Cryptocurrency: Backed By What Exactly
grarpamp at gmail.com
Wed May 11 19:47:16 PDT 2022
The Contrarian Curse
What if all the new consensus memes are as wrong as the ones they replaced?
I have the Contrarian Curse, and I have it bad. The Contrarian Curse
is: as soon as the herd adopts your previously contrarian view, you
start questioning the new consensus, just as you questioned the
Example #1: fiat currencies are doomed. After all, if creating "money"
out of thin air solves all our problems, why not just let everyone
print as much as they want at home? Oh, wait, only the super-wealthy
and powerful get the newly created "money"? Oh, that makes it really
sustainable, doesn't it?
Now the hot meme is the US dollar is expiring and gold /
commodity-backed currencies will replace it atop the heap. Many of us
on the fringes have pondered alternatives to fiat currency, and so
this becoming mainstream is a real sea change.
Which immediately arouses my contrarian curse. Ok, so exactly how does
a gold/commodity-backed currency work? If gold or wheat declines (as
measured in purchasing power to everything else), does the quantity of
currency shrink to reflect this decline in value? Can the currency
supply only expand if gold/commodities rise in relative value? Can the
issuing central bank just keep emitting new currency without expanding
the reserves of gold/commodities?
What about private banking creating new "money" by originating new
mortgages and other loans? What's backing all this new
Lots of knotty questions, few if any detailed answers to how a
gold-backed currency functions in actual markets. An idea can be great
as an abstraction but the execution of the details is what
differentiates an abstraction from a real-world system that's
functional, transparent and thus trustworthy.
Can I convert my gold-backed quatloo into gold? If not, then what
exactly does gold-backed mean?
As for digital currencies issued by central banks or private banks,
how are these different from existing fiat currencies, which are for
all intents and purposes, already fully digital currencies?
Even more contrarian: what if the demand for US dollars pushes the
relative value higher despite the intrinsic flaws in fiat currencies?
"Money" is a funny thing. You can print more, but expanding the supply
tends to devalue the existing stock of "money," reducing the value of
the newly issued currency. But if demand for the "money" exceeds
supply, the relative value increases even as the supply continues to
Here's another funny thing about "money." Take a bunch of
loans--student loans, truck loans, mortgages, lines of credit, etc.,
and extinguish all that debt by writing them off as uncollectible,
forgiving the loan, reducing the market value of the underlying
collateral (if any), and so on. All that "money" goes to Money Heaven
and the supply of "money" shrinks accordingly.
If demand remains steady, this reduction in the supply of "money" will
push its relative value up. (Questions like this prompted me to write
Money and Work Unchained.)
Example #2: yields and interest rates have to stay near-zero or the
system implodes. Now that debt has ballooned to insane levels, there's
no way to service the debt except at near-zero rates of interest which
means Treasury yields also have to be near-zero.
Now that this is the consensus, I wonder: what if rates will continue
rising anyway? What would it take for the 40-year bull market in
bonds--i.e. 40 years of declining yields/interest rates--to reverse
into a Bear market for bonds, i.e. yields/interest rates steadily
What if entire mountains of debt are extinguished, effectively
reducing the supply of "money"? If capital becomes scarce, then
perhaps there will be a premium charged to borrow it.
Geopolitically, one way to reduce the burden of higher commodity
prices is to increase the value of the nation's "money" by inducing
demand while limiting supply. One way to induce demand is to treat
capital fairly and transparently.
What if all the new consensus memes are as wrong as the ones they
replaced? I told you it's a curse.
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