Zbigniew Piekarski On the law of "Too much of a Good Thing"

"The best way to destroy the capitalist system is to debauch the currency."

- Vladimir Ilyich Lenin (1870-1924)

One of the most fundamental Laws of Nature, which still rules the lives of all Homo Sapiens, although its force has been hidden from the herd, is the Law of "Too much of a Good Thing".

Take the example of the male tungara frog. A native of Nicaragua, this little amphibian lives a rather precarious life. The more sex it has, the surer it is to be eaten. In order to mate, the male of the species makes a very distinctive noise that resembles a dive bomber. Female frogs are attracted by it, but fringe-lipped bats also tune in; the call is their beacon for finding frogs to gobble. While the frog believes he will get love and immortality, what he actually gets is what he least expects: immediate extinction.

The same law applies in the relationship between wolves and caribou. Wolves kill the weakest members of the caribou herd. By doing so they strengthen the herd, so that just when the wolves are celebrating and finding prey easy to kill, they are guaranteeing that hard times are ahead and that fewer wolves will survive.

This law can be extended to human behavior. When capital competed with labor, labor organized and a balance of benefits was established. Then the State stepped in and, for a time, the law seemed not to apply. All actions became intended and assured. In an amazingly short period of history, rules and regulations expanded to cover every type of activity and the unthinking herd was promised continued prosperity and happiness - provided certain rules were obeyed.

Groups of Men became arbiters of who should survive and prosper - not the market. Market forces were distorted as the State decided which companies and industries were allowed to survive and which to fail. For a time, and in defined geographical areas, Gardens of Eden were built. And it had to be in a defined geographical place, for its subjects had to pay tributes in order to create and maintain the garden.

Whilst States regulate any and every market within their territories, there is one market that no single State can control, but which has a dramatic effect on the State and all of its citizens. So the law of "Too much of a Good Thing" now applies to competing States themselves.

This market has no central location and follows the rising sun. The daily trading volume exceeds $1.4 trillion per day, roughly 30 times the volume of all U.S. stock markets. The consistent liquidity of this market provides traders with the ability to enter and exit trades regardless of the size of the transaction or time of day. More importantly, every attempt by a State to interfere with it has spelt eventual disaster to that State. This is the power of the international currency market.

Once upon a time, each paper currency could be exchanged for a specified amount of gold. The gold standard was not perfect - no system ever is - and its widespread use was abandoned during the depression. After the Second World War, a limited form still existed. Only the U.S. dollar remained pegged to the price of gold and all other currencies had their exchange rates fixed to the dollar, under the Bretton Woods agreement.

This agreement was abandoned under Nixon in 1971 and all currencies became freely floating, their value being set by the laws of supply and demand - by the market. The Fed became the lender of last resort and began to control the World economy by the extension of credit facilities to its friends and the denial of them to its enemies.

The unintended consequence of this act was to enable the various Central Banks, the Fed in particular, to print as much paper money as they wanted.

For more than half a century, the dollar was the unrivalled global currency, a currency whose position as an international means of exchange rested on the strength of the U.S. economy, its national unity and global military presence.

By the early 1990s, the use of the dollar had become so widespread that 70 percent of $100 bills were held outside the U.S.A.

But just at the time the U.S.A. has achieved the status of the only global superpower, the pre-eminence of the dollar is under threat. The market has delivered its verdict and this year alone, the dollar has declined some 20 percent against major European currencies. Its decline will continue, for the historically high fiscal and trade deficits are raising questions of a moral nature, a core subject before moral philosophy became economics.

The decline of the U.S. dollar has far more dramatic consequences than may first appear. The temporary advantage of other currencies will lead to permanent instability, as the economic blocks become embroiled in competitive devaluations. The demise of the dollar as the global currency, with no other means of exchange to replace it, means that we will enter a period of currency chaos and global economic contraction.

Distrust will emerge towards all paper currencies. In the final stages of the currency crisis all currencies will devalue drastically against gold.

Just in case you believe that the Euro will rule, have you ever met a native speaker of Esperanto? The history of this language, invented by L.L. Zamenhof who lived in Warszawa at the time, gives you a clue to the eventual role that the Euro will play. The only beneficiaries in the above scenario will be market participants. If your savings are in dollars, change them into Swiss francs now. Join us on www.gpmanagement.com and find out what the future holds.

On the WSE: Currency considerations have played a constructive part in assisting the balance sheets of many companies and yet, the market is delivering a verdict on Poland's future. The chart pattern is not the Devil's Horns, nor a smirking Cheshire Cat but Churchill's victory sign in reverse, which is an insulting hand gesture to the Anglo Saxon.