Let the search begin for viable alternatives to the world’s fiat currencies. Is bitcoin the answer?

What value does the dollar, or the euro, or the yen have, when the people responsible for maintaining it can play the fool like this with its underpinnings?

PUBLISHED : Monday, 08 January, 2018, 2:57pm
UPDATED : Friday, 31 August, 2018, 9:48pm

Transaction fees hamper everyday bitcoin use

-- South China Morning Post - Business , January 8

When is the last time you heard anyone say that bitcoin is here to stay?

I certainly cannot remember hearing anything of the sort recently. All that I hear and read is that bitcoin is a speculative bubble headed the way of the dodo bird.

Now I don’t pretend to understand how it works. People have explained blockchain to me before, that drew from me only a grimace of idiocy. I’m in my sixties. I was raised on vacuum tube technology. This one is beyond me.

As much as bitcoin’s recent trading does indeed exhibit the traits of a speculative bubble, I think there may be a lasting role for cryptocurrencies other than as a criminal’s money laundering currency of choice, which the reported impossibility of tracing transactions certainly makes bitcoin.

It is not because cryptocurrencies are necessarily so good that I think there is a lasting future for them. It is more that the traditional hard currencies - the dollar, the euro, the yen or any of them - are steadily losing the attributes that made them “hard.”

The problem at heart is that we have lost gold. For most of the history of civilisation, gold was the ultimate backing of currency because, fortuitously, the amount of it in circulation at any period, times the speed at which it turned over, roughly matched the growth of the economies that used it.

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This meant that as an accident of history, currencies based on gold maintained a more or less steady value.

In the late nineteenth century, however, this began to change. The world’s economy expanded faster than the availability of gold, despite huge discoveries of the metal’s ore. The result was worldwide deflation. Prices fell. The growth of international trade and investment also strained the fixed price of gold in major currencies.

Things grew worse in the 20th century, and in 1973 the United States finally declared a formal end to gold backing for the US dollar. The rest of the world followed.

The value of a banknote in your wallet now rests only on your confidence that the relevant monetary authority won’t print too many of them.

In the space of only a few decades, it has proved a vain hope. True, most monetary authorities have not printed too many of them. That is only the way of countries like Venezuela.

Instead, they have sought economic stimulus by cheapening their currencies with more complicated tricks, such as quantitative easing, which force interest rates down while not changing the amount of money in circulation.

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Without going into all the technical details, the result has not been economic stimulus, but government profligacy, diversion of money from mainstream industries into financial chicanery, home prices driven to astronomic levels and investment otherwise misdirected by subversion of the price of money.

We are living in the boom phase of this monetary delusion at the moment, but when it is shattered, as it must inevitably be, one big question will arise: What value does the dollar, or the euro, or the yen have, when the people responsible for maintaining it can play the fool like this with its underpinnings?

The real value of gold is that no human can manufacture it, or easily find it and extract it. Perhaps the only way to give a currency a worthwhile backing is to put it similarly beyond human reach. If it takes only one fool to destroy it, and such fools will certainly arise sooner or later, let no one touch its backing.

This is essentially what we have with the extreme difficulty of mining bitcoin from mathematical workings. It is far from ideal, but it at least represents a search along the right path.

Why is South Korea suddenly terrified of bitcoin?

We may not need it as a unit of account. Traditional currencies do well enough for that. Perhaps we may not even need it so badly as a store of value. We have plenty of liquid investment choices. Who holds cash for wealth?

But we will increasingly need something better than fiat currencies for a steady, solidly backed unit of transaction. The world’s central bankers have betrayed the responsibility entrusted to them in this respect

It will have to be a digital currency; that much is clear. Now let the search begin for something better than a bitcoin farm.