Friday, August 5, 2011

There's Counterfeiting and Then There's COUNTERFEITING

While away on a recent trip I perused the Financial Times during my flight. A letter to the editor struck me:
Sir, As the European Central Bank and the European Commission fight to save the euro, on a rare visit to a McDonald’s in Nîmes, France, this week I thought for a moment that the fight was lost. When I paid with a €50 ($70, £44) note for a Big Mac, the lady at the till promptly started to tear the note in two. In response to my worried inquiry as to what was amiss, I received the reassuring answer that tearing €50 notes was now company policy, at least in this region, to ensure that they were genuine. The metal security strip resists the action.

While my mind was set at rest as regards the immediate survival of the euro, it does suggest that our currency is not perhaps held in the same regard as the US dollar, which I believe is legally protected from such systematic attack.

While it is, perhaps, charming to think that the the U.S. dollar is legally protected from such physical abuse, it's value is surely not protected.

Counterfeiting works to destroy a money's purchasing power by increasing its quantity. As counterfeiters print phoney dollars and spend them, the demand for goods increases, which leads to higher prices and reduces the quantity of goods each dollar can purchase. This can be a real problem if counterfeiting occurs on a large scale.

How big is the problem? The Secret Service estimated that at the end of 2005 $61 million counterfeit dollars were being used and held throughout the world. It is important to remember, however, that the negative consequences of creating money out of thin air occurs no matter who is doing the counterfeiting. $61 million is a lot of money, but it is clear that private counterfeiters are mere pikers compared to the Federal Reserve, our central money creating machine. During 2005 alone the Fed increased the money supply by $107 billion (with a 'b')!

Now you tell me, who has done more to undermine the purchasing power of the dollar: private criminals increasing the money supply by $61 million or the Federal Reserve who increased the money supply by over TEN TIMES that amount in one year?!? In case you are unsure, you might be impressed that the Fed has increased the money supply by $2.5 TRILLION since 2005!!! 

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