I’ve always been interested by the connection between money and the physical world we live in. With money, we are able to buy the things we need, purchase investments for the future, and lend our money to others in return for a little bit of income. Without money, we’d be reduced to barter and the double coincidence of wants: if a farmer doesn’t need my services as an engineer, then why would he sell me his eggs?
A healthy money is crucial to the life of our civilization
Money is an incredibly important tool; it’s a vital fluid in the economy that makes an advanced civilization possible. As an economy is really just millions of exchanges, so the best kinds of money have historically been chosen by the people. It’s important to remember that money is just a tool for improving exchange, as well as allowing one to save up purchasing power by producing more than they need. This excess purchasing power reflects the additional goods added to the economy, and can be redeemed in the future.
To a certain extent, money needs to reflect the underlying reality. People have traditionally chosen gold as the premier currency, as gold has some excellent properties that make it especially useful as a form of money, such as the fact that its supply grows only slowly, and it is very durable, easy to divide, and it even looks beautiful, too.
The rise of fiat versus gold
However, gold has fallen by the wayside in favour of fiat money. Fiat has some desirable properties too, such as being an incredibly easy medium in which to facilitate exchanges and commerce, and the value of fiat rests in a computer, so even if some physical notes get lost or destroyed, they can always be recreated by the bank.
The problem with fiat is that it isn’t a great means of storing long-term wealth. Because fiat is based on convention and law, rather than the physical laws of the universe, a government is always tempted to inflate the supply of the currency, so that they can use this inflated supply to acquire more of the real, physical stuff that money represents, without having to raise taxes to compensate. It’s a way to tax all holders of the fiat currency, without having to actually have them hand over any extra bills.
Because this exorbitant power is so hard to resist in the hands of populist politicians, we have seen credit bubbles get larger and larger, and countries bury themselves ever deeper in debt. There’s now a wide gap between fiat currencies and the actual physical world that they are supposed to represent, and this gap is growing larger by the day.
The return of gold
As the situation gets worse, the health and life of our world civilization is at stake. If money can no longer do its job, then producers have less of an incentive to produce, consumers will have less to consume, and life for many will stagnate or get worse. However, not everyone is willing to just stand by and watch all of this happen.
What if the pendulum has swung too far in the direction of make-believe paper instruments? Can gold return some sanity and sense to this world monetary order?
Freegold might be one way in which sanity gets restored, as we see gold take a greater place at the table as a premier store of value, while reserve currency holders lose some of the privilege of being able to export inflation that they’ve enjoyed in the past. It seems that there are some changes ahead that will lend more credence to gold regaining its proper place at the table.
Basel III and the return of gold as a Tier 1 asset
One of these changes would be the return of gold as a tier 1 asset to the banking system! The banking system would recognize physical gold as a premier reserve, marked at full market value. Indeed, there are rumours that Basel III regulators are planning to reintroduce gold as a Tier 1 asset. The re-introduction of gold into the system could help with the recapitalization of banks, as excess debt gets destroyed and worked out of the system.
When we think about whether the sky is really falling, it helps to remember that no thunderstorm lasts forever, not even the biggest hurricane. Eventually, the sun comes back out, and may it shine brightly on us all.
A quick recap
- Gold is not an investment (except as an investment in your own future and in the future role of gold). That’s what equity markets are for.
- Gold is also not a premier medium of exchange; fiat has taken over that role.
- Gold is, however, a premier store of value and means of final settlement. Those in the east have known this for thousands of years, even if some of us in the west have forgotten.