Returning to the subject neglected for almost a year since I spoke about the Gyro as a solution for Greece, but which will be a major theme for all us in the next 10 years – Money.
A Central Bank Liability ?
Let’s review modern currency. It is not a store of value. It is just a very low cost artifice to facilitate transactions. The final conclusion to this is digital currency. Storing massive amounts of value in a physical store becomes more unpractical as the scale of transaction grow beyond a low-transaction,local economy. Money allows us to exchange valuable goods and services across time and space with the minimum of cost. The movement to fiat and then digital currency is the natural conclusion to the complexity of our society as we have reduced the cost of the transaction medium.
However even in digital form as is most of our bank accounts, what is money ? Many look at it as a liability of the central bank. Traditionally a bank “Note” is an obligation of the issuing bank. However that is an artifice in today’s system. These institutions don’t have any assets to cover those “notes”, and hence the fear of goldbugs that money will be worth nothing as the banks follow the leader of 21th century finance, Zimbabwe, into oblivion.
Money is what everyone else believes it to be ! It is focal point of an unit of value and can only be redeem to the extent that others accept it. This may seem obvious, but clearly it is a confusing concept. Money is a store of value only during stable times because others are willing to accept it at stable exchange rates to things of real value, but in uncertain, chaotic times — may increase or decrease in value depending on a variety of factors that all sum up the overall confidence in the system.
Money is credit instrument, not of the central bank, but of all the members of society, without any kind of recourse to their real underlying assets. You are taking pure unsecured risk to society when you hold money. This too should be obvious. It truly requires faith that society will be held together and rules and laws will be obeyed. As a tool for facilitation of trade, it seems obvious that money only holds value while the society holds together. Just as laws only hold value as long as people submit to them. The moment people, in mass, start breaking the law, then lawlessness rules the day, and the laws on the books become worthless. Laws and money are the tools created by society that help bind and nourish itself.
Timeless Value ?
Many people want money to hold its value, but a dynamic world implies a changing value of time. Anyone who has traded futures knows the value of commodity in one month is not the same as the same commodity in another month. Heating fuels are usually worth more in winter than in spring. After the Spanish found gold in the New World, they suffered massive inflation as gold coins lost their value relative to everyday goods. The state of the world always changes and with it, relative prices. Demand and supply is constantly changing both at the global level, the local level, down to two people making a trade in their living rooms.
The universe recreates itself in every blink. Depending on the rate of change, the value people assign to items will change. Isn’t this obvious ?
So why do we want to keep the value of money the same ? As with all “communist” systems that attempt to control outcomes, the desire to fix values is born of fear for most and for those few more more ambitious that desire to control money , it is driven by greed, which some also attribute to a displaced fear of death.
The world of freedom demands that we live in the moment and embrace the dynamic changes like a kung-fu master who is ready for anything. We as a society need to embrace the joy of change rather than give up power to those that want to control. In a free world, monetary changes free of central control would be no different than the natural currents in a river that we can all master.
We have an opportunity with distributed public hyper-ledgers to create currency without any government control. Real currency that represents relative prices , not artificial Bitcoins, and can enliven all transactions by naturally repricing with supply and demand. Stay-tuned for that.