The Psychology Of Money

• A global banking crisis is unavoidable, probably starting in the Eurozone. US bank exposure to EU banking deposits in dollars will be withdrawn and sold. Instead of a flight to dollar safety, it is likely that there will be an intensified flight from dollars. Counterparty risks with other banks, such as the British, and those with foreign-owned prime brokers could result in substantial disruption in US financial markets. It is certain that the US Treasury and the Fed will continue to underwrite risks in the entire US banking system in that event.

• The US banking system will have to absorb bad debts from both covid and supply chain failures. The sheer scale of these probably constitute a greater threat to US banks than counterparty risks from foreign bank failures, but a combination of the two will ensure a banking crisis in the US and elsewhere will be considerably more difficult to deal with than the Lehman crisis twelve years ago.

• In the wake of a banking crisis, equity markets are bound to suffer a major reverse. The consequences are that the mirage of wealth creation in financial markets will disappear and foreign selling of financial assets and of the dollar will almost certainly accelerate.

• Bank loans secured with financial assets will no longer be covered, leading to the possibility of a repeat of the domino effect behind the multiple banking failures in 1930-33.

• The Fed has managed to keep the purchasing power of the dollar stable by maintaining an asset bubble in US Treasury debt, and by extension in US equities. A combination of banking problems and rising interest rates forced on the Fed by the foreign exchanges will end these conditions and inevitably the dollar will then be taken down with collapsing bond and equity markets.

Clearly, the violence of these likely events has the potential to challenge the American public’s confidence in the dollar over a foreshortened period of time. For now, the public believes in the government’s control over markets. People are generally unaware of the dangers ahead. But as a cohort, they are beginning to drift into one or the other of the other two cohorts: supporters of cryptocurrencies and precious metals.

Dealing with a fiat currency collapse

The outcome of current inflationary policies is increasingly obvious to those who care to think about it. We are coming to the end of the monetary era of fiat currencies. The common assumption of those aware of it appears to be that it will lead to a reset controlled by governments, clubbing together to manage the situation. Attempts to develop central bank digital currencies are consistent with governments seeking an alternative to existing currencies, but CBDCs are still fiat and will not survive the public’s rejection of unbacked government money.

The problem with a government monetary reset is it ignores the origin of the problem — that governments cannot be trusted with money. While a government reset might be attempted it is bound to fail because on the basis of experience humanity will reject it, unless it is credibly backed with metallic money, or as bitcoin hodlers presumably hope, governments abandon the money business entirely.

However, successful action will be borne out of a crisis, and the only available anchor to money is gold, owned in quantity by central banks and government treasury departments. Anyone who thinks governments will just stand back and let the people decide for themselves what is money, leading to us carrying around gold and silver coins or transacting with cryptocurrencies between mobile phones, has failed to learn the lesson of government control. If only to prevent individuals taking away control of money from the state completely, governments will be forced to turn what is left of fiat money into gold substitutes to ensure widespread distribution. In this context, a gold substitute is a form of money exchangeable on demand by the holder for gold coinage at a fixed rate. In other words, the monetary system can only return to the generally accepted monetary conditions that existed prior to the First World War.

There will be other difficulties. The Keynesian priesthood will have been discredited, leaving an intellectual vacuum. Being the only nations with unencumbered and undeclared bullion reserves free of leasing and other forms of double-counting, China and Russia will probably be the first to credibly back their currencies with gold substitutes, while the geopolitical implications and the loss of the dollar’s hegemonic role is bound to be taken badly in Washington.

But we know the eventual outcome. The only question is how long it will take for the crisis to accelerate and end, and how long it will take for governments to reinstate their gold reserves as backing for their new currencies, acting as gold substitutes. Most governments have gold: none of them have bitcoin.

The crypto cohort

In the markets, there is considerable uncertainty over the monetary qualifications of leading cryptocurrencies, particularly bitcoin. Other than mainstream investors, who still cling to the Keynesian creed, there is an emerging crypto cohort who have so far not addressed the subject of a possible replacement of fiat adequately, riding high on recent price gains for bitcoin and other cryptocurrencies, which they persist in measuring in dollars and other national currencies. In other words, they understand the effect of the relative rates of issue between cryptos like bitcoin and fiat currencies, and they buy into the concept that cryptos are potentially a better form of money than state-issued fiat for that reason. But for nearly all of them fiat unconsciously remains the principal form of money: fiat remains the objective value in crypto transactions.

There is little doubt that measured in fiat cryptos such as bitcoin can continue to rise priced in fiat significantly from here, and growing numbers of respected investment managers in the fiat cohort are now buying into this concept. With central banks working on their own centralized digital currencies, respectability is loaned to the crypto class. The lack of new supply in bitcoin, in particular, presents an attractive performance opportunity relative to other portfolio investment assets. In other words, this current wave of cryptocurrency buying is not with the intention of hedging out of fiat risk but intended to be sold for fiat at a future date.

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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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