Death of fiat

Does anyone have any mitigation strategies for fiat currency risk that local governments can employ? There are very strict guidelines surrounding local government investing activities and for good reason, but I'm wondering if there are less obvious options that still adhere to the legislation and can help protect taxpayer money in the event of loss in faith in our sovereign currency and the subsequent hyperinflation?

Historically, every fiat currency that has ever been created eventually dies. Ever since the western world decoupled from the gold standard, most of our sovereign currencies have been in free fall; some declining faster than others. There are a number of financial indicators that are concerning. Legislation severely limits local governments' options in terms of risk diversification but I'm hoping there are options out there that I'm not aware of and that others would be willing to share.

Thanks

Comments

  • Hi Rob. Yes, all currencies that are out there are only backed by the government that issued it. These governments call it legal tender and people accept that fact. If any of the investments listed under Section 183 (certainly a province or Canada) were to default there would be serious ramifications and questioning of the faith in the entire monetary system. As a steward of municipal funds it is very important to have a good policy that promotes liquidity, safety and diversification _before _return. Using the DBRS ratings helps one select higher quality products. I have been purchasing MFABC Bonds (not the MFABC Bond Fund) on the secondary market as these are "AAA" rated as the MFABC has the authority to levy a tax.

    Also, it is important to note that there is a misconception that BC credit unions are 100% guaranteed no matter what by the Province of BC. If a fund is impaired and all other means of trying to settle the deposits are fully exhausted (i.e. StablizationOne, another credit union stepping in, etc.) the Lieutenant Governor in Council **MAY **direct the Minister of Finance to enter into a guarantee of the indebtedness not exceeding the amount that the Lieutenant Governor in Council considers necessary to repair the fund. So the 100% guarantee is discretionary but the credit unions have a number of backstops and controls in place before it ever got to that state. For example, FICOM is very proactive and monitors the health of credit unions on an ongoing basis to make sure there won't be a problem. Furthermore, if a credit union is trending towards concerning ratios, etc. FICOM will take the steps necessary to bring that credit union back on track - even to the point of exercising their authority to supervise or take control of the credit union and its assets.

    In summary if municipal staff respect Section 183 of the Community Charter, one has a policy in place, and the city's portfolio is well diversified I think we have done all we can to take care of the funds entrusted to us.

  • Thanks for your comment, Scott. It's quite considered but doesn't really address my concern. Being so liquid is very much the problem and I'm not sure diversification under the auspices of Section 183 really meets the definition of "diversified."

    I'm not interested in investing taxpayer money in pork bellies or derivatives, but rather some tried and true currency hedges like precious metals or something of that ilk.

    Cheers

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