptions of rental income growth will hit the wall of
either too high of inflation forecast (reality will not be as
bad as forecast), or the wall of declining occupancy due to
an economic contraction OR classic overbuilding. At that
time, even if inflation continues to increase, real estate
will suffer another of it's classic contractions.

My projected peak for the current Commercial Real Estate
Cycle remains in the 2006-2008 time frame, which fwiw
happens to dovetail very nicely with Martin Armstrong's next
peaking period.

The stock market bubble probably now broken. A new and more
dangerous bubble about to rise from the ashes to take it's
place. Bubble rotation seems to be the name of the game in
life. I have now seen
Stock Bubble 1
Real Estate Bubble 1
Farmland Bubble 1
Gold Bubble 1
Oil/Gas Bubble 1
Real Estate Bubble 2
Stock Bubble 2

It appears we are within:
Oil/Gas Bubble 2
Farmland Bubble 2

And about to enter:
Real Estate Bubble 3

There is just something about human nature that needs to
replace one bubble with another bubble in short order. It
is rare indeed where all bubbles collapse simultaneously and
completely due to a serious collapse in systemic liquidity.

Just some comments from someone who has been chased off a
couple of Boards because of my unconventional views.

******* ***** [name withheld pending permission to disclose]
(fwiw in the 1960-70's bubble the "real" economy actually
held up very very well for several years after the stock
market peaked and broke. The real economy, by a number of
standard measurements didn't actually peak until early 1973,
or about 5 years after the stock market peak of 1968)

Learned letters like these really keep this site going. Here's a guy in the mid-West with a great background, sharing with you, some important ideas. I think I see what he's getting at. The problem that I keep coming back to involves energy. Remember that real estate will grow as long as there is energy to feed the U.S. Now, the problem not being discussed by either George II or Gray Davis this week as the President and the Governor of California met, is that oil is now primarily controlled by Moslem states. Many of these folks don't like us. (And sometimes with good reason.) So yes, provided the world macro-view remains stable, and lost Russian nukes and bio-terror are contained, then yes, I agree with real estate as an inflation hedge. But again, moving assets into that "next bubble" is always a gamble. Had you made inflation protection moves in Germany during the Weimar era, you would have married into the future of Nazi Germany to get your money back. So when you pick an asset class, and as system risk increases, the transportability and divisibility of assets can become important. Real estate isn't exactly portable.

Meantime, one of our sources up in 'Vegas reports he talked with a fellow who has two oil tankers parked out here in SF Bay that can't be unloaded because "energy prices ain't high enough". As Elaine & I sailed over to the Alameda Yacht Club this weekend, we sailed past them. A couple of big "F-2" or largers, and low to the water. Yup, sitting off the dock on the Bay.

There's a larger game afoot, I'm afraid. And I think we're the game...

Write when you get rich...

George

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