3 Minute Gold News
A Quick Read for Busy People
A 3 minute synopsis of the recent 40 minute Gold as Money vs. Bitcoin as Money debate with Jim Rickards, author of Currency Wars, Senior Managing Director at Tangent Management Partners LLC, and Roman Skaskiw at the Intellectual Minds Conference, London, in December 2013.
Argument for Gold as Money
Gold is genuinely scarce.
“Rare earth” minerals are in low density but gold is more rare than “rare earths”. Even with intense effort in mining we only add 1 1/2% to the stock each year. There is about 165,000 tonnes of gold in the world and it only goes up 2,000 – 3,000 tonnes each year.
The economy grows each year at a certain pace and if gold was not scarce then it would be unstable as a store of value.
There’s a feedback loop between production and scarcity which supports its stability.
It is rare for a lot of gold to come into the market quickly. The California goldrush of 1849 is an example.
When this happens it causes inflation. Then mining costs go up, making mining less profitable, so mining slows down. Conversely, in deflation gold becomes more valuable which attracts more people to mining. This feedback loop supports the stability of gold as money.
Bitcoin has patterned itself on gold in its choice of words. “Mining” bitcoin is taken from mining gold.
Gold is an element so it is pure.
You could have an oil standard or a wheat standard, but those things come in various grades. Gold is uniform.
Gold is dense so you get a lot of value for the weight.
Gold is malleable so it’s easy to work with.
Jewelry is not a different use for gold, gold jewelry is money that you wear.
Gold has longevity as a store of wealth.
It has been known as money through the entire history of civilization. It hasn’t always been coined but it has always been historic wealth.
Is there enough gold to support world trade?
There is always enough gold, it is just a question of price. There might not be enough gold at $1,200 an ounce but there is plenty at $10,000 an ounce.
You cannot have a discretionary monetary policy with a gold standard.
If we have a gold standard and we have a financial crisis or a depression you cannot just dictate a price for gold and print money, it must stand up to the open market. A Central Bank can print money but the open market will show whether people believe the new price is good or not.
If you are trying to create inflation, destroy wealth and steal savings then people will not trust the Central Bank and will buy gold.
Open Market Operations combined with discretionary policy can work side by side using price signals, an Austrian concept, to guide the monetary policy and tell whether the Central Bank is on the right track.
Gold as money:
An Atomic Element
Long Historical Track Record
Tangible (no trust needed in a third-party)
Argument for Bitcoin as Money
Roman owns gold and thinks both Bitcoin and gold are great.
Physical gold assumes we have a free market for money. It is assumed that you can trade them or carry them across borders, and that it will be allowed.
It is not allowed.
Bitcoin is a reaction to the State’s impositions on money.
Bitcoin’s advantage over physical gold is that you can transport it anywhere in the world almost instantly for free.
It’s easier to verify it – there have never been fraudulent Bitcoins.
It’s more divisible than physical gold. Bitcoin is divisible down to eight decimal places.
Physical gold requires no trust? Roman points out that you are trusting that there are no physical aggressions against your property. It is easier to hide Bitcoin than to hide gold, and easier to transport Bitcoin than to transport gold.
In some ways Bitcoin requires less trust than physical gold.
Roman believes that the biggest rival to Bitcoin will come when the fiat system is dead and buried, and entrepreneurs aren’t afraid of engineering gold to behave as Bitcoin.
He believes that then you can do with gold everything you can do with Bitcoin. You can then send it across boundaries free, and trust some company is keeping the accounts accurate in a vault somewhere far away.
This is how the company E-Gold functioned before they had all of their gold seized. It was one of the largest seizures of physical gold ever.
But even then there is a case to be made for Bitcoin because whereever that physical gold backing the E-Gold is, there is still a physical risk of someone coming in and taking the gold.
No such risk exists with Bitcoin.
You are still trusting a third party if you are using electronic gold, where Bitcoin is person-to-person and there is no third party whatsoever.
In their decade of existence, E-Gold had a peak where their highest annual transactions were about $1 billion, just before they were shut down.
Bitcoin is already doing transactions of $200 million per day.
Bitcoin is a protocol and it has no owner. That makes it very attractive to software developers.
Roman believes this is why there is so much more action on Bitcoin than there ever was with E-Gold.
Relying on a third party also has the potential to create a “Google Reader” problem.
Google Reader was a popular reader that people would get their news from, but it belonged to Google. Google decided one day that they wouldn’t support it anymore, and shut it down.
Programmers may not want to build infrastructure on top of the next E-Gold when it is controlled by someone.
Bitcoin does not belong to anyone. It is peer-to-peer with no need to trust third parties.
