Uncle Donald deals with dodgy Duckets

Uncle Donald is the god-emperor of the duck universe. His currency, the Ducket, is like the Duckaroo and also pegged to the price of a duck. But his empire of ducks is vast and his ducks are fat and healthy. They breed so fast and he buys and sells so many of them that he has lost count of how many ducks he has long ago.

His wife is a Ukrainian psychic. His daughter is a best selling novelist and celebrated porn star. His sons hunt giant pandas with ninja stars. His estate has three post codes and his swimming pool has tides.

Uncle Donald has heard of my plight and has offered a solution. He will buy up all my Duckaroos from the mob at my gate and will not demand a duck for each banknote just yet.

Uncle Donald makes the deal. The Duckaroo holders are so impressed with the power of the mighty Ducket that they are willing to accept one big fat Ducket for two ailing Duckaroos.

The mob heads for the pub. Uncle Donald's prestige and his currency have saved the day and praised be the Lord.

However,

Now I am deeply in debt to Donald. He has bought 1000 ducks from me for the price of 500. He will give me time to come up with the ducks but at an interest rate of .1% or one duck each day.

Remember, I only have surviving 500 ducks from my flock of 1000. To get out of this mess I need to breed at least two ducks a day and at that rate it will take a year and a half providing there are no more surprises.

So now I am working for Uncle Donald and if all goes well I will be debt free in 500 days. If not I could be wallowing in duckshit for the rest of my days and for no reward while Uncle Donald will get at least 1500 ducks for the price of 500 without getting his famously tiny hands dirty.

So how did Uncle Donald pull off this deal?

Because unlike myself he has the ability to print Duckets at will without anyone questioning whether they are adequately collateralised which gives him extraordinary buying power and a huge discount on everything he buys.

No-one asks the leader of a duck superpower how many ducks he has because no-one dares to, leaving him free to print as many Duckets as he wants and buy whatever he pleases with them.

Did he bail me out with the goodness of his heart? No. He is just a predatory duck hunter. And with each raid such as this one his empire of ducks grows and more importantly so does his prestige. Combined these factors mean he can print more Duckets to conduct further raids to get bigger discounts - forever and a day.

But surely it's only those holding weaker currencies that are disadvantaged here – so we should happily stick with the Ducket – dodgy as it may be.

Well, no.

As the mob heads into town with pockets stuffed with Duckets the publican decides that this might be a good time to put up his prices and and grab an extra 5% of that good paper currency. The next day the other merchants do the same and soon their suppliers do too. Now the purchasing power of the Ducket has decreased by 5%. Uncle Donald will be fine – he just prints more Duckets and carries on raiding disadvantaged duck farms. The rest of the townsfolk just bear the loss and put it down to the greed of merchants and the state of the economy rather than what it is - the constant devaluation of the Ducket. Now the good folk must work harder, save more, invest more, and beg, borrow and steal to be able to afford goods and services with money that buys less every year. And Donald has all the ducks.

But enough of ducks.

This is a story about predatory globalism and inflationary paper currency. It is what libertarians, anarcho-capitalists, crypto-zombies, gold bugs and a good deal of actual economists like to bang on about even though no one is listening because they are too busy joining those they can't beat.

Ask the Turks, the Iranians and the Russians whose currencies are reeling from the onslaught of the US Dollar wielded as a weapon against their regimes. Their financial institutions and wealthy individuals have some options - they can buy precious metals or real estate or pork belly futures: but to save themselves from ruin and stay liquid they mostly buy the currency of the enemy, which just makes their enemy stronger.

While everyday people have only their earnings and imagine that the meagre interest the banks give them is enough to off-set the devaluing of their savings, the reality is that the interest earned is probably less than the bank fees.

According to Republican Congressman Alex Mooney, who is proposing that the US dollar should once again be collateralised by gold, the purchasing power of the dollar has decreased 30 percent in since 2000 and has lost 96 percent of its value since the gold standard was ended 1913. Under the Federal Reserve’s two percent inflation target, the dollar loses half of its purchasing power every generation, or 35 years. Check out this chart from the U.S. Bureau of Labor Statistics.

So if inflationary paper currencies are unfair to all but the global predators, would a truly global currency or a return to the gold standard fix this mess, or both?

Tune in next week when we look for a solution in crypto-currency - something I know slightly more about than ducks.

