Please follow the above link to an archived U.S. GOVERNMENT video that was made in 1947 and explained what “good money” was. Kudos to SGT for digging this up and Zerohedge for spreading the word. Can you imagine the government running a piece like this today? A “run on the bank” would be almost immediately started if the current “Monopoly money” status was understood by the average person. When I say “run on the bank”, of course I am talking about a “run” OUT of “the money”. This is what is meant whenever you hear the saying “good money drives out bad money”, let me explain.
When people understand that the “money is bad”, they SPEND it as fast as they can. This in essence IS hyperinflation, when people lose faith in the money and try to get rid of it for something that is real or “good”. Too many make the mistake that the only way that a currency can hyper inflate is by “over issuance”. Yes, over issuance can, and has, hyper inflated currencies all on its own but hyperinflation can and has also happened when “confidence or trust” in that currency gets broken. I guess that it’s somewhat a “chicken or the egg” scenario because over issuance does on its own erode confidence but, confidence can erode (if you lose a war, natural dister etc.) without massive over issuance. What happens though is that people will spend their “bad money” and hoard their “good money”. The good money then goes into hiding so to speak and velocity drops to nearly zero as no one wants to spend or part from it. Conversely, velocity skyrockets like a game of hot potato with bad money as people want to hold it for as little period of time as possible.
This effect becomes self reinforcing as less and less of the good money is attainable because people are hoarding) and the bad money’s velocity speeds up. Add to this, today’s current situation where debt “saturation” has occurred and the government is forced to print more (borrowing more to pick up the slack) just to keep the system from seizing up. We already have the second part happening, the Treasury is borrowing and the Fed is printing it but this money so far has not “mobilized” in the form of bank loans. Velocity however is crashing as people (banks) pull in their horns and cut back on spending (lending). Slowly, as you have watched the price of Gold and Silver rise over the years, more and more people are converting their paper into metal. This “rising price” in reality is a function of the Dollar losing value (confidence) and requiring more and more Dollars to purchase the same ounce.
This second part, “velocity of money” or lack of, once it turns will explode. This “explosion” is nothing more than the “fear instinct” taking over, fear of loss, loss of value in ones money. It has happened many many times before, all over the world and since the beginning of time. What the government will need to do BEFORE we get to this point is to “change” the money or lose all credibility and with it “power”. This is now an “all in” game of chicken, because fear is THE greatest and most swiftly acted upon emotion. Mathematically the Fed MUST “over issue” the currency just to keep the system running yet they must not let the game of hot potato to start. Truly between a rock and a hard place because there is no policy response that can make the currency more valuable, nor any policy response that create greater confidence in the currency. So…do nothing…or as little as possible so as not to spook the herd and “hope” that something, somewhere will emerge to save the day. In other words, “buy more time”…which is all we have been doing now for going on 5 years. They must soon choose, the economy (stock market) …or the currency. Every government in the history of history has sacrificed their currency, this will be no different!