In recent months we’ve seen a number of unique monetary policies enacted around the world. Like never before heaps of cash are being dished out. The difference this time around is it’s not just going to big banks and Wall Street who dealt in questionable assets, it’s going out to average Joe and plain Jane on Main Street. In a recent article, titled are stimulus packages destabilising the future? we looked at how multi-trillion-dollar stimulus packages may and may not be the tinder for dramatic world wide inflationary periods.
When it comes to saving businesses, it’s not just the banks that need saving. Numerous industries are hoping for a helping hand; airlines, restaurants, hotels, cruise lines, retailers, events, sports and more.
The seemingly endless money creation capabilities of the FED and other central banks allow it to stretch the money supply pretty far. More new money than ever before is being issued to buy assets, increase budgets and create stimulus packages. These actions have woken many people up to the fact that money has no intrinsic value. For the first time ever, people realise their dollar bills or Euros are not as valuable or reliable if they can be created so effortlessly. The revelation inspires people to reassess their ideologies and challenge their faith in the financial system we all live by.
An ordinary person is likely to see inequalities in the abilities of senior members of society making powerful fiscal decisions, especially ones they disagree with. Many opponents to fiat money and fractional reserve banking systems consider the gold standard to be, well, the gold standard. Unfortunately, gold is not a practical medium of exchange. The sheer size of the world population and the scarcity of gold makes it an unrealistic basis for the global money supply.
In the 17th and 18th centuries, countries frequently experienced liquidity traps and deflationary periods. Arbitrage situations commonly occurred between parallel markets; this happens when the face value of a silver coin in one country could be lower than another so coins could be exported to where they are more valuable. Similarly, the price of the metal used to mint a cousin could exceed the face value, therefore requiring gold and silver coins to be recalled and be reminted to increase their face value.
Besides all of the deflationary risks of a monetary supply backed by a fixed or scarce supply of a commodity, there are also limits on economic expansion, because of these issues related to scarcity and regular revisions in monetary policy. Financial hardship was a regular occurrence until the numerous monetary reforms of the 20th century came into effect.
It’s easy to say that commodity-backed money is unrealistic when the only experience we have to reference was from a time long before modern IT and communication capabilities.
Thanks to technology, we’re able to transfer money almost anywhere in the world in a matter of minutes or even seconds. The barriers to investing in commodities, equities and many other asset classes are near nonexistent. From our mobile phones, laptops or computers we can use apps like PayPal to access e-Wallet solutions, or services like Transferwise make remittance incredibly cheap, and trading platforms like MetaTrader 4 or cTrader get access to markets. Cash and physical payment methods are truly becoming a thing of the past.
Digitising assets to use them as a medium of exchange could be a solution to divisibility, portability and reliability of alternative hard assets besides gold and silver. Bitcoin and other decentralised digital assets have become a valuable proof of concept of what a fixed supply, transparent and immutable monetary system looks like. However, it’s unlikely to become a mainstream financial instrument due to aggressive lobbying from legacy financial institutions and inherent money laundering concerns.
Investment platforms like Robinhood allow users to invest in fractions of shares, in increments as little as $1. Take, for example, a share in Walmart costs $100; an investor can buy 10% of a Walmart share with $10. This seems to be a great set up for using stocks as money.
If we look past gold and silver as hard assets to back the money supply, there is a strong case for considering other financial instruments like stocks or bonds. As per the example of Robinhood, clearly stocks, ETFs, bonds and other asset classes can easily be divided to make precise microtransactions. Imagine transferring ownerships of 0.5% of a Walmart share from an app on your mobile phone to buy a CocaCola. This concept might sound like a plot from Black Mirror. Still, there are some significant advantages to this representative monetary system when you compare alternatives like a gold standard and cryptocurrencies.
Oftentimes, interest rates suck. There is little incentive for people to save money as year after year; their buying power is reduced. According to the US Bureau of Labor Statistics CPI Inflation Calculator, $1,000 in August 2000 has the same buying power as $1,539.80 does in August 2020. Unfortunately, there isn’t a savings account on earth that can help you to beat inflation of those proportions. However, if you invested the same amount into the S&P 500 index, over the same period you would have $3,077.54, thanks to an annualised return of 5.778%.
The case for a representative currency based on equities most certainly helps the average saver and spender. Savings are no longer dry powder; they are at work in the economy.
The stock market is the backbone of the US economy, and it plays an essential role for most other developed nations too. A big problem with gold is that it doesn’t really do anything for the economy. Warren Buffet famously once said;
“[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”Warren Buffet
Gold is just another form of dry powder. Capital can be used to get new ideas off the ground and into the market, invent solutions, create services and deliver value to society. However, gold locked in a Swiss vault does none of that.
The issues related to gold and silver standards have already been raised in this article. Other reasons why BItcoin and other digital assets have not taken off are their decentralised nature. Currently, the overwhelming majority of financial instruments go through a centralised authority.
The Federal Reserve clears US dollars, and Euros are cleared through a national bank in the EuroZone. e-Wallet providers submit CRS (common reporting standards) reports and regulated exchanges, clearinghouses and depositories report on stock transactions. Governments have full transparency and oversight of how money moves around the world.
Governments assert the importance of having control and oversight over financial markets to prevent tax evasion, money launder and preventing terrorism and organised crime. Digital assets effectively disenfranchised governments.
Introducing a new monetary system is inevitably going to get some push back, as far as concepts and vague ideas go, the idea of using stocks to back money ticks a lot of boxes.
It’s hard to say if we could use stocks as money. Theoretically, sure. Realistically, who knows? Some very smart economists and think tanks need to give it some serious thought. Needless to say, overhauling a monetary system is not an easy feat.