Let’s Level the Playing Field between the Dollar and Competing Currencies

Written by Michael Milano

To be a reliable and useful medium of exchange, money must be durable, portable, divisible, and recognizable, but also scarce. The privileged power of the state to manipulate the scarcity of money has had disastrous consequences for national currency systems throughout history. While money, like everything else, is subject to the subjective valuations of consumers—as noted by Mises—money’s exchange value is “the most important kind of value, because it governs the social and not merely the individual aspect of economic life.” Legal tender laws and other regulations imposed on currencies cause value discrepancies to arise.

Indeed, when states intervene to impose “official value” on money, true market preferences can be partly observed in the workings of Gresham’s law. Gresham’s law is conventionally described as “bad” money drives out “good” money, but a more accurate definition per Rothbard is that “money overvalued artificially by government will drive out of circulation artificially undervalued money.” Imagine a specie-based economy that issues a coin containing one ounce of gold. Facing mounting debts, the government substitutes copper for a more valuable metal in the minting process while maintaining the coin’s denominational value. According to Gresham’s law, once citizens recognize the inconsistencies in the precious metal content, they’ll opt to spend their artificially “overvalued” newer coins while hoarding their artificially “undervalued” older coins.

Whereas “overvalued” money was created in the past by physical debasement, “overvalued” money today is the result of reckless monetary and fiscal policy. Over the course of the pandemic, the money supply, M2 according to the Federal Reserve, increased 29.7 percent, from $15.405 trillion in February 2020 to $19.979 trillion in March 2021. Since the advent of the Federal Reserve, the purchasing power of the dollar has dropped by over 96 percent (i.e., $1 today is the equivalent of $26.14 in 1913). Unbridled quantitative easing has further amplified inflation worries and global doubts about the stability of the dollar.

Legal tender laws in the United States require the public to accept payment for debts and taxes at the dollar denomination shown on the bill. This form of coercive price control has established the dollar as the economy’s unit of account. Similarly, burdensome tax regulations bolster the “overvalued” dollar by constructing barriers of use for its rivals.

The Case of Cryptocurrency

We can see the effects of these regulations at work today in how cryptocurrency is used.

According to the IRS, bitcoin and other cryptocurrencies are considered property for taxation purposes. Thus, the act of buying goods and services with BTC is identified as a realization event that requires the purchaser to declare any gains recognized from their BTC cost basis. Disregarding scalability concerns, onerous requirements that force users to track gains and losses for all transactions ultimately prevents BTC from serving as an effective medium of exchange.

On the other hand, if there is real market demand for various cryptos, government regulations designed to discourage the use of anything other than the “official” money will cause the demanded “unofficial” monies to become “undervalued” currency.

Thus, in accordance with Gresham’s law, the in-demand cryptos would be hoarded, rather than circulated at large. In the bitcoin community, for example, this mentality is personified by the Hodl meme encouraging bitcoin users to simply hold, rather than spend, bitcoin. A feedback loop has been generated where greater levels of fiat inflation have led to wealth flooding into BTC, further strengthening the perception that BTC is a reliable store of value. This mentality has been embraced of late by numerous corporations, who have transferred portions of their cash reserves into BTC (e.g., Tesla, MicroStrategy, Square, and MassMutual).

Thanks to so many government restrictions on the use of potential monies that aren’t the dollar, we can only guess as to what the relationship between dollars and bitcoin would be in a functioning marketplace. To find out, it would be best to level the playing field by eliminating legal tender laws and onerous taxation requirements. This would allow individuals to actively assess true differences in purchasing power.

This is unlikely, however, because elected officials depend so much on inflating the supply of dollars for political gain. Whether Democrat or Republican, politicians within our current system overwhelmingly perpetuate the welfare-warfare state—and this would be much more difficult with market-based money not subject to easy inflation by central banks.

Perversely incentivized, these politicians promote expansionary monetary policies that benefit special interest groups while pandering to their electoral base. As noted by Hayek, “[W]ith the exception only of the 200-year period of the gold standard, practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people.” Depriving the state of this exclusive power would force accountability first and foremost. If the threat of violence and imprisonment were stripped away, the public could freely evaluate the quality of different currencies and act accordingly.

USD Purchasing Power and Current Issues with Inflation: Why buy Gold, Silver and Bitcoin

Featured below is a graph showing the “Purchasing Power of the Consumer Dollar”. This graph shows the output of the purchasing power of the dollar since November of 2006. Notice the downward trend of the purchasing power of the dollar.

This should be a concern for savers of dollars, and it should be a wake up call to action to make moves to insure their assets are beating the trend of inflation.

Recall: Inflation is the expansion of the monetary base(money supply) that is greater than the actual amount of metal stored. In this case, the metal considered would be gold or silver.

Consider all the stimulus packages, bailouts, monetary injections, repurchase agreements, and other monetary/fiscal policy measures that have been done since 2006. While that is under consideration, think about the growing United States Government debt. If any economist is telling you inflation is low, they are not being honest. Per the definition of inflation, it is here.

This is why the smart money is on Gold, Silver, and Bitcoin. This is why serious investors, who are concerned with inflation, need to look at these assets to hedge against inflation.

(source: FRED.St Louis Federal Reserve. Time expressed in number of months)

Inequality and the Gold Standard

By David Howden

Imagine that you earn $40,000 a year and your boss doubles you at $80,000 a year. Business was good to you both in 2013, and you received a 25 percent raise for your efforts. Not bad, and your boss gets to share in this good fortune too with an extra $25,000 (about 30 percent). You’re going to make $50,000 in 2014 and your boss will pull in $105,000.

Are you happy with this deal? Probably. But wait, income inequality just increased! Your boss originally outpaced you by 100 percent, but now his salary is 110 percent higher than yours.

In today’s progressive narrative, this situation is cause for alarm. Income inequality has increased and despite the fact that everyone is doing better than they once were, one group is doing relatively better.

What about if we reverse the example, starting from the original salaries? Instead of having a great year, imagine things were very bad and salary cuts are going around. You get a 25 percent pay cut so that you will now be earning $30,000 a year, and because he has more responsibility about the direction of the business and its lack of success, your boss gets a larger pay cut of $25,000. (This situation is the mirror image of the first example.)

You are making much less than you did last year. Are you upset about this? Probably. But wait, apparently there is a silver lining. Your boss now “only” makes about 80 percent more money than you, versus the 100 percent salary differential that existed last year. Income inequality decreased!

Apparently you can take solace in knowing that the playing field has been leveled, even if your kids are going to have a tough Christmas morning one year from now.

This is admittedly a very simple example. What I am trying to show is that the income inequality debate is not as straight forward as it is commonly framed. It is not just a question of one group getting a larger piece of the pie, but of increasing the size of the pie so that everyone can benefit.

John Cassidy recently entered the melee with a very digestible look at American income inequality over time. In his “six charts” there is some of the same (the top 1 percent of earners have seen their share of the pie rise rapidly over the past decades) and also some surprises.

Relying on data from Berkeley economist Emmanuel Saez, Cassidy shares the following graph showing changes in real income growth over the past century.

how

First let’s look at the top 1 percent. There seem to be about three distinct periods their incomes have gone through. The first from 1913 to roughly 1973 is more or less flat. Real incomes for the top 1 percent were no higher in 1973 than they were around 1930. After 1973 however there is a sharp and mostly uninterrupted spike upwards which seems to stop around the year 2000. After 2000 their real incomes have ebbed and flowed, primarily in response to capital gains and losses on their stock portfolios. Even though the volatility of their income has increased, it still remains quite high relative to any time over the past 100 years.

Compare this with the bottom 99 percent. There seem to be about four distinct periods of real income growth. From 1913 until the end of the Great Depression, real income remained more or less constant. The 1940s, 50s and 60s saw a rapid increase in real income growth, far more rapid than what the 1 percent experienced. This came to a sudden end around 1973 and a stagnation until the early 1990s. Then from 1993 onwards we see the same final stage as the 1 percent. Increasing real incomes (though much slower than the 1 percent) but more volatility as well.

There are many things which are the same in these two trends, but the one year that probably pops out for people who think income inequality is a bad thing is 1973.This year marked the end of the steady advance for the 99 percent’s real income gains and set in motion the rapid advance of the 1 percent. In other words, the marked income inequality we see today is a product of the post-1973 world.

So what happened in 1973? Many things as it turns out. Decreased unionization was getting underway in the US economy around this time, as was the spike in the price of oil.

Russ Roberts at Café Hayek has a different explanation. He thinks it has to do with changes to the family unit. Large increases in the divorce rate and a steady increase in the number of households headed by women could be to blame for the sudden jump in income inequality.

Maybe, but although this could be a reason why, I doubt it is the primary reason.

Let’s try an informal test. What was the biggest event to occur in 1973?

Americans probably will answer Roe v. Wade, the completion of the World Trade Center as the world’s tallest building or the beginnings of the Watergate hearings. Maybe the start of withdrawal of troops from Vietnam or Britain joining the European Economic Community. Or for sports fans it could be Secretariat winning the Triple Crown and getting immortalized on the cover of Time.

Actually the most important thing to happen in 1973 actually happened in 1971, August 15th to be exact.

On that date Richard Nixon closed the gold window. The US dollar was convertible by foreign governments into gold under the then-existing Bretton Woods system at the great price of $35 per ounce. Continued redemption demands by some belligerent countries (primarily France) drained the US of its gold reserves until the breaking point when it became questionable how much longer this could continue for. In what could have been the most important day of the twentieth century, Richard Nixon decided to renege on the US’s promises to foreign governments and essentially default on its currency. No longer was the US dollar tied to gold and the US no longer had to worry about spending beyond its means.

Well, almost no longer. While there was no convertibility into gold after 1971 there was still that old bugaboo of fixity in the exchange rate. The US dollar still functioned on a fixed exchange rate standard relative to gold until 1973, even if there was no convertibility. This meant that the US was still not free to expand its money supply or incur ever increasing budget deficits at will. It had to target a dollar price of gold, which was reset a little higher in 1971 to $38/oz. Even though there was no redeemability, the US was legally obliged to target this gold price, something which tied its hands concerning the extent to which deficits could be run and expansionary of the money supply policies could be pursued.

The effect on the deficit is easy to understand in light of this.

how

Since the late 1880s (and before) the US government ran a somewhat balanced budget. Minor blips appeared during the two World Wars, but by-and-large the deficit hovered very close to the zero line. In the late 1960s we can witness the a growing deficit, partly in response to the cost of the Vietnam War but even that is relatively mild to what would come later. Likewise, 1971 also witnessed a growing deficit but the year which defines the point of no return is clearly 1973. At that point the US deficit went into free fall and besides a few surplus years in the late 1990s it has never recovered.

The effect was also pronounced on prices.

how

Prices were indeed climbing throughout the 1960s, but 1973 was also the year that set off the most inflationary episode in America´s history. Being unhinged from that relic of gold, the Federal Reserve could increase the money supply and monetize the Federal government’s budget as it wanted. This culminated with 15 percent annual inflation in 1980 something which took a very strong-minded Federal Reserve chairman by the name of Paul Volker to tame by putting the breaks on money supply growth.

Inflation looks tame today, though the experience following the 1973 decoupling showed what happens when you let the government spend at will without any restraint. Gold provided restraint, just as political gridlock should today. But in the period of the mid to late 1970s there was no such luck.

All this takes us back to the original question: why did income inequality increase so much after 1973? We can look to two factors both related to the loss of the gold exchange standard in 1971 and the arrival of flexible exchange rates two years later.

First, as the US government no longer had to worry about redeeming US debt held overseas in gold, it was able to spend without restraint. Of course, this created a large budget deficit quickly, something which needed a solution. This brings us to the second point. By monetizing the US budget deficits, the Federal Reserve set off a period of high price inflation.

