Use value; we often hear this term, but what does it mean?
First introduced by Aristotle, use value is the universal consensus of currency we know today. He was the first to theorize that value is determined by demand, but demand is determined by its use value; yet, use value was relative and was assigned by man. Aristotle understood that an item could have use value because it acted as a medium of exchange and demand generated by its use case, gave the item true value. For the first time ever, use value and exchange value were clearly understood and it was this understanding that gave birth to currency.
Various currencies have come and gone, but one factor has remained constant; all were centered around Aristotle’s theory of value. Historically, currencies have been issued and regulated by centralized organizations on a somewhat local scale. Over the course of last century, economic growth and innovation have made international trade accessible to almost anyone. Global transactions were becoming a regular occurrence, and with over 150 countries, it only made sense to adopt a universal medium of exchange. Doing so would allow for much easier record keeping and simplified cross border transactions. This sounds like a pretty great thing, right?
Well, don’t hold your breath.
The U.S Dollar (USD) is the global reserve currency and central banks across the globe hold significant quantities of U.S. Dollars for use in international trade. After the second World War, a new monetary arrangement called the Bretton Woods system was imposed. This allowed other nations to peg their currency to the USD and they did this because the U.S. Dollar was backed by gold. For the most part, everything was working out well, it was easy trade with the United States, money was pegged to something with a finite quantity, and countries had the ability to collect interest on U.S. Treasury bonds (T-bonds) which were purchased using their U.S. reserves.
A Gradual Decline
Nothing good lasts forever, and following the decline of the Bretton Woods system, a new monetary policy was about to take the world by storm. This new policy was sparked by the Nixon Shock and on August 15th, 1971, then president, Richard Nixon announced the end of the gold backed U.S. dollar.
Politically, this was a power-play for the Nixon administration, unemployment at the time was at 6%, inflation at 5.8% and the new monetary policy was fueling prosperous ambition. Not only was the labor force happy, Wall St. favored the change as the Dow Jones Industrial Average (DJI) rallied 33 points for a record one-day gain. Headlines praised the former president, but at the time, little knew what detrimental effects the new system would create. Since the Nixon Shock, various wars have been fought and more times than none, the U.S. Dollars reserve status is one of the underlying reasons. Dont get me wrong, im an American and I love this country, but our leadership doesn't have the best track record.
Following Nixon’s dramatic change in policy, a fiat currency system was implemented. Unlike its predecessor, fiat currency has a floating exchange rate which would often fluctuate relative to economic and geopolitical events. Many argued that fiat was superior, because according to them, it self corrected using supply and demand to naturally find equilibrium, although the “natural” aspect is subject to debate. Central banks often use economic tightening and easing along with other monetary policies, which are anything but natural
I’ll admit, I too was naive to the current system, but started to take notice when goods and services were starting to inflate beyond control. People can no longer afford the same luxuries that previous generations enjoyed without spiraling into debt, and it is only getting worse. Don’t get me wrong, I love free market capitalism, it’s the foundation of most great nations, but most do not have a free market anymore, they have centralized ponzi schemes disguised as fractional reserve banking techniques and it’s an absolute mess.
Bitcoin and other cryptocurrencies are the solution to these institutionalized ponzi schemes. Unfortunately, most people neglect to scale their existence relative to history. People lack the comprehension needed to understand the infancy of our currency system. Sadly, most still question bitcoin, but I have a strong feeling that may change in the near future.
Money markets have been an absolute mess; the Federal Reserve have been injecting billions into the economy on a regular basis. Short term lending markets are starting to worry and the stock market is a massive bubble that has been pumped through years of quantitative easing. Over all, things are not looking to great for the U.S. Dollar and global economy.
Over the past two years, I’ve noticed emerging markets selling their USD reserves in exchange for Gold bullion instead. I thought it was slightly strange because normally countries could buy T bonds with their reserves and collect interest in USD, but after due diligence, it made perfect sense, in my opinion, it was clear the U.S. Dollar will lose its reserve status within the next few years.
Since I started looking into the reserve selloffs, economic and geopolitical turmoil has become a regular occurrence. Within the last 5 years, a domino effect has started to gut market liquidity and trigger hyperinflation throughout many smaller countries. For example, Venezuela and Argentina have seen crippling hyperinflation, which can be attributed to government corruption and having free reign on the supply of fiat currency. On the opposite side of the world, nationwide protests in Lebanon, which led to the resignation of their prime minister, forced banks to shut down for two weeks and sparked fears of possible bank runs.
You may not think bank runs pose a serious threat to the financial system, but surprisingly, the threat is very real. Bank runs occur when social unrest sparks widespread panic and causes people to simultaneously rush the same banks and withdraw funds. Although we currently have The Federal Deposit Insurance Corporation (FDIC) in the United States, before 1933 our money was not insured. Bank runs were one of the major causes of the great depression in the 1930’s and unfortunately in many countries they are becoming a regular occurrence, with the most recent happening in China in November 2019.
Bank runs are a real and serious threat across the globe, especially in countries without monetary insurance. The reason bank runs pose such a serious threat is because most banks practice fractional reserve banking. For the people that aren’t aware, fractional reserve banking is a federally sanctioned Ponzi scheme, and no; I’m not kidding.
For example, say you deposit $1000 into a bank, the bank only keeps $100, then loans out the remaining $900, yet your account balance still reads $1000. How is this possible? Well, it’s only possible if people keep their money in a bank. See, with such a large amount of capital flowing through banks, if you withdraw your $1000, they will simply pay you from someone else’s account. The other person won’t notice because their account balance hasn’t changed, it still reads the same amount. The only way anyone would notice the lack of funds is if a large crowd of people attempt to withdraw their currency at the same time and the banks can’t pay out.
Banks across the globe are essentially running ponzi schemes similar to Bernard (Bernie) Madoff, except he got 150 years in federal prison when it came crashing down. Lets not forget, the only reason he was caught was because the economic recession at the time triggered his clients to simultaneously withdraw their capital. Sound familiar?
When it comes down to it, society needs a change; the current system is failing and the signs are inevitable. Bitcoin, cryptocurrency, and smart contracts have become a major factor when it comes to monetary ideologies. More people are starting to understand Aristotle’s theory of value and applying it to cryptocurrency. Remarkably, this idea is slowly becoming a social norm and shaping the world of finance. People can now conduct instant P2P transactions over the internet without an intermediary. This greatly reduces the dependency we have in banks, but what makes it even better, most cryptocurrencies have a decentralized means of distribution, which reduces the risk of corruption.
As Nobel Prize winning economist, Milton Freedman once said-
“I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash — a method whereby on the Internet you can transfer funds from A to B without A knowing B or B knowing A.”
And right he was.
If you truly think about it, it makes sense. Our current monetary system is primitive in comparison to other modern technologies. The people that regulate this primitive system are reckless none the less. Far to often we hear about billions of dollars vanishing without a trace. More than likely accounting mistakes, one can assume this isn’t a positive thing. If the system itself was automated, public, and based on mathematics, it would eliminate a substantial amount of risk and corruption.
They say no one can predict the future, but I disagree. The future of money is now and Bitcoin, crypto and blockchain technologies are here to stay. They are making headwinds in the financial and political worlds, and fortunately for us, for the most part, cannot be stopped.