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.

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.

Negative Interest Rates: A Delusional Concept Beyond Space and Time

At the time of this writing, the notion of Negative Interest Rates are being pushed forward by central banks throughout the world. Bankers are developing new and improve ways to help stimulate the economy, and the employment of negative interest rates is the latest tool in the banker’s tool kit. Why the use of negative interest rates? How does it actually help the economy?(If it actually does) With this article, it will explore some things that make this concept of negative interest rates against reality. Keep in mind, an entire treatise can be written just on the notion of interest rates.

What Is the Interest Rate?

The non economist(and some mainstream economist) think the concept of the interest rate is exclusively related to the money and finance. There is some truth to this claim. Yes, interest rates are used in the world of finance, for example, loans to obtain a home, cars, or other fixed assets. Most will see the interest rate in these transactions as the “cost” of purchasing the underlying asset.

However, the origins of the interest rate does not begin in the world of Finance. It starts in the world of Economics. One of the forerunners of the development of the concept of the interest rate was Eugen Bohm Bawherk. His critique of Karl Marx’s work(Exploitation theory) lead to an expansion of the interest rate, and subsequent thinkers such as Knut Wicksell continued the development of this notion.

The fundamentals of the interest rate is straight forward: It is all directly related to human action. All behavior is purposeful. Since humans are unable to be in multiple locations in space and time, this means certain actions are done before others. This explicitly means there is a preference in ranking of preferred actions. For example, if three items are preferred, the first item, the second, and the third must be done in order temporally. The utility ranking(as this is called) simply is a preference ranking of the activities the actor chooses to engage. Of course, this example is given for simplicity, as this process is much more dynamic and there are many more options. Nonetheless, the ranking still exists, and due to the constraints of space and time, some items are done now(in the present) others in the later(in the Future).

The interest rate is derived from the economic actors choosing goods in the present versus the future. The prices of those goods–ones purchased in the present versus the ones in the future. That net ratio is the actual “interest rate”. The other consideration: This “interest rate” is unique to each individual. It is subjective to the individual’s preferences, as each person’s utility ranking varies.

Since each person’s utility ranking varies, and the interest rate is unique to each individual, how is it possible for the Central Bank to calculate the overall interest rate? It can not.

The Folly of the Negative Interest Rate

The interest rate, as it is based on present and future transactions, makes the outcome a positive integer. This is the first thing that makes the negative interest rate fallacious. Moreover, in consideration of how man moves through space and time, time travel going backwards in time is not possible. Having a negative interest rate implies the economic actor is moving backwards in time, and currently is choosing things in the past over things in the future. This is nonsensical. Back to the first point, if we take two prices of the same good, a current price versus a future price, how would that yield a negative number? One of those prices, in our ratio, would need to be a negative. Do Vendors sell goods with negative prices?

Vendors with Negative Prices

If vendors(firms) sell goods(currently or in the future) sell goods for a negative price, this would yield a negative interest rate. This also is absurd. The vendor is seeking to sell his goods at the highest price possible, and the consumer is seeking to purchase those goods at the lowest price possible. The optimal point of this scenario is the equilibrium price; this price is not a negative integer. Also, the business owner needs to earn a profit on the sale of his goods. The profit serves several purposes: (1) It allows the owner to cover his expenses to repurchase more goods to sell, (2) The net profit(revenue less expenses) acts as a return on his investment; this is adjusted against the interest rate. Having a negative interest would imply no prices, or no positive integers acting as prices, and the consumers would be receiving the goods plus extra cash(acting as a credit). This also works against the incentives of human action.

Negative Prices

Prices serve as signal callers in the marketplace. They allow both buyers and sellers to realize if there are changes occurring. For example, if prices rise sharply, this could indicate a scarcity issue with that certain good. Perhaps something along the supply change is impaired, causing a delay in the distribution or manufacturing of that good. Note: sharply rising prices will not detail why the food’s price has risen. Based upon that sharply rising price, the consumer can choose to re prioritize his utility preferences and elect to choose a viable substitute, at a lower price, or opt out of buying the good. With this activity, the increased prices discriminate against those who are willing to pay the increases price versus the group of persons who seek to pay for those goods a lower cost.

How would a negative price come into play? If goods became scarce, the owner would not lower the price to the point he give the goods away for free AND provide additional monies to the consumer. The business owner would not stay in business very long. Eventually, consumers would run out of those goods.

Conclusion

As bankers adopt negative interest rates, it simply is a move from the sublime and into the land of folly. Consumers pay for goods with positive integer prices, and firms accept their cash with positive integer prices. This directly correlates into a positive interest rate. Moving interest rates to zero or in the negative simply has a negative impact on the economy, and it should be rejected as a means of monetary policy.

Gold: The Protection Against Inflation?

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods.”—Alan Greenspan “Gold and Economic Freedom

As I scan the various media outlets and listen to the financial experts discuss personal finance; the message is similar. The message of needing to beat inflation is a common theme. While on the surface this seems to be a sage and insightful thing to address, however, one must understand why inflation occurs in order to beat it.

When the monetary base is expanded, via the central bank, it is done mainly based upon deficit spending by the central government. The central government deficit spending occurs due to the fictional the tax revenues are unable to meet the expenses for a certain budgetary time period. When this short fall occurs, the central bank purchases government securities, primarily debt instruments, which gives the central government the cash to balance the budget. Over time, this process expands the money supply and causing inflation. Of course, the interest on the deb continues to grow, adding more of an expense to the citizens.

How does gold factor into this model? How is gold the solution in mitigating the effects of inflation? The answer can be found from an essay written by Alan Greenspan “Gold and Economic Freedom”(1966). The use of gold, as a medium of exchange, helps reduce the impact of governments overspending.Read more here: https://www.constitution.org/mon/greenspan_gold.htm