The reason why there is growing income inequality since 1973 is a direct result of this monetary mayhem. All this new money needs an entry point into the economy. Someone has to get it first and spend it. When they spend this newly created money they do so at the existing set of prices, but in the course of making these expenditures prices will rise. Those who get the money first “win” in the sense that they get a free lunch – they have a greater income and can spend it before prices rise. Those who get the money last are the “losers” – they get access to this money eventually as it is spent (trickles down?) but by the time that occurs, prices have already risen. They are no better off.

The 99 percent that have become relatively poorer over the past 40 years are those who get access to this new money last. (Remember however that these people are still, thankfully, wealthier than they were 40 years ago.)

Who are the remaining 1 percent, then? Well, who gets the money first?

Government officials and contractors, to the extent that they gets the proceeds of all the newly created money are the first and primary beneficiaries. Big banks and financial institutions also win as they are the enablers who help this newly created money enter the economy. Incidentally, 99 times out of 100, when we think of someone in the 1 percent who is getting ahead of the rest of us, they probably either work for the higher echelons of the government or are involved in the financial industry.

Coincidence? I doubt it, and you just have to go back in time to 1973 to understand why.

US National Debt Passes $28 Trillion, +$4.7 Trillion in 13 Months. General Treasury Account Down by $480 Billion in 2 Months, $620 Billion to Go

What does it mean for the markets that the government now spends the proceeds from debt sales last spring that the Fed had monetized back then?

By Wolf Richter for WOLF STREET.

It finally happened, that glorious moment, when, after teetering on the verge for weeks – for reasons we’ll get into shortly – the incredibly spiking US gross national debt, after kissing the line a couple of times for a moment, finally, and suddenly by a big leap, jumped over the $28-trillion mark, with a $143-billion leap in one day on Wednesday, March 31, following some big Treasury sales. It gave some of that up on Thursday as some bonds matured. And it now amounts to $28.08 trillion, as per US Treasury Department on Friday.

The US gross national debt has now spiked by $4.7 trillion in 13 months since the end of February 2020, in the days before this show started.

The flat spots in the chart are the visual depictions of a charade unique to American politics, the periods when the debt bounced into the Debt Ceiling. Those were the days when everyone in Congress was still trying to hijack the Debt Ceiling law to get their favorite spending priorities!

If it looks like the trillions have been whizzing by a little less fast in recent months, that the growth of the debt has somehow slowed, that is correct.

The chart below magnifies the daily debt levels since December. On March 3, the debt level touched $28 trillion but only barely and just for one day, before backing off, and then kissed it again on March 17, only to back off again and remain tantalizingly close, but no cigar, until Wednesday, when it did the deed with one huge $148-billion leap:

The reason for this slowdown in borrowing is that the government sold a gigantic amount of debt last spring, adding $3 trillion to its debt in a few months, and then didn’t spend all of it, but kept the unspent amounts in its checking account – the General Treasury Account or GTA — which ballooned to $1.8 trillion by July, from the pre-crisis range between $100 billion and $400 billion.

During the final months of the Mnuchin Treasury, it was decided to start spending down the balance in the checking account by borrowing a little less, and by early January, the GTA had dropped to $1.6 trillion.

Early on in the Yellen Treasury, the drawdown was formalized. In early February, a schedule was announced: the balance would be brought down by $1.1 trillion to $500 billion by June. And they’re now well into it.

The drawdown has the effect that the government spends money it doesn’t have to borrow at the moment because it already borrowed it last spring when the Fed was still monetizing essentially all of the borrowing. This has some implications for the markets.

The government’s TGA is at the Federal Reserve Bank of New York and is reported weekly on the Fed’s balance sheet as a liability (banks report deposit accounts as liabilities) because this is money the Fed owes the government.

In the two months since early February, the balance has plunged by $480 billion to $1.12 trillion. Over the next three months, it will plunge by another $620 billion:

During the six months through June, the government will spend $1.1 trillion that it doesn’t have to borrow because it already borrowed it a year ago and that the Fed monetized at the time. But this ends in June.

What does this mean?

Not having to borrow this $1.1 trillion of spending during the first half of 2021 is taking pressure off the Treasury market. And yet, despite that relief, the 10-year Treasury yield has surged to 1.72%.

