The Psychology Of Money

The conditions likely to benefit the crypto cohort most are the continual existence of depreciating fiat which never quite dies and therefore is never actually replaced. That condition, such as occurs in Argentina, requires a better form of money, in this case, dollars, to circulate alongside the peso. And because the economic activity continues with the sounder currency, the depreciating peso continues with it. The more likely outcome, a collapse of the whole fiat currency regime and its replacement with gold substitutes raises the question that really matters: can distributed ledger cryptocurrencies survive being priced in gold?

In any event, it is hard to see how they can be used as a pricing medium, assuming state currencies re-emerge as credible gold substitutes. If they are to gain a monetary role, cryptos will need to be stable enough to act as the objective value in transactions. Furthermore, future values need to be both stable and calculable so that business investment in production of both consumer goods and of the higher levels of production can be contemplated. It is all very well for the crypto cohort to revel in spectacular gains measured against fiat currencies, but if a borrower of, say, bitcoin, is faced with the prospect of significantly lower prices for his end product measured in bitcoin, it is no use to him as a financing medium.

This is probably the most important reason cryptocurrencies cannot act as money. Their innate volatility and inflexibility render them unsuitable for the financing of production. And without the money function the idea of bitcoin continuing to act as a store of value is only possible until the successor to fiat is a stable form of money. Whatever that outcome turns out to be, a return to monetary stability will make hoarding money largely redundant, replaced by personal liquidity relative to anticipated purchases of goods, and savings, whereby hoarded money is invested in and loaned to businesses. If the successor to fiat is to be bitcoin, it will have to survive this radical change of use.

Furthermore, consideration must be given to the financial structure of a post-fiat world. Today the sum total of OTC derivatives is over $600 trillion according to the bank for International Settlements, with a further $30 trillion in listed futures and a further $43 trillion in options. These are paper on paper, which will evaporate with fiat, destroying the financial world as we know it. Speculation and the pseudo-speculation of risk hedging with derivatives will die. Unfortunately for lovers of cryptocurrencies, if, as we must conclude, gold wins the race for the replacement of fiat, they will have turned out to have been mere speculation, drowned alongside all that paper.

Nevertheless, the crypto cohort is likely to have an important effect, in that it sparks an early realization in a growing part of the wider population about what government is doing with money. That is likely to speed up the collapse of fiat currencies compared to what would otherwise occur.

The gold cohort

Like the crypto cohort, supporters of precious metals taking over the role of money are considerably smaller than the mainstream. We can exclude investors in mining shares and physical ETFs on the basis they are only seeking exposure to them as investments, intending to measure and take their profits in them at a future date — again in a fiat currency retaining its role of objective value. And promoters such as the World Gold Council dare not mention the moneyness of gold for fear of frightening off investors in their ETF.The true supporters of metallic money are those who hoard bullion and coin, ensuring there is no counterparty risk. Not only does this rule out securitized representations of precious metals, but putting them under the control of a bank, even on an allocated basis, does not qualify as clear title of ownership.

The retention of physical gold and arguably, silver, is a bridge to a post-fiat future. As argued above, after an unsettling period the future is almost certainly based on gold and fiat money being reassigned to become gold substitutes. Unlike bitcoin, gold possess a flexible supply, which is determined by its users and is beyond the control of governments. To annual mine supply is added gold being used for non-monetary purposes. A rise in gold’s purchasing power leads automatically to an increase in supply from sources such as jewelry through enhanced scrap, and a fall in purchasing power leads to increased jewelry sales. In any event, throughout recorded history the additions from mining to above-ground gold stocks have approximated to population growth, making gold for money purposes no less scarce today than it was in the past.

This flexibility in the supply of monetary gold and the stability of prices allows the originary rate of interest to be both low and stable. It allows entrepreneurs to do business calculations with a high degree of certainty, knowing in terms of goods the value of money in five- or ten-years’ time. And savers, who provide the monetary capital for future production can be confident of the future capital value of their savings when lending them for business investment purposes.

A return to the monetary arrangements that existed before the Fits World War shows that price stability combined with free markets and free trade, as argued and demonstrated by adherents of the Manchester school in the nineteenth century, is the sure path to future prosperity in a post-fiat world.

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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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