Floating Money. From 1.19 to 1.26? How Far Can the Dollar Drop?

Back in 1976, Friedrich Hayek tackled a big taboo. In The Denationalisation of Money, he asserted that the government should not maintain a monopoly on cash. Of course, central banks could keep on printing dollars or francs - but they should not have the whole playground to themselves. Other players could step in with their own branded currencies. Hayek thought his ducat - designed to keep prices stable - would eventually crowd out the dollar and the pound.

Hayek’s view shattered the conventional conception. Fast-forward a few decades, and the cryptocurrencies slipped through this crack. However, Hayek’s original vision did not come to reality. Instead, a caricatured version prevailed. The same happened to many of the ideas of Keynes, his well-known conversation partner.

However, this matter is not a philosophical one. It pertains to weight. The dollar, the euro, the pound—they’re backed by real, massive, productive economies.Crypto? Not a chance. It barely floats. Based on hype. Or on leverage. Or on stories that hardly constitute proper economics. Or on underground markets that nobody taxes.

The US, the UK, and the Eurozone aren’t theoretical abstractions. They’re constituted of factories, labor markets, taxes, trade, consumption. Their money “works” because the structure underneath “works”. Crypto spins around a core that’s smaller, thinner and more frail. Not anchored in production, labor, or trade. It simply hovers.

It doesn’t build trust. It profits from a lack of it.

Crypto is the offspring of quantitative easing: first in the US and UK, then in Europe. Central banks blow up the balance sheets, alt-money promises a lifeboat. When confidence breaks apart, it leaves space for questionable alternative narratives to emerge.

Even fiat money today has no intrinsic value. A hundred years ago, a banknote was backed by gold or silver. Today, it is no longer the case. Back then, money represented a claim on metal. Now it’s a claim on output—on a wobbly, rapidly changing quantity of goods and services.\

Nowadays, money represents a prime example of shaky property rights. Inflation is not a random shock. It’s the price of discretionary printing. Volatility is also a byproduct of it. And still—the dollar, euro, pound—they are more functional than any other form of currency.

Murray Newton Rothbard, never a fan of central banks, made it crystal clear: people don’t want money for its own sake. They want it because others will accept as a means of exchange for other goods. Nobody treasures a dollar bill for its pretty design.

The concept of money didn’t appear out of thin air—it did not emerge from a social contract or clever branding. It starts with a valuable, non-monetary commodity. Gold and silver were the most favored options as they are scarce, divisible, always in demand. Languages maintain a recollection of it: geld, argent. Fossilised.

Ludwig von Mises takes this view one step further: his regression theorem shows currency must first appear as a commodity people actually trade freely before it becomes money.

Rothbard’s issues a blunt verdict on Hayek’s ducats. New paper bills can’t compete with dollars or pounds—currencies born as gold-and-silver weight units, whose position consolidated over centuries of market interactions.

Thin money cannot replace thick economies. Leverage cannot replace substance.

It is worth shifting the discussion from the abstract, theoretical sphere to the concrete macroeconomic one. The dollar is devaluing in a seemingly deliberate fashion. Chronic US deficits don’t mix well with a strong dollar. A strong currency requires competitive exports and an economy that can soak up global demand. A weak dollar instead allows for deficits to be corrected.

The euro-dollar rate reflects this attempted readjustment. Exceeding the 1.19 dollars to euro threshold makes room for a rate as high as 1.26, as long as 1.184 holds. This is neither incidental nor erratic volatility. The dominant currency fluctuates strategically. Just like the pound until the second half ot the 20th century, the dollar remains the international benchmark, but adapts to internal and external movements.

We still ask ourselves, what happens when this benchmark becomes increasingly fragile?

The answer is not a purely abstract one anymore. It was first formulated shortly before the Great Recession. During the late 2007, Peter D. Schiff, working on The Little Book of Bull Moves in Bear Markets, saw his Crash Proof predictions come true. The housing bubble was punctured, but did not explode violently. It slowly deflated. Recession was around the corner, even though not everyone wants to openly admit it..

The prologue to the 2010 edition of The Little Book of Bull Moves in Bear Markets starts precisely with this. In a free market regime, recessions, however painful, remove the excesses of the last boom and restore the fundamental economic balance. The problem arises when this cleanup process is sabotaged.

The phantom-wealth generated by soaring home prices fuels a spree of consumption on unproductive goods: bigger houses, refurbishment, flat screens, SUVs, vacations. Not savings. Not capex. Not tradable goods.

Instead of letting the market to adjust, policymakers instead opt for stimulus. Government spending aiming to make a recovery from recessions and trying to “jump-start the economy”, are, according to Schiff, like an alcoholic taking "the hair of the dog". At the very best, it only creates an illusion of recovery.

Interest rates maintained at very low levels lead to a surge in asset prices, even though inflation in consumption goods remains practically absent. Falsely signalling stability reinstates self-sufficiency and makes reform politically impossibile. The real collapse is merely postponed.

In such a context, safe-haven assets - cash and bonds - become vulnerable. Not due to the markets, but rather due to the currency itself. Schiff is categorical about this: when the dollar slides, dollar reserves protect nothing anymore.

Gold comes back, not as an investment option, but, rather as an asset revealing the lower bound. As a gauge showing the zero-level of losses. The fact that the gold ounce rose from 1,200 dollars in 2010 to 5,000 dollars at the present should not be perceived as a splendid performance of gold, but instead serves as a testament to the state of currency.

This is why Alan Greenspan's observation remains valid: gold guarantees the upholding of property rights. It opposes deficits and inflation, the subtle means of seizing private wealth.

Money may stay afloat for long periods of time. Due to the confidence of the public. Due to narratives. Due to postponing effects. But without real backing, money cannot help build economies. Money can help keep them in a levitating state.

But when real gravity returns, they may be nothing left of these economies.