The Psychology Of Money

The world stands on the threshold of monetary hyperinflation with the US dollar leading the way. The final months of fiat money are coming into view.

What will replace them — bitcoin or gold?

This article argues that the final solution is bound to be with central banks and government treasury departments retaining their control as issuers of money by the only means at their disposal: deploying their gold reserves to back their currencies, not as fiat, but as credible gold substitutes.

Central banks own no bitcoin, which effectively rules it out. They may try their own equivalents, central bank digital currencies, but they are simply another form of fiat money and will also fail — assuming there is enough time for them to be introduced. In any event, the eventual replacement for fiat money needs to be beyond government control (other than the state acting as a monetary trustee, ensuring gold coins are always available for exchange) and flexible enough for its users to collectively set the quantity that acts as money. A formulaic medium such as bitcoin does not provide this flexibility, but gold clearly does and has proved its suitability in the past.

Coins, Banknotes, Money, Currency, Finance, Cash

Image Source: Pixabay

Introduction

For anyone interested in the history and qualifications of money as a circulating medium the current times are fascinating, being the fin de siècle of fiat currencies. Any doubt that fiat currencies are failing is being banished. The days when governments can finance their schemes by debauching their currency are numbered. Consequences flow.

A meaningful debate about why they are failing is yet to be had. Only very few, who have an idea of monetary history and an understanding of the economics of inflation, are aware of an impending monetary crisis, but there are early signs they are being joined by a widening circle of thinkers. But for all the believers in the macroeconomics of Keynes, there is for the moment, a state of profitable bliss, of money-making in anything financial. They do not realize it yet, but when everything rises in price it is because the purchasing power of the currency in which they are measured is falling.

But belief for these macroeconomic investors is everything because with the belief you can evade reality. Belief is a condition where things held in the mind are true. There can be no evaluation. It provides the foundations of attitude and behavior. Over the decades the Keynesian cohort has led itself to believe in governments and their statistics at the expense of humanity and those beliefs have become increasingly divorced from economic reality. For them, inflation is no longer of money, but redesignated to prices, leaving the weapon of debasement concealed from the public. Prices are indexed to rise by a targeted two percent — paying that little bit more for everything every year is good for us, apparently. Bull markets are perpetual. Banks will always be bailed, so counterparty risk becomes a theoretical problem, never to be realized. And while most of us might be persuaded these speed bumps are inevitable, we now find that whole economies need to be bailed.

It is all thanks to the magic money tree, which can be stripped repeatedly by central banks, now that official inflation, which everyone accepts as the truth, is contained by a goal-sought two percent. The belief that a rising GDP represents economic growth allows governments to make up the numbers simply by spending more. And because the continual debasement of the currency guarantees that the dumbest trend follower will make money in financial markets, Keynesian beliefs continue to be reinforced, notwithstanding the reality.

Of one thing we can be certain and that is hyperinflation of the quantity of money will destroy the mainstream’s dreams. That time is now upon us, but the blind deaf, and mute Keynesians and their followers will wake up to reality late in the hyperinflationary collapse.

There are two other cohorts we must consider: those who believe that gold and/or silver will return as money out of the destruction of fiat, and a new class of believer who understands the relative supply dynamics of bitcoin relative to the rapid and increasing expansion of government currency. There is a gentle rivalry between believers in precious metals and cryptocurrencies, the former sticking to the lessons of history and the latter enthused by the technology.

The problem we have to deal with is that, for now, the majority in all three cohorts are comprised of believers and not realists. They all believe they are right but have applied little thought to the demise of fiat and what it means. Nor have they stopped to think how its replacement will come about and what that replacement will be. This article attempts to answer these questions.

The certainly of fiat destruction

Now that fully two-thirds of US Government spending in the second half of fiscal 2020 was funded by monetary inflation (the other third being from revenues which fell sharply) we can say that without a miraculous change in circumstances and financing policies, the dollar is on a hyperinflationary course. For what has happened is continuing to happen, and irrespective of who commands the White House in late-January, the political imperative rules out cuts in government spending and demands it to be increased instead, even while government revenues continue to fall.

In the face of mounting bankruptcies and supply chain failures, it behooves the government to do whatever it takes to rescue businesses and prevent an economic slump. Its advisers are Keynesian priest-like figures, who argue that government spending must be increased to save the economy. They say more deficit spending is required, and modern monetary theorists argue that the increase in government debt will be owed to itself. In this the MMTs have a minor point: US Treasuries bought by the Fed is effectively debt owed to the government by a government department, its own central bank. But otherwise, MMT is simply a justification for unfettered inflationary financing of government spending.

The hyperinflationary conditions in the second half of fiscal 2020 are therefore certain to continue, and as the dollar is diluted by successive increases in its quantity, the nominal amounts of inflationary issues of money and credit must rise to achieve the imaginary benefit. At the time of writing, a stopgap of $900bn has currently been agreed in Congress, but President Trump has rejected it as being too little and reflecting vested interests. Further increases will inevitably follow, because the Keynesian priesthood knows of no other means of dealing with the current economic situation.

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Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information ...

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