Bitcoin? I Think Not

Da Times are a Changing

In the YouTube video China is Using Gold to Replace the US Dollar, Andrei Jikh describes how China appears to be in the process of positioning its currency to be a preferred reserve currency globally by backing it with gold. And the question that such action poses is "How should the US respond?" After all, since Bretton Woods, the US has enjoyed an enormous advantage as the world's preferred reserve currency.

The answer, in part, can be found in my blog post yesterday titled Concerning the Nation's Currency. However, there is something I did not discuss in that post that merits discussion and that I was planning to address in a future blog post. It has to do with another problem with using gold as the basis for a currency: trust.

I can tell you I have five thousand gold bars in my basement. I can tell you I will let you "own" one of the gold bars in my basement in exchange for your goods and services. I can even let you into my basement and show you the bars "you own" and let you handle them. And based on your faith that I in fact posssess the bars I claim to have, you could accept the currency I create based on those bars as payment for goods and services you provide me.

But, like so much else in the world, your faith in my gold-backed currency could be misplaced. The bars I show you could have centers filled with a mixture of lead and other metals designed to make them have the same apparent density as gold. After you leave my basement, I could even turn around and sell the same bars to someone else. And if you ever ask that I surrender one of the bars in my possession to you for the paper I issued, I could, despite whatever promises I may have given you, tell you to f-off.

This is not to say that China or the US or any other nation would ever lie about the amount of gold in their vaults. Nor would I ever suggest that China (or any other nation) would potentially elect to "seize" the gold belonging to another nation that is in their custody based on some fraudulent pretext. But it does reveal that using a gold-backed currency as a reserve currency for foreign exchange still relies heavily on trust.

And, of course, there is that other problem I mentioned in my earlier blog post: that the perceived value of gold could be manipulated through hording.

A Better Choice

Now, let us suppose instead that there is a currency that is defined in terms of a number of kilowatt hours of electricity. It is a currency that is regularly redeemed at face value by the nation's citizens and commercial enterprises. And it is a digital currency that employs blockchain technology to ensure that every single digital note that is ever issued and in circulation is (1) not counterfeit and (2) accounted for as a debt of the nation that issued it. Hmmm...sounds like a pretty good currency to me.

Note that any other country's currency similarly backed by a number of kilowatt hours of electricity could be easily exchanged for the proposed currency. The exchange rate would be known precisely. And each country could issue as much currency as it needed, provided that the country that issued it could satisfy any foreign demand for repayment in the form of electricity or, more likely, an equivalent physical energy source, such as gasoline or propane, held in reserve. Kind of like a reverse petrodollar.

However. note that a currency like Bitcoin (and I am not trying to say anything bad specifically about Bitcoin here) should not be used by the nation. A nation's currency needs to be able to scale with the nation's economy, and a currency such as Bitcoin cannot do that. Additionally, the seigniorage (the profit from the creation of the currency) should rightfully belong to the nation, not to a private party (regardless of the requirements imposed on such parties to lay claim to it).

Of course, if the US currency stops being a reserve currency worldwide, the ability of the US to "benefit" from the massive trade imbalances such status created would disappear completely. But it was going to go away sometime. The US currency's privileged status was the byproduct of the collapse of all the industrialized nations at the end of World War II. And, given what China is trying to do, it would appear the end is nigh. And blackmailing countries into a Breton Woods type agreement (aka, the Mar-a-Lago Accords) will not work to prevent the change. Like glaciers melting into the sea.

Hopefully someone out there is listening and taking notes.