This is something of a magnum opus dwelling on a possible hyperinflationary future. I hope this survey of a century of monetary history and of alternatives kinds of future money is instructive and entertaining.
IN THE BEGINNING – THE CLASSICAL LIBERAL GOLD STANDARD
In 1914 you could walk into a bank in Britain and withdraw your cash in silver or gold coinage. The smallest gold coin was the half sovereign worth ten shillings. The smallest Bank of England note was the lovely big white five-pound note – equivalent to about two weeks wages for a skilled tradesman. These two are now worth about £170 and £1700, respectively, in terms of the current gold price. You can obtain broadly similar values if you multiply 1914 prices by UK inflation indices.
Other advanced countries had the same automatic acceptance of precious metals as money, and of the convertibility of gold and bank notes, as the natural order of things. In America the dollar was convertible at $20.67 per troy ounce. The pound was tariffed at 4 pounds and 5 shillings to the troy ounce. The exchange rate therefore was $4.86 to the pound.
This resembles a fixed exchange rate. But it is merely the reflection of the fact that gold is the same everywhere. Different weights always trade in the same proportion to each other. In less well-run countries, people used sterling as the principal unit of account, store of value and means of international exchange, just as people in the third world now use the dollar.
The Gold Standard was still a statist arrangement. National governments defined their monetary units in terms of gold. It was not as good as an entirely private system in which actual weights of gold or silver would be treated as monetary units with no intermediate, politically defined units such as marks, pounds, francs or lira. (Originally the pound was simply a 1lb weight of silver, sliced up into 240 silver pennies.)
The Bank of England was privately owned, as the Federal Reserve and the Swiss National Bank (partially) still are. It held gold equivalent to a steady proportion of the bank note issue to ensure convertibility. But it had the government-awarded privilege of being able to create unbacked money as the lender of last resort. It could decide to go off gold – default – without being busted. To permit inflationary war financing, it did so for the duration of the French Revolutionary and Napoleonic Wars from 1793, and it did so again in 1914, this time for good as it turned out.
THE ROAD TO FIAT OR PAPER CURRENCY
The present-day successors of the half sovereign and the Bank of England fiver, the 50p coin and the rather slippery new £5 note, are a great deal less valuable. The British state and its allies in the financial establishment have engineered an annual average inflation of 5% over the intervening period. This let them transfer accumulated wealth and a cut of productive people’s annual incomes into their hands.
The 20th century growth of the welfare/warfare state would not have been feasible if the state had not borrowed heavily and then defrauded its creditors by devaluing their debts through money creation. The history of the move away from gold is littered with doomed attempts to mimic the success of the Gold Standard as an anchor of prosperity and stability.
But at the same time the political classes can’t accept the way a true Gold Standard stops them stealing from productive people by creating new money to reduce the vale of their incomes and savings. After all the point of the state is to enable insiders to live by predation rather than production. If governments actually cared about their populations, other than as tax sheeple and welfare voters, they would go back on a Gold Standard tomorrow and western societies would begin to heal.
First in the line of fake monetary regimes we had the Gold Exchange Standard, introduced by Winston Churchill in the 1920s at the pre-war dollar parity of $4.86 to the pound, or £4.25 to the troy ounce. This pre-war parity - due to wartime inflation - now unrealistically overvalued the pound. However, under the new system, only governments could exchange sterling for gold. If they could be persuaded not to do so, the painful charade of convertibility into gold at the wrong rate could continue.
Gold was no longer available to redeem the people’s banknotes. This wasn’t therefore a true Gold Standard. There were no longer millions of transactions exchanging between paper notes and gold. These everyday transactions had confirmed the market value of the monetary unit in terms of gold. Without them, successive monetary pacts were merely political hot air.
Had Churchill actually put the pound on to a true Gold Standard at the now overpriced pre-war rate, it would have failed immediately. The Bank of England’s gold reserves would have begun to vanish. (Had Churchill tried it at say $3.50 - $4.00 to the pound, it could have worked. But then the Gold Standard would have been abandoned again in 1939 to help fund another disastrous war.)
This kind of 1920s ‘sort of but not really’ Gold Exchange Standard saddled the Bank of England with years of trying to deflate the UK economy to make the wrong exchange rate plausible, much like the ERM fiasco under Thatcher. The result was the General Strike in the 1926 and, of course, inevitable failure.
As part of the Gold Exchange Standard saga, European governments were not encouraged by the British to proffer their sterling for gold. Nor were they encouraged by the Americans to try to convert US dollars at $35 to the troy ounce under the Bretton Woods