Hello there,
I’ve been thinking about what money is , what it will be in the future for a while now. I own some minimal stakes in BTC, ETH – for now to be ‘along for the ride’ and partially as a hedge against central banker mistakes. Central bankers may have PhDs, but we’re all human, and I don’t think they know the future. (Before we jump in -if you need a primer on cryptocurrencies, you can for example read Mark Susters’ great piece on cryptocurrencies – the cases for and against.)
Writing this in August 2020, we are in the throes of the COVID-19 pandemic, and the US Federal Reserve has just deemed it necessary to expand their balance sheet by about 5 Trillion USD.
My main premise in this post is that every-one should seriously learn about cryptocurrency today, and potentially invest a small stake to better understand the ‘nature of this particular beast’. It could be very important.
So why now?
The 5 Trillion in new money from the Federal Reserve will flow out into the economy via the commercial banks, from there to the larger companies, regional banks and from there on down to Main Street. Unfortunately the current financial system is leading to greater concentrations of wealth – the 0.1% getting richer and richer, while the 80% struggle with the cost of basic goods (food, health care, education, housing etc) increasing. We can already see it in that the stock market as of now is back to all-time highs, while on Main street the unemployment rate is high and many small businesses are turning off the lights.
Most people don’t think about the role of our country’s currency – and one of the key points which argue against cryptos becoming mainstream is the level of ignorance most people have re: what money/ currency – really is.
So understanding the different characteristics of money is a good starting point:
- store of value – it needs to keep it’s value, be relatively stable
- medium of exchange – you need to be able to transact with it
- fungibility – one ‘dollar bill’ needs to be exactly the same as the next ‘dollar bill’
- recognizability – you need to know it when you see it
- unit of account – you need to be able to split it and record it in myriad ways
- Fiat money vs commodity money – and finally – it will be either ‘fiat’ – that is credit money, or it will have some backing to it (like gold).
How many people you associate with understand these characteristics, and have questioned these for your country’s currency? In most developed countries most people just ‘use’ money, like clean water coming from the taps. We don’t have to understand how it got there.
We don’t use the Dollars, the Euro’s because they are excellent mediums of exchange or stores of value. I’ve lived in three developed countries (Finland, Singapore, US) and I can tell personally it didn’t really matter whether I was transacting in SGD, EUR or USD. The features were the same, you’d earn very little interest and lose out on inflation if you held cash in those. Today’s money is primarily a ‘unit of account’ that you use to track your income, spending, loans and savings – and for most people they don’t question WHAT that base unit actually IS.
Another main reason we use currencies today is because the government in the country where we reside are legally requiring (‘forcing’ to use the libertarian lingo) us to use that currency – at least for paying taxes. I fully agree that governments will NOT cede monetary control easily – since the whole government & country apparatus is transacting in that particular currency, and the government benefits from what’s called ‘Seigniorage‘ – that is where sovereign-issued securities are exchanged for newly-printed banknotes by a central bank, allowing the sovereign to “borrow” without needing to repay.
Understanding that modern money is based on the electronic deposit system controlled by the banking system, and that this Fiat money is created as credit through the loan creation process, is crucial. In today’s electronic money system money exists largely as a record of account in databases as a result of the money being created via loan generation. Meaning that all of the ‘money’ in today’s world are actually just IOU’s. This also means that the USD’s , EURs of the world need to have inflation, as you and I need oxygen. We saw in 2009 what happened when even small amounts of deflation threatened to bring down the whole deck of cards.
So why is a deflationary currency better? Glad you asked.
- Because with a deflationary currency (eg Bitcoin) it would not be possible to ‘bail out’ Wall Street / speculators who have used too much money on stock buy-backs over the last 10 years, and kept nothing in reserves. We are rewarding stupidity – the bankruptcy process is needed to dis-incentivize speculation.
- An inflationary currency allows us to inflate and borrow almost limitless amounts, and spend money we don’t have – sacrificing not only our own futures, but our children’s future. A deflationary currency focuses you to spend on what you truly need, and some wants. It’s better for the environment, because you will not buy unnecessary ‘stuff’ because your money will be worth more in the future.
- A gold-backed currency is inherently deflationary – the US Dollar was gold-backed until 1971, and folks back then didn’t die of a ‘deflationary death spiral’ as some would want you to believe. Some of the greatest ‘real’ – (i.e. growth in earnings / wealth, accounting for inflation) – growth periods in US history happened in the 1870s-1880s with rail-roads being built, industrialization getting started.
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With eg Bitcoin there is a fixed limit to the number of Bitcoin that will ever be released, and the mining process is ardous and expensive, so there is a mathematical guarantee that only a certain number of Bitcoin will ever be created (21 million to be exact, by 2140). The Bitcoin Blockchain has not been hacked since it’s inception in 2009, and I would suppose the likely hood is extremely low.
So how could a transition to using more Crypto / Bitcoin then happen? One route is via the recognition of wider parts of the population – eg because of a currency crisis – that a crypto can provide a better store of value – eg ‘Bitcoin as digital gold‘. Currently it’s more of an option / hedge as mentioned.
Also if there is a wider recognition, adoption, then it should naturally lead to Gresham’s law (bad money drives good money out of circulation) – people holding that currency (eg crypto) for it’s value preservation abilities, and transacting in some other medium of exchange. Basically if you’ve bought Bitcoin, you would hold them as you’d believe they will store value / appreciate in the future – and you would transact in your local fiat currency.
Eventually you would also want to start getting paid in crypto (more value) instead of the fiat, should the ball start rolling this way.
To sum it up – I don’t have a crystal ball, and can’t predict the future – and have yet to find any-one that can. So pls consider these points:
- The current monetary system seems to reward a very small portion of humanity disproportionately – why not try to find a better tool in this arena?
- As humans we are experimenting with different technologies and tools all the time, so shouldn’t we try to discuss, experiment and improve also on how money works, rather than leaving it to a select committee?
- Given what we know about human fallibility and central banker prediction capabilities – is it not prudent to have a small portion of ones net-worth invested in alternative vehicles (like crypto, gold) that are not tied to the current monetary systems?
Thanks for reading,
Oskar