By June, this pressure valve will close, and the government will borrow more, and the market will have to digest it, and there is a huge amount of new borrowing being lined up to fund the added spending. This will put further upward pressure on long-term yields.

The fact that the government is now spending the proceeds from debt sales a year ago that the Fed monetized a year ago has been adding liquidity to the economy and the markets – liquidity that had been stuck in the TGA – possibly adding to the craziness of the markets in recent months. But that will end in June.

Types of Money

Robert Kioysaki discusses the different types of money, gold, silver and Bitcoin. He also mentions why individual savers are losing money by saving fiat currency in their bank account.

Many economists in the past have written about the ills of fiat currency. Robert’s points are supported by well respected economists such as, Murray Rothbard, Phd, Ludwig Von Mises, and many more. Both Rothbard and Mises(Mises was Rothbard’s mentor) wrote extensively regarding the social ills of the use of fiat currency.

This video covers some of the reasons why individuals should use Gold, Silver, and Bitcoin to save money for the future.

Sound Money Is Key to Defending Our Liberties

By Thorsten Polleit from: Mises Institute

The title of this article epitomizes what the Austrian economist Ludwig von Mises (1881–1973) called the “sound money principle.” As Mises put it:

The sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.

And further:

It is impossible to grasp the meaning of the idea of sound money if one does not realise that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of right.

Mises tells us that sound money is an indispensable line of defense of people’s liberties against the encroachment on the part of the state and that sound money is a kind of money that is not dictated by the state but is chosen by the people in the free marketplace. The world we find ourselves in is a rather different place. Our monies—be it the US dollar, the euro, the Chinese renminbi, the yen, or the Swiss franc—represent fiat currencies, monopolized by the state.

Fiat money is economically and socially destructive—with far-reaching and seriously harmful economic and societal consequences, effects that extend beyond what most people would imagine. Fiat money is inflationary; it benefits a few at the expense of many others; it causes boom-and-bust cycles; it leads to overindebtedness; it corrupts society’s morals; and it paves the way toward the almighty, all-powerful state, toward tyranny.

Central Banking Is Marxist
It is certainly no coincidence that “the state” has been expanding ever since the world adopted an unfettered fiat money regime back in the early 1970s, and that as a result individual liberties and freedoms have been under pressure ever since. The state feeds itself on fiat money. It simply issues new debt, which is then monetized by the its central bank, which is at the heart of the fiat money regime.

Perhaps you will find it surprising that I believe that the concept of central banking is truly a Marxist concept. (I am not saying that central banking is only favored by Marxists. Not at all! There are also many other ideologies which approve of central banking.)

In their Communist Manifesto of 1848, Karl Marx (1818–83) and Friedrich Engels (1820–95) compiled a list of measures necessary to establish communism. Measure number 5 reads as follows:

Centralisation of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly.

Against this backdrop there should be no doubt that once the state has become the absolute ruler of fiat money, the door is open for it to grow bigger and bigger, eventually turning into the dreaded deep state. And the deep state, as we know well from history, has little regard for individual freedoms and liberties.

Making Money Great Again: Returning to Sound Money
What needs to be done? Well, the challenge at hand is “Making Money Great Again”! This requires, first and foremost, ending the state’s money production monopoly and opening up a free market in money. A free market in money means that people have the freedom to choose the kind of money they wish to use and that people have the freedom to provide their fellow men with alternative goods that may serve them well as money.

As things stand, however, a final solution to the “money problem” has not arrived yet—even considering the emergence of the cryptocurrency space. This is because the financial intermediation problem is still unsolved in the cryptocurrency ecosystem; we will come back to this issue in a moment.

But first let us address the question: How can we get from a state-controlled fiat money regime to a free market in money?

The first strategy is monetary enlightenment—informing the widest possible audience about the evils of fiat money and how it affects their personal lives, families, and communities. This also includes explaining to people that there is a superior and practicable alternative to a fiat money regime, namely a free market in money.

