In Part 37, we discussed “too big to fail” and why it’s a terrible thing for our economy in the long run. It’s yet another example of how the government’s power over our 0% backed fiat money leads to them making policies that hurt us more in the long run.
This post, let’s see where money could go from here. And then finally dig into cryptocurrencies!
One intriguing idea to evolve money further, which is already being tried in many countries, is central bank digital currencies (CBDCs). A 0% backed fiat currency that gets converted to a CBDC is still a 0% backed fiat currency, but now the money would be only digital–there would be no more physical cash. There are lots of ways to accomplish this, but every application of it involves people having to use a card- or phone-based digital payment method for every single transaction. We already do that for nearly every transaction in many industrialized countries, even when we are sending money to friends, so it’s not too huge of a jump to move us to this kind of digital-only cash.
I said the idea is intriguing because it almost seems like having a CBDC would be the same as having a country’s currency switch completely over to Bitcoin or some other popular cryptocurrency, especially if the CBDC uses blockchain technology.
But having a CBDC couldn’t be more diametrically opposed to having a private cryptocurrency. When a government and central bank run a 0% backed fiat currency that is purely digital, many new ways to take our wealth and control us arise.
For example, the government would be able to track every transaction, which opens up new taxation opportunities. It could even decide to tax every single transaction if it wanted. It could also disapprove certain transactions, so now it has direct control over what we can buy. Or it could cause money that hasn’t been spent in a certain amount of time to “expire,” which basically means it just disappears straight out of our bank account. (That would be even worse than inflation causing the money to lose its value–at least the money doesn’t completely disappear from your bank account!) So now it could force us to spend money when it wants to “stimulate the economy.” Or it could restrict money’s use to certain regions. And then there’s the risk of the government leveraging this power over money against its political rivals, which is analogous to (but more frightening than) what has already taken place in the United States when certain businesses have been “debanked,” except in this case the control would be even more direct.
And all of that doesn’t even consider the risk of the internet going down, which could completely prevent transactions from taking place. Hacking of the money is yet another risk, although that one is present any time you have digital money.
So, with everything I know about money, I believe CBDCs are only good for governments and banks furthering their selfish interests and that they create a terrible risk to the freedom and financial security of the people.
If we look at money again from an evolutionary perspective, I would say that CBDCs are actually the final possible stage of money’s evolution. Each evolutionary step past 100% backed receipt money has gotten worse, and CBDC is no exception; it is the worst possible form of money.
But what about private cryptocurrencies? Will any of them ever become a country’s official currency?
Originally, I wrote that I highly doubt it. But since then, further reflection has changed my mind. Now, my answer would be that it’s possible.
Not that I think any government would willingly give up its 0% backed fiat currency. Can you imagine any government willingly giving up its ability to create new money for spending whenever it wants? Suddenly politicians would become very unpopular when they have to raise taxes instead and people start to see the true cost of government actions. No more hidden taxation!
Governments would also not like switching over to a private cryptocurrency because much of a government’s power of taxation/tax law enforcement is dependent on transactions being reported. But if the two parties involved in a transaction choose to keep it anonymous (and nobody knows who the account owners are), then there’s no way for government to trace the transaction back to any individual. Which means there’s no one to send a tax bill to!
But, in spite of how much governments would oppose it, there are two factors that make a private cryptocurrency displacing a government’s 0% backed fiat money possible: (1) the strong and well-funded crypto lobby and (2) the private market.
The strong crypto lobby is obviously influential in shaping the crypto-related policies that get passed. But here’s something I bet most people don’t think of: The crypto experts dictating which policies the crypto lobby should support are more knowledgeable about that still-enigmatic industry than the politicians, so I think there’s a very real chance that some of the policies that are being advocated for by the crypto lobby (and that eventually will get passed) are policies that the politicians don’t fully understand the long-term implications of. This could lead to a sort of covert crypto takeover of the 0% backed fiat currency. At the very least, it will lead to the crypto owners making more money, which ultimately comes from increasing investment in their cryptocurrencies. And a huge way to increase interest and subsequent investment in crypto is by getting crypto to come into common use as a means of exchange and also as a store of wealth, as opposed to purely as a speculative financial instrument, which is mostly what cryptocurrencies are right now.
Now, how could the private market facilitate crypto taking over a 0% backed fiat money?
Remember what leads to the collapse of a fiat currency–a loss of trust in the money maintaining its value, which then causes it to no longer be a good means for storing or exchanging wealth. The value of fiat money is determined by its supply and its demand. Governments are already expanding the supply like crazy, which is devaluing their fiat currencies. But what governments don’t have direct control over is the demand for their money. Sure, they can institute legal tender laws to try to force people to accept their money, but what if an alternative to their money comes along and holds its value much better? People would increasingly turn to that alternative currency, and the demand for the fiat currency would drop.
