Your dollars are just Monopoly money

By Bill Fleckenstein

This week's column is going to be a little different, as I'd like to discuss human nature and the paper we call money from a slightly different perspective.

I was recently thinking about what has transpired in this country in the past decade: first the equity bubble, then the real estate/credit bubble and the steady debasement of the dollar (where a trickle of trouble threatens to turn into a flood).

I have been struck by how few people seem to understand how all these events are related -- in that, at the root, they each have the irresponsible printing of money as the cause. (The sociological and psychological phenomena that go with that -- e.g., the regulators not doing their job -- are just part of the process.)

Each problem led to the next, and one year ago the financial system was bailed out at the risk of the country ultimately enduring a funding crisis.

One fact that strikes me is how few people seem to have been able to protect themselves from the first two (even though they were so obvious) and how so few will be able to save themselves from this third, huge problem.

In my own little world, I wrote until I was blue in the face about the risks inherent to each of those bubbles -- and others did, too -- but still only a small subset of folks avoided calamity.

Similarly, I have droned on forever about the weakness in the dollar and the necessity for folks to protect themselves via precious metals or some other idea. (I don't know what that idea is, or I would say, but there will turn out to have been other options.)

Give it up for the real rock star

Let's face it. Dollars -- the things we call money -- are simply pieces of green paper. They are just a state of mind. They have no intrinsic value and are just wampum. Thus, they're not worth anything. Furthermore, all paper currencies historically have lost all of their value. On the other hand, gold -- which has been in an eight-year bull market but still receives far more derision than praise -- has been money for literally thousands of years.

In fact, the green paper has lost 97% of its value compared with gold since President Richard Nixon closed "the gold window" in 1971. (He ended the promise that dollars could be exchanged for gold.) Yet people seem to be more terrified of owning gold than dollars.

Gold nail-biting

For the past month or so, as gold has traded around $1,000 an ounce, I have seen no euphoria -- only a tremendous amount of angst on the part of gold holders who fear an imminent collapse in the price.

But the point of this column is to encourage people to think about what's liable to happen to the green piece of paper I've nicknamed the "xera" (a combination of Xerox, zero and dollar).

Federal Reserve money printing in the past year -- to create its own bailout from the problems it created, and to finance other government bailouts -- is the functional equivalent of the government saying that you can take the Monopoly game out of the closet, grab all the colored pieces of paper, put three or four zeros on the end of each bill, and then go out and spend it.

Go directly to bailout

However, the way this game has been played, some folks got multiple sets of Monopoly money, some financial institutions got thousands of them and yet a lot of individuals got no Monopoly money. But the outcome is still the same: The value of the money in circulation has to be worth less once this turbocharged Monopoly money is introduced into the system. That means inflation.

Video: How to play the gold rally

Folks will ask me, "How can we have any inflation, given what's going on today?" Well, we may not have inflation immediately. But it is not debatable what would happen to the purchasing power of your green pieces of paper when you think about the Monopoly example.

The likely outcome as we proceed down the road is liable to be more and more fear about what a dollar is actually worth (i.e., nothing). When Main Street psychology turns against the faith-based currency we call the dollar, it will be nearly impossible to get that genie back in the bottle. Of course, this is part and parcel of the funding crisis, though the dollar's meltdown could start before all of this dawns on Main Street, as it appears already to be dawning on America's creditors.

So, if you're not in the habit of thinking about the dollar and the effect its depreciation is having (and will have) on you, consider this: Basically, you are the frog that's slowly being boiled in water, and at some point you're liable to face a similar demise, financially.

Hedge fund manager John Paulson (speaking at the recent Grant's Interest Rate Observer conference in New York) succinctly summed up his views about how to protect himself:

"What I'm looking at is not where gold is going to be tomorrow, one week from now, one month from now, three months from now. What I'm looking at is where is gold going to be vis-à-vis the dollar one year from now, three years from now, five years from now. And I think, with a high probability at each of those points, gold will be higher than it is relative to the dollar today. That probability increases the further out you go. So when I look at what the risk is, the risk to me is far more staying in dollars than it is in gold at this point."

At the time of publication, Bill Fleckenstein owned gold bullion and gold futures.