The second strategy is making progress in the field of alternative currencies and payment systems, especially in terms of technological disruptions and their economic profitability. This is the activity space for those among us who are propelled by entrepreneurial spirit.

The Limits of Cryptocurrency
The cryptocurrency community, the bitcoin community in particular, and also precious metals–based payment system providers have been making some headway in this area in recent years, but unfortunately victory has not yet been achieved.

For instance, bitcoin still has some scalability and performance issues. Currently, the bitcoin network settles a peak of around 350,000 transactions worldwide every day, and given its present configuration, it is presumably running at almost full capacity. By comparison, the German fiat money payment system alone processes more than 75 million transactions on average every business day. From the payment processing viewpoint, bitcoin cannot outshine fiat currencies yet.

What is more, a currency in a modern economy must provide for the possibility of financial intermediation (an issue I mentioned earlier). People typically demand payment or storage services for their money, or they want to lend and borrow money—irrespective of the kind of money they actually use. Often peer-to-peer is not enough, a third party is required.

Providing intermediation services outside existing state regulation is difficult. In fact, it would put an upper limit on the financial sophistication of any cryptocurrency. This is a heavy drag on their competitiveness compared to fiat currencies. And if a cryptocurrency comes out into the open space, it will have the state breathing down its neck, drowning it in business-destroying regulations and restrictions. Because the financial intermediation problem is still unsolved, one has reason to remain skeptical that—given the current circumstances—existing cryptocurrencies will succeed in pushing aside the state and replacing its fiat currency just like that.

Precious metals suffer from similar problems. In many countries, the state subjects gold and silver to value-added taxes and/or capital gains taxes. This makes them uncompetitive versus fiat currencies in terms of using them in daily transactions.

The Key to Free Market Money Is Deconstructing the State
In fact, is it possible that a free market in money can ever emerge as long as there is the kind of state we know today? The state is, as most of you probably know, the territorial monopolist of ultimate decision-making with the right to tax its citizens. We can rightfully expect that this kind of state will do its best to crush any competitor to its fiat money and prevent a free market in money from emerging.

So if we want a free market in money, the sobering logical conclusion is this: we need to reform, to deconstruct, the state (as we know it today).

Now the uncomfortable truth is out, because the state is possibly the fiercest adversary you could choose. How can we hope to achieve victory?

Well, there is certainly no magic spell. One possible and straightforward strategy might be appealing to people’s inner self, and that is their right to self-determination.

The right to self-determination is inalienable and it is an indisputable truth. Each and every individual is the owner of his or her body and the owner of goods acquired in nonaggressive ways (without violating the physical integrity of someone else’s property). We cannot dispute these words without causing a logical contradiction.

The right to self-determination implies that the citizens of a state have the right (1) to make it known, by a freely conducted plebiscite, that they no longer wish to be members of the state and (2) to form an independent state or to attach themselves to some other state. In other words: the right to self-determination includes the right of secession, that is, people’s right to break up the big state and to deconstruct it into smaller units.

Smaller political units are less powerful, more peaceful, and free market oriented. They keep taxation low, or may even go without it and become wealthier. Just think of, e.g., Shanghai, Hong Kong, Switzerland, Liechtenstein, or Monaco. This is because small political units must compete for capital and talents with other political units. They must behave themselves nicely. Otherwise, people and capital will leave their territory. Given a great number of small political units, there is a good chance that some of them will allow for, even encourage, a free market in money, setting an example that creates emulators.

Conclusion
It is hard to say which route would be the most effective in “Making Money Great Again.”

Perhaps the cryptocurrency community will somehow succeed in ending the state (as we know it today), leaving a truly free market in money in its place.

In the meantime, however, it certainly would not hurt if we (1) kept educating the wider audience about what good money is and what bad money is and also (2) kept unmasking the state (as we know it today), showing that it is incompatible with and a violation of the inalienable right to self-determination of each and every human being.

In any case, it is of the utmost importance to wrest the money monopoly out of the hands of the state. Otherwise, there is indeed little hope that the free society (or what little is left of it) can survive.

(The complete article, with footnotes, is located here)