So then you would have a fiat currency that already chronically has decreasing value due to ballooning supply, but on top of that you’d have decreasing demand, the combination of which would tank the fiat currency’s value. Then, the government, which is so reliant on funding itself through printing more money, would have to print even more money to be able to continue buying the same number of things. All of this would trigger a hyperinflation death spiral, and soon everyone would turn to using the alternative currency. Workers would start demanding to be paid in crypto by their employers, and stores would require they be paid in crypto as well.
I haven’t delved deep into what would happen to the government at this point. I think it might just implode. Services would just disappear, even though there’s still laws on the books requiring those services to continue. This could be the source of major political upheavals, with dire consequences. It could even lead to revolutionary attempts and civil war. I don’t doubt that at least one faction would be looking to establish a new constitution supporting a true socialist form of government, which is becoming increasingly popular among the younger generation who obviously haven’t read enough Friedrich Hayek or Milton Friedman or this blog. I really hope that the implosion of government that would likely happen as a result of it losing its power over the currency doesn’t lead to all of that. But, if there’s any major regime change, I hope they use my constitution (work in progress) the next time around instead.
So what kind of private cryptocurrency is most likely to win out when the competition kicks into high gear for general use?
Stablecoins pegged to the value of any other 0% backed fiat currencies are no good, especially if the fall of the USD starts a domino effect with other fiat currencies. Supply-limited 0% backed cryptocurrencies, such as Bitcoin, are better, but remember the goal isn’t to have a fixed supply currency; the goal is to have a stable value currency. And the only way to achieve that is to have one that is backed by specie, which makes its value always be regulated by supply and demand. The best would actually be to have one that is fully (100%) backed by specie, because then essentially what we have accomplished is getting back to a commodity money (with the perk of having digital receipt money as well), and there would be no way to create more digital coins without adding more specie to the vault, so no tampering with the value of money anymore.
Which commodity would be best? Take a look back at my characteristics of optimal money in Part 9. There’s a reason this blog has used gold as the example–because it’s a great option. Silver might be a better option though because it’s more plentiful and spread across different regions, which makes it less easily monopolized. But there’s a persistently strong historical interest in gold as money, so that may make it take precedence over silver when it comes to the market choosing between the two.
While the transition to cryptocurrencies is taking place, we will probably have different cryptocurrencies with different commodity backing competing for general use, but the downside of that (until everyone standardizes around a single commodity) is that you would have to track the value of the different commodities, which would change independently, so stores would constantly need to post and frequently adjust multiple distinct prices.
And we should expect big value swings in every cryptocurrency until the market settles on a single commodity and the speculation dies down. After that, the competition will be narrowed to being between the cryptocurrencies that are 100% backed by the market-selected commodity. I would love to see 4 or 5 different cryptocurrencies with that commodity as backing continue to compete with each other, each with policies that ensure efficiency/low cost, safe storage of the commodity, audit transparency, and easy exchangeability (so you walk in with your crypto wallet and exchange digital coins for physical coins). Then those cryptocurrencies could establish branches in every major city, where people could go to redeem their coins for the commodity. And I hope merchants start accepting either the digital coins or the physical coins because the continued use of the commodity itself as money would be important to help generations of people remember what they are actually using as money even when they’re making digital transactions.
Prices would be super turbulent in the market for a while, and that would hurt economic efficiency. But, as things settle, the new monetary system would unlock incredible economic growth, which would finally also start translating into continually rising purchasing power.
So that’s what I hope happens. I hope the private market comes in, with the help of some clever policies pushed through by the crypto lobby, and sets us free from the bondage of a 0% backed fiat currency.
Does that mean we should all start buying crypto?
Yes and no.
The more pressure that stores have to accept crypto in payment, the sooner this transition to a private cryptocurrency will happen. So getting set up with a crypto wallet and owning a few coins for the sake of experiencing transacting with crypto is a great idea! But, with cryptocurrencies still being so unstable in value, I don’t recommend anyone start storing too much of their cash wealth in any of them–at least, not until the USD starts down its hyperinflation spiral, and then at that point most crypto options would probably be better than keeping your cash wealth in the form of USD.
But, to be clear, cryptocurrencies should not be considered sound investments. Using them as investments is pure speculation, which you should understand by now (but, as a refresher, go back and read my definition of speculation in Part 20). I will not judge anyone for speculating in crypto, but I really hope that those who do are only allocating a small percentage of their portfolio to it and can stand to lose that money. Some people have a lot of fun with gambling, and if crypto is your game of choice, then go right ahead. I personally do not have any of my investments in crypto.
I will be interested to watch the crypto market over the next couple decades, and I hope it elevates quickly from a mere speculative financial instrument to an actual useful form of money that saves our economy and facilitates a drastic improvement in our quality of life.
Before writing Part 39, I’ll look over my notes from some of the books I’ve read on this subject of money and banking to see if there are any other important topics to cover. And once I’ve done that cleanup effort, I’ll move on to discussing other solutions to help get us out of this 0% backed fiat currency mess.
Clear Thinking on Healthcare 