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When a transaction occurs usually a good or service
is exchanged for payment. One risk associated with payment is credit
risk. All fiat
currencies are ‘bills of credit.’ Commodity currencies have
no credit risk because they are solid assets. The value
of a commodity currency is not based on an extension of credit.
However, the exchange-rate risk is largely determined by supply and demand
factors. When an institution or individual accepts fiat currency, that
institution or individual is accepting a promise of value. Thus, payment risk is assumed until the
fiat currency is exchanged for a tangible good or service; at
this point the risk is passed on to the individual or institution receiving
the fiat currency.
By contrast tangible assets can never become
worthless. Many financial
assets, such as currencies like the Zimbabwe $, Continental dollar, stocks
such as Enron and bonds such as WorldCom can and often do become worthless
ending up in the financial asset graveyard. As someone exchanged value
for the financial asset when it loses value or becomes worthless that person
is ‘left holding the bag.’ Thus tangible assets are not
subject to payment or credit risk but are subject to exchange-rate
risk. Financial
assets have counter-party, performance, payment and exchange-rate risk.
Why take any exposure to unnecessary risk?
“In the absence of the gold standard, there is
no way to protect savings from confiscation through inflation. There is no safe store of value.
If everyone decided, for example, to convert all his bank deposits to silver
or copper or any other good, and thereafter declined to accept checks as
payment for goods, bank deposits would lose their purchasing power and
government-created bank credit would be worthless as a claim on goods. The
financial policy of the welfare state requires that there be no way for the
owners of wealth to protect themselves.” – Alan Greenspan
“Counterfeiting the nation’s money is a
serious offense. The founders were especially adamant about avoiding the
chaos, inflation, and destruction associated with the Continental dollar.
That’s why the Constitution is clear that only gold and silver should
be legal tender in the United States. In 1792 the Coinage Act authorized the death penalty for any
private citizen who counterfeited the currency. Too bad they weren’t
explicit that counterfeiting by government officials is just as detrimental
to the economy and the value of the dollar.” - Ron
Paul
Trace Mayer
RuntoGold.com
Trace Mayer, J.D., holds a degree in Accounting from Brigham Young
University, a law degree from California Western School of Law and studies
the Austrian school of economics. He works as an entrepreneur, investor,
journalist and monetary scientist. He is a strong advocate of the freedom of
speech, a member of the Society of Professional Journalists and the San Diego
County Bar Association. He has appeared on ABC, NBC, BNN, many radio shows
and presented at many investment conferences throughout the world.
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