Gresham’s law holds that “bad money drives out good money,” meaning that given a choice of currencies (broadly speaking, “money” that serves as a store of value and a means of exchange), people use depreciating “bad” money to buy goods and services and hoard “good” money that is appreciating or holding its value.
As this dynamic plays out, eventually there is little “good money” in circulation and the economy suffers accordingly.
Correspondent AK recently submitted an insightful discussion of Gresham’s law and bitcoin:
1: Discussions surrounding Bitcoin and Gresham’s law immediately devolve into a debate about historical formulation or wording of Gresham’s law. Gresham’s law includes the notion that one or several currencies must be accepted at a defined value under legal tender law. However, the wider economic phenomenon that “powers” Gresham’s law is a universal phenomenon that is independent of any particular legal or cultural context.
According to the conventional economic forecast, interest rates will stay near-zero essentially forever due to slow growth. And since growth is slow, inflation will also remain neutral.
This forecast is little more than an extension of the trends of the past 30+ years: a secular decline in interest rates and official inflation, which remains around 2% or less. (As many of us have pointed out for years, the real rate of inflation is much higher–in the neighborhood of 7% annually for those exposed to real-world costs.)
Borrowing in USD was risk-on; buying USD is risk-off.
There is a lively debate about the global demand for U.S. dollars:
Global finance faces $9 trillion stress test as dollar soars (Telegraph.co.uk)
Is There a US$ Shortage? Will it Sink the Global Economy? Again? (Mish)
The Dollar Squeeze – How Problematic Is It? (Acting Man)
The Global Dollar Funding Shortage Is Back With A Vengeance And “This Time It’s Different” (Zero Hedge), which references a Bank for International Settlements (BIS) paper: Global dollar credit: links to US monetary policy and leverage.
Correspondent Mark G. went through the BIS report and offered these insightful comments: