With all the monetary
instability we are facing on a global scale at the present time, should we
continue to trust the role of central banks and governments to manage our
money, or should we push to allow free markets to self price interest rates and
money supply, and allow money to evolve of its own free will? It is clear to
date that central banks, coerced by governments, have forced interest rates to
historic lows and printed billions in fiat currency in the pursuit of buying
time in the vain hope of avoiding the natural cycle of debt deflation, commonly
known as bankruptcy to the man in the street! But how do we derive true value
from our current money as its debasement is being systematically managed?
The Dollar
The dollar has lost up to
98% of its value since the Federal Reserve (US central Bank) inception in 1913.
The Fed has run monetary policy to help government and elites by creating an
inflation bias that robs savers of their hard earned wealth, allows government
to run deficits in order to buy votes by promising voters unsustainable
policies and provides asset price inflation for wealthy elites to benefit. The
Federal Reserve continues to devalue the dollar with its QE to infinity programme
(money printing) in order to keep interest rates low and banks solvent. By
engaging in this manipulation of markets it is able to maintain the status quo.
However, the dollar will almost certainly lose value further while these
policies are maintained.
Gold
Gold is history’s most
well known form of money. It has everything that the dollar has and a little
something else. It is a "store of value." Sadly, recent history shows
us that a high price of gold is something that the monetary authorities fear.
If gold were to double or treble in value over a short period of time it would
immediately indicate true devaluation of fiat paper hence the price of gold has
to be controlled. Market manipulation by central banks is commonplace as
previously discussed. However, other manipulations of particular markets have hit
the news in recent times such as the LIBOR rigging scandal. The UK government
is also up to no good in this respect in the housing market. By pumping in around
£130 billion in tax payer guarantees, the help to buy scheme is a massive
market manipulation where the true value of property is hidden. Therefore, to
believe that the gold market is somehow not manipulated would be foolish. It is
counter intuitive to see the price of gold drop while seeing massive monetary
expansion by indebted governments! Maybe that is why we are seeing a run on
physical supplies in the west, only for them to re-emerge in the east as the
surplus nations use to attempt to hedge their dollar reserves against a sudden
devaluation.
Bitcoin
Bitcoin is a digital
decentralised currency which can be accessed from anywhere in the world with an
internet connection. Value however might seem to be a mystery! Bitcoin derives
value through the genius of the system that has been created for its
distribution, its ultimate limits to expansion, its freedom from control and
its potential ease of use. So why has Bitcoin suddenly increased in value since
its inception in 2009? Quite simply, more and more people are becoming aware of
how the current status quo of government monopoly of money is damaging them. As
awareness of Bitcoin and its freedoms expands just as the internet did 20 years
ago, so the value of Bitcoin will really be seen. Based on its scarcity and its
impending usefulness and utility plus its lack of counterparty risk, Bitcoin is
fast becoming seen as a modern version of a gold standard. Western governments
are actively trying to regulate Bitcoin and generally discredit it at any opportunity.
They are scared of Bitcoin and rightly so. It has been suggested the Bitcoin is
in a "bubble" but we are only at the beginning of this revolution in
money so that type of comment seems implausible. The expansion of Bitcoin
supply will continue until 2040 when there will be 21 million in circulation
(each Bitcoin is divisible to 100,000) so we have a long way to go and a lot of
time for people to understand and recognise its beauty. Current prices I
believe reflect the potential in the currency but also the fact that
governments do not control it in any way. Unless of course they switch the
power off; unlikely I suspect! So what of Bitcoin’s ultimate value when
compared to the dollar? Based on dollar supply expansion, particularly as we
enter 2014 with Janet Yellen, the new Fed governor and her dovish stance, taper
being off the agenda and expansion of QE very possible, Bitcoin could very well
see significant gains. Be prepared for massive volatility though as liquidity
is still limited. That said, one should not be talked out of getting involved.
Conclusion
Value at present seems to
be in the eye of the beholder. The paper bugs will tell you that the current
system of money is undergoing a little reform but will be maintained. The gold
bugs will tell you that the US dollar is doomed as the reserve currency and the
advent of a hard money standard is just around the corner.
Bitcoin remains
an interesting phenomenon. Perhaps it deserves its rise against fiat currencies
as it offers some of the essential qualities of money that they (currencies)
do not, such as the need to expend time and energy to produce it, a
promise that it will have a defined rarity value, the absence of
counter party risk and its current lack of government
manipulation or regulation. It is a better pretender to
the monetary throne than the rest of the rabble and may have
its Oliver Cromwell moment in history. Those over 40 with a dot com
bubble behind them may remain quietly sceptical as its ability to demonstrate
true intrinsic value is as yet untested. Is it just a currency based on
a vulnerable tulip bulb belief structure, albeit one with
more credibility than the current paper in our wallets? Its
success may well be the source of its downfall as it starts
to appear large on governments’ radar screens. Institutions with
the abilities remotely to take down an Iranian nuclear installation or successfully outlaw
widespread use of cheaper readily available forms
of diesel which would work perfectly well in our cars will
surely react if their currency is materially threatened. But for now
Bitcoin is sending a message to the government money printers
about the boxes they fail to tick in their pursuit of money
creation for the status quo.
This article is written by Richard Horswill. All views expressed are his own.