No Investment is an Island


A Chinese woman from Kunming is attempting to sue the Federal Reserve for debasing the dollar:

A woman in Kunming, Yunnan province, is trying to sue the United States central bank after discovering that the real value of the US$250 she put in an account in 2006 had shrunk by 30 per cent.

She claims it was a result of the Federal Reserve issuing too much money.

Her attorney, her son Li Zhen , called the lawsuit “litigation for the public good” which aimed to stop the Fed from continuing its quantitive easing policy and promote people’s awareness of their rights.

This is a quite bizarre claim. If I buy and hold a currency or instruments denominated in that currency, I try to understand the mechanisms through which the market price (or my subjective valuation) of that asset could increase or decrease. In buying dollars, market participants tacitly accept the actions of the United States government and the Federal Reserve system. They tacitly accept that dollars (and implicitly, dollar-denominated instruments) are freely reproducible in either cotton-linen blend, or as digital currency in accordance with the Federal Reserve’s mandate, which includes a definition of price stability of 2% inflation (reduction in purchasing power as measured by the CPI-U) per year.

This is true with other liquid media, as well as less liquid assets like land, companies and capital goods. With gold and silver, future market prices are dependent on the actions and subjective expectations of gold miners and market participants. How much gold will they bring to the market? How much will they dig up out of the ground? To what extent will future market participants desire to hold and own gold? These are the questions one must implicitly answer in buying or selling gold.

The same is true for seashells, Bitcoin, Yen, Sterling, Euro. The differences are in physical characteristics, and the web of social interactions around them. All currencies and liquid assets are built on social interaction. The future viability of any currency or asset is dependent upon a complex web of social interactions.

Users and holders of Bitcoin today have an extraordinarily precise timetable for future monetary production — with Bitcoin, the great uncertainty lies in whether people will choose to use Bitcoin or not, and whether or not governments will try to outlaw it. For modern state-backed fiat currencies, there are legislatively-defined price stability targets designed to regulate monetary production, although the actions of central bankers and macroeconomists may surprise many holders of the currency. The power of the state also matters; a collapse of a state usually spells doom for any fiat currency it has issued.

When we buy something as a store of purchasing power, we enter into an implicit contract with ourselves to accept the currency risks and counterparty risks associated with it. That is our due diligence. Purchasing dollars and then complaining that the Federal Reserve is debasing them is incoherent. No investment is an island, insulated from risk. It is the same as purchasing gold before Columbus sailed to the Americas and complaining when conquistadors brought back huge new supplies of gold that diluted the money supply. The discovery of huge new gold supplies is part of the risk in holding gold, just as quantitative easing is part of the risk in holding dollars.

16 thoughts on “No Investment is an Island

  1. Li Zhen , called the lawsuit “litigation for the public good”

    I do see your point, but isnt that a good thing, if every body followed Li Zhen
    then the fed would be in deep-very deep trouble.

    aziz, I love reading your posts but theres something tells me that your not a fan of gold ?

    my regards


    • I have nothing against gold. I’m not a gold-worshipper, and I don’t think it’s “the only form of real money” as some do (I think whatever people choose to use as money is money). I think there are risks and advantages to holding it. I wrote a few articles about its worth in physical form as a liquid hedge against currency and counterparty risks. Certainly people in countries experiencing hyperinflation are grateful for hard liquid assets. In the short run, I’m not bullish on price, but in the long run gold will make new highs.

  2. 1) This suit is super wacky and your analysis is correct.
    2) I feel compelled to point out that, to make her 30% decline in real value accurate you need to assume ~5.25% average inflation since 2006.

  3. No matter the form that money takes, it’s life will be as fleeting as it is illusory. Even the best money possible [an amount created that mirrors (as closely as possible) the amount of goods and services produced in an economy], can not serve anybody but those who control capital/labor.

    And not to beat a dead horse to smithereens, but the value of labor must be allowed to float in order that people be correctly compensated for their labor. The conversion of labor-value preformed into its money-form allows labor to be fixed, therefore allowing those who control money, to manipulate labor’s price.

    Since all true value is created by human labor, if you can control its price, you can rule the world. Bankers preform many horrid acts, but none more debasing that the theft of human labor from the entire of humanity through the abstraction of labor-value into its money-form, and then, into their pockets.

  4. She should’ve sue the China’s Fed and the RMB first.

    Still remember the days that 30 Yuan bough you a nice family dinner in a nice restaurant in China. Now it’s 20 times more to buy the same dinner.

    A mid size fish was about 2 yuan. Now 30 yuan to purchase the same size of fish. Prices are keep creeping up on daily bases in China according to the people living there telling me.

    Land investing is much better than Gold in China so far. That’s why Chinese government’s economic policy is all about Land policy. The most people are buying land Real Estate instead gold. Now some money go into gold because the government is trying to beat up the Real Estate business.

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  7. Screw farmland, I am going to buy an Island like that. Plenty like that on the Great Barrier Reef.

    Forget about buying, I will seastead. They are National Parks, and no Park Ranger so yo can effectively live there free. Bring a desalination plant, and hope you love tropical fish for dinner.

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