The Theory of Money, Part 38

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Last week, I discussed “too big to fail” and how that predisposes to bank bailouts by governments, which is yet another example of how the government’s power over our 0% backed fiat money leads to them making policies that hurt us in the long run more than they help us in the short run.

This week, let’s see where money could go from here.

One intriguing idea that is already being tried in many countries is central bank digital currencies. This is basically just the same as 0% backed fiat money, 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.

The big downsides of this, though, are that we would be completely dependent on the internet being up and running to enable every transaction, and it also allows the government to track every transaction, which interferes with privacy and also gives the government greater taxation power (or maybe I should say greater tax law enforcement power–no more under-the-table transactions!). There’s also been talk of central banks finding ways to reclaim money by simply having it “expire” (i.e., disappear). With the background already discussed in this series, you can see how that would be an attractive option to enable the government to make money disappear, which would allow the government to create more new money without as much of an inflationary effect.

And what about cryptocurrencies? Will any of these private currencies ever become a country’s official currency?

I highly doubt it. Sure, you could put a central bank digital currency on a blockchain, but that’s probably the only way any form of crypto will be an official currency.

But as for a government co-opting one of the private cryptocurrencies as their country’s official currency, can you imagine any country’s government willingly giving up their power over money? If they did so, they would instantly lose their ability to create new money for spending. And suddenly the true cost of so many of their policies would become known when taxes have to be increased significantly to account for the loss of their means of “hidden taxation” (through inflation).

Switching over to a private cryptocurrency may also take away much of a government’s power of taxation/tax law enforcement because so many more transactions would be completely anonymous. Remember, for a government to be able to tax a transaction, they need to know about its occurrence and know who was spending the money. But if a transaction is anonymous, there’s no one to send a tax bill to!

So is there a point to investing speculating in cryptocurrency? (Please refer back to my definition of speculation in Part 20.) Now that we’re all the way to Part 38, I hope you have a more complete understanding of why I said that cryptocurrency ownership is solidly in the realm of speculation. So, sure, if you want to gamble with your money, that’s an exciting way to do it. And if your goal is to have some fun, which I think is the only rational goal of gambling, then go right ahead and speculate in cryptocurrency. But if your goal is to invest money for the future with the hope that it will grow over time, cryptocurrencies are a terrible investment from a risk-reward perspective.

By the way, I’m not trying to argue that no private cryptocurrency will ever stabilize in its value and become more widely accepted. I hope at least one does! And I think it’s very likely this will happen sometime in the next decade, although take that prediction with a grain of salt because I am not a crypto expert. But if we get at least one private cryptocurrency to accomplish those two feats, that would elevate it from being a speculative instrument to an actual form of money, which would offer us a great alternative to transacting in our country’s 0% backed fiat money. So, until one like that emerges from the pack, I have no interest in owning crypto of any form.

Overall, then, I guess I’m saying that I think our money has pretty much reached its final stage of evolution at 0% backed fiat money (whether that includes physical cash or not).

Next week, 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 the final topic of this series: how we could possibly get back to commodity money.

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