Experience is the teacher of fools

1. Agcapita Partners
#250, 120 Country Hills Landing
Calgary, Alberta T3K 5P3
Phone: 587 887 1541
Fax: 587 887 1537
E-Mail: info@agcapita.com
Web: www.agcapita.com
June 25, 2012 Letter

2. June 25, 2012
page 2
Erasmus is purported to have written "experientia magistra stultorum" or for the rest of
us who successfully avoided even rudimentary latin instruction "experience is the
teacher of fools". What he meant was that a wise person was capable of analyzing the
world and avoiding obvious mistakes but that a fool could only learn the hard way - by
experience.
According to an interesting study of the 775 fiat currencies that have existed 599 are no
longer in circulation. The median life expectancy for the defunct currencies? Fifteen
years. Perhaps the author was being unfair by focusing solely on the failures. Sadly no,
the average life expectancy of all fiat currency is running at a truly underwhelming 34
years. Only a select few have managed anything approaching old age. The British
pound sterling is one such example at over 300 years and counting. Before we get too
excited by this apparent example of longevity, at inception the pound was defined as 12
ounces of silver. The pound is now worth less than 0.5% of this original value and of
course there is no silver involved anywhere. In other words, the most successful
currency in existence in terms of life-span has lost more than 99% of its value.
The study also found that 1 in 5 fiat currencies have failed outright through hyper-
inflation - a percentage that I must admit surprised me as I was under the impression
that hyperinflation was a much less common occurrence. The following is an excerpt of
some of those hyper-inflationary episodes. Full details of each example with
precipitating causes can be found here.
• Angola (1991-1999)
• Argentina (1975-1991)
• Austria (1921-1922)
• Belarus (1994-2002)
• Bolivia (1984-1986)
• Brazil (1986-1994)
• Bosnia-Herzegovina (1993)
• Bulgaria (1991-1997)
• Chile (1971-1973)
• China (1939-1950)
• Ecuador (2000)
• Greece (1944-1953)
• Georgia (1995)

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• Germany (1923-1924, 1945-1948)
• Greece (1944-1953)
• Hungary (1922-1927, 1944-1946)
• Israel (1979-1985)
• Japan (1944-1948)
• Mexico (2004)
• Nicaragua (1987-1990)
• Peru (1984-1990)
• Poland (1922-1924, 1990-1993)
• Romania (2000-2005)
• Russia (1921-1922, 1992-1994)
• Taiwan (late-1940s)
• Turkey (1990s)
• Ukraine (1993-1995)
• United States (1812-1814, 1861-1865)
• Vietnam (1981-1988)
• Zaire (1989-1996)
• Zimbabwe (1999-2007)
Regardless how it happens, it certainly appears that fiat currencies have a pronounced
tendency to fail in de jure or at the very least de facto terms with time being the only
relevant variable. Some argue that fiat issued by a dominant economic/military power is
the exception to this rule - eg the pound Sterling and the US dollar. While such status
certainly seems to extend the life span of a fiat currency, this conclusion surely misses
the point that a relentless loss of purchasing power (even if in the currency of the
dominant economy) is just a failure in slow motion.
Since one of the key requirements of money is to act as a store of value and fiat
currency seems abysmal at this function why do we persist in its use and more
importantly who benefits? The answer is obvious - fiat currency is extremely useful to
the banking and political classes and so it persists.
For politicians printing money acts as a stealthy tax - a tax for which few voters are likely
to blame the political class. Secondly, by reducing the value of the currency, the
economy's "measuring stick" so to speak, politicians are able to deceive the voters that

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their wealth has increased.
Meanwhile, members of the banking class are ideally positioned to take advantage of
the confusion between the nominal value of the pool of capital and the pool of capital
itself (the "measuring stick" issue again). In simple terms, they can strategically and
quickly exchange a declining currency for productive assets while artificially low interest
rates act to subsidize their activities. Secondly, through their direct influence over the
money printing authorities they can be relieved of the consequences of any mistakes -
aka bailouts.
So the simple answer to the question "why print money"? For certain privleged
participants a significant amount of wealth can be quietly and almost effortlessly
misappropriated. For the rest of us, the expansion of the money supply offers no true
benefits and the very real danger that it is our wealth that is misappropriated.
In the spirit of Bastiat, ask yourself if the central banks increased the global money
supply 10-fold overnight would we have more farmland, more oil wells, more factories,
more of anything other than decimal places in our currency? The nominal price of all
these things would likely increase but the size of the capital pool has not changed. How
do the money printing programs currently underway differ from this in anything but
magnitude?
I believe that the expansive monetary policies underway globally can only serve to fuel
speculative activities at this point. Of course, more speculation is exactly the opposite of
what is required - someone has to produce something and production requires genuine
capital. But since the needs of the political and banking classes largely dictate monetary
policy what might we expect in the future? Clearly the sovereign defaults that are
underway will not improve bank balance sheets. Therefore, I think we should anticipate
additional monetary expansion (bailouts) which is just another way of saying currency
devaluation. If history is a guide, the monetary steps that are being taken to "solve" the
unfolding sovereign solvency crisis may only serve to morph it into a fully fledged
currency crisis with a flight out of financial assets. Do we really want to experience this
on a global scale just like the fools Erasmus had in mind?

5. June 25, 2012
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