You can keep your damn money (I'm going to make my own)

What is money anyway? Once upon a time it was bits of precious metals we carried around in drawstring bags. Then the banks got in on the act and offered to store the precious stuff for us and issued paper IOUs for it, which, apart from being the death knell for the drawstring bag trade, made it easier to trade in denominations of pennies and pounds now dollars and cents.

The practise of banks issuing currency was eventually centralised by governments of nation states and when the gold and silver standards were abandoned these pieces of paper were collateralised by nothing in particular other than the promise of the central bank that the money was good. We believe the bank is good because the economy of the nation state is good.

There are places in the world like Hong Kong where banknotes are still issued by two private banks (at one stage there were 13) and collateralised by some gold, silver, some land and their ability to borrow from other banks – particularly from each other.

So, if I have enough collateral, credit and courage could I could issue my own currency, starting with issuing paper IOUs for assets I hold?

Consider ducks.

As the struggling owner of 1000 ducks I am duck rich but cash poor. As a courageous anarcho-capitalist I decide to create my own currency – the Duckaroo (Ausssie birds obviously). Each Duckaroo can be redeemed on demand for one healthy duck. As the market price of a duck is around $20 so in turn one Duckaroo is worth roughly the same in fiat, which in this case is Australian dollars.

Now I can trade my ducks on the market or purchase goods with paper rather than actually carrying the damn birds around under my arms with them crapping down my legs.

Will merchants accept my Duckaroos as payment for goods and services? They don't have to because they are not legal tender. But they might if they believe that there is in fact a duck waiting for them to pick up on demand, that the price of a duck is stable and there is sufficient demand for ducks at the market so they can easily liquidate the duck for $20 in fiat. It would help if they were fond of ducks.

I head to the market and trade all my Duckaroos. Now I have 20,000 dollars worth of fiat, goods and services and I still have 1000 ducks.

And there is more good news. Ducks breed and for each new baby duck I can issue and spend a brand new Duckaroo. The bad news is that ducks are mortal creatures. So now I must put all my efforts into maintaining collateral for each Duckaroo in the marketplace.

Disaster strikes. Avian flu arrives from China. Half of my ducks die. The health of the other half is in doubt. Word gets around and I wake to find a queue of Duckaroo holders in my yard demanding healthy ducks.

Not only are the Duckaroo holders seeking to get their ducks out while they are still able, but also supply and demand economics have pushed the price of a duck up to $40 due to statewide losses from the avian flu. Panic and greed take hold and we find ourselves in the savage grip of a Duck Run.

Remember the 13 Hong Banks which once issued their own banknotes? This is what became of 11 of them. Rumours about a bank being undercollateralised led to bank runs when panicked depositors withdrew their funds en masse. With competition fierce among the many banks and no central bank to bail them out, eleven of them collapsed and were swallowed up by the others, leaving just two big banks still standing today.

So what to do? I am short 500 ducks. I could buy some but the price per beak has gone up so replacing my lost ducks would cost an extra $10,000 that I don't have.

But I might be able to stall if the Duckaroo holders believe that I am good for the ducks – just not today.

So here the strength of the economy kicks in as quasi-collateral in the way that the economies of nation states sort of collateralises their fiat currency, their banknotes that are not IOUs for anything- just attractive pieces of paper that say “You can trust me – I'm from the government”.

Will my local economy support the failing Duckaroo? Will my neighbours lend me some ducks? Would a duck merchant extend me some credit or, if not, will my local bank lend me some money? Will a merchant bank or a loan shark? Will local merchants extend me credit so that I can eat until the duck crunch has passed? Will the government bail me out? Is there a growing demand for duck products as the population is growing and wealthy enough to afford duck rather than the much cheaper chicken? Are interest rates affordable?

If the answer is no to too many of these questions: the Duckaroo is cooked, sorry. The mob at the gate will leave eventually – to get flaming torches and pitchforks.

So where did I go wrong?

Other than relying on perishable goods as a store of value, I was clearly undercollateralised. I needed at least 2000 ducks to issue 1000 Duckaroos in case my entire flock was wiped out. I also need credit and insurance, but from companies which might not be satisfied with a two to one ratio of collateral as lightning often strikes in the same place twice. Or thrice, - or more.

So how many damn ducks are enough collateral for each bloody Duckaroo? What the hell have I got myself into?

Tune in next week - Uncle Donald rides to the rescue. Or does he? We will delve further into this mess and discuss better ways to issue our own currency.