Markets choose their money. With the current flight from the US dollar, the door is wide open for Bitcoin in a way that is not open for gold.
There are currently no restaurants or electronics stores that will sell for gold.
Jim owns gold and does not own Bitcoin.
Is Bitcoin a form of money? Sure. But Bitcoin is not State money.
Money gets it’s value from the fact that the State can require it in the form of taxes.
The problem with Bitcoin is that if you buy your Bitcoin with $100 and you exchange them for $200 in goods and services then, according to the US tax code, you have a $100 gain. You have to put that gain on your tax return and pay dollar taxes on the gain. Jim believes most Bitcoin owners are not aware of this.
Jim says that if Bitcoin users do not claim the gain on their taxes then they are evading taxes which is a felony in most jurisdictions.
Jim suggests that Roman’s argument regarding E-Gold is a strawman argument, because Jim did not mention E-Gold and does not own E-gold.
Jim is not talking about E-Gold as money. He’s not talking about Comex future, or GLD or ETFs. He is saying that physical gold is money.
Gold is no one’s liability. It is the only form of money that is not a liability.
A US dollar is a contract. It is a note.
A note is a liability and a bank lists the note on the liability side of the balance sheet.
It has no interest and no maturity. It is a perpetual non interest bearing liability of the Central Bank. And these days the Central Bank is insolvent.
So the amount of trust needed in using a US dollar or pound sterling as money is extremely high.
The reason clam shells and feathers used to be used as money is because the people in the system trusted that they had value. That works fine on a limited scale where the trust is high, like in communities and tribes.
When you broaden the community and do not have direct contact then your trust may be misplaced.
Bitcoin is a global community, and whether you trust in the creator, whether he is an individual, or a team, or working with Google, we’re not sure. We do not know if the creators made trap doors or hidden aspects of the code.
The time you want your store of wealth, your money, the most is when society is at its worst.
Jim is not a gold bug. He calls himself an old school Imperialist and favours a strong dollar. But we do not have a strong dollar.
Since the policy in the US is to weaken the dollar Jim favours gold.
If society collapses then gold will be good as money.
Jim’s answer to the divisibility problem of gold is to use silver for the smaller denominations.
Jim believes that Bitcoin is not outside the power of the State. He believes the State is watching, and and that they control the portal as well as the power grid.
And good luck with your Bitcoin if the power goes out.
Roman believes that Bitcoin is outside the role of the State in the price and the usage.
He believes that the State has an impact on the price. For example, the drop in price from $1,200 per Bitcoin to $700 when the Chinese equivalent of Google stopped accepting, it in response to the Chinese government limiting its legal usage.
It’s a question of whether it is going to be a black market, or a white or gray market. Roman believes that if the US dollar starts to go then you will want to be in the black or grey market.
The Bitcoin exchanges are “choke points”, and because they are guarded by the State most people want to stay in Bitcoin because they want to only go through that choke point once. They want to have Bitcoin so they can then exchange without asking permission from any bank or approval of any State. That is why it will spread.
If the electricity goes out then the “legacy” banking system will be out of luck just as much as Bitcoin.
And when the power comes back on the blockchain is still there.
Replies to Questions
There are currently about two hundred other digital currencies known as “alt-currencies”.
Bitcoin is like a big ledger and you are renting space on this ledger. It is used for the sending of money without a wire transfer fee, a Paypal fee or a credit card fee.
Bitcoin requires trust in a third party. You have to trust the Bitcoin community because the community could say that 21 million total Bitcoin is not enough and then decide to create more.
You need trust for Bitcoin. You have to trust the government, trust the power grid and trust the community.
With each Bitcoin divisible down to one million pieces there is no problem with there not being enough Bitcoins in the system.
Money as Contract Theory is a subset of law. Before the Industrial Revolution wealth was gained by violence, by stealing it. Money is a part of a rule of law as a way a civilization can create wealth without violence. In that regard both gold and Bitcoin are money.
Every piece of code for Bitcoin can be read openly and at this point there are no back doors. Even if at some point someone breaks the cryptography the blockchain still exists, and we know who owns what Bitcoin. At worst it would be a disruption and the community would change to a different type of cryptography.
The type of cryptography being used by Bitcoin has been under academic scrutiny for decades.
Within the Bitcoin ledger no one has ever made a fraudulent transaction or sent Bitcoins they didn’t own.
Another Week on Wall Street
words and music Elaine Diane Taylor
© 2013 Intelligentsia Media Inc. All rights reserved.
from the album Coins and Crowns
words and music Elaine Diane Taylor
© 2013 Intelligentsia Media Inc. All rights reserved.