As always, doing catch-up reading of Zero Hedge. My eye alights on a little article proposing a (post-diluvial) gold-based currency. Note: gold-based not just gold-backed. His idea is that part of the difficulty with a 100% gold-backed currency — that you can't expand it to cope with new goods being produced — will be solved by simply using gold coins instead, and relying on velocity of circulation. I'm not so sure about that: if your currency really is 100% backed by gold, then each unit is ipso facto "the same as" some amount of gold, so you gain nothing by moving the gold around. Indeed, you continually lose a little bit to wear and tear, and perhaps to thieves who can be guaranteed to find ever-smarter ways to remove a little bit of gold from a coin without the next guy noticing. They didn't invent milled edges for nothing, after all. The velocity of circulation argument seems to be a red-herring too, no, in my view, you'd just have to rely on deflationary effects to sort out the money supply: if I open up a widget factory, the supply of widgets increases and their price falls, all expansion of the money supply does is cover up that basic fact, so let's just accept it instead.
Anyway, none of that is the point of this post, though there's a clue in the wear and tear reference above. It's that coins — at least those that depend on their precious metal content for their value — are an essentially analog specie. Notes on the other hand, are essentially digital. If I shave a tiny scrap off a gold coin, I reduce its value; if I do the same with a dollar bill I am left with ... a dollar bill plus a tiny, worthless, scrap of paper.
Now I'm as impressed as anybody else by what seems to be happening, simultaneously, to the money supplies of independent nations (and blocs) all over the world, and I do think that we risk seeing coordinated runaway hyperinflation on a global basis some time in the next twenty years. But. But... we are not going to be giving up our mobile phones and their NFC payments, or our online shopping for that matter. So I don't see gold making a comeback as an actual circulating currency. As one amongst many stores of value, yes, certainly, but not as circulating coinage. It's just not digital enough, and it's not "e-digital" at all.
So what can provide a store of value and medium of exchange in an e-digital world, and one that's unadulterable by thief and government alike? The only thing I can think of is BitCoin, the subject of much derision by professional economists. It doesn't help, either, that one of the few functioning BitCoin exchanges (and vaults) closed its doors this week. However, historically, many currencies have stumbled after their introduction (one thinks of ... oh ... the Euro), so none of this negativity is necessarily a guide. As a result of this train of thought I've now decided that I'm more positive with respect to BitCoin's prospects: it, or something like it, probably has a part to play in the future.
One intriguing suggestion as to how BitCoin might start to be used more, that I came across recently, is that it would make a perfect in-game currency. This really is rather appealing: if nothing else, it would provide instant convertibility between in-game artefacts in different games, without the necessity (and possible legal complications) of involving state-backed currencies. Also it would provide economists with perhaps a better way of comparing the sizes of game economies. What's not to like?
We could base currency on an assortment of commodities - a few milligams each of gold platinum and palladium, rather more milligrams of silver, and several grams each of more common elements.
ReplyDeleteThere's a lot to be said for an aluminium based currency. Aluminium is plentiful - it is the third most common element in the earth's crust, so large factor in the price is the cost of the electricity needed to extract the metal from its ores, so its price reflects the cost of the cheapest available electricity.
In a sense, what we're reaching towards, is the idea that the currency somehow "be" the sum total of all goods in the economy. Commodities such as gold, silver and aluminium, are proxies for this "ideal" currency.
ReplyDeleteI suppose a government could simply declare a new currency whose units represented say 100 billionth of the national wealth, but I bet such a currency would have an odd trajectory on the fx markets. Not to mention the fact that technological change can radically alter the "stock" of wealth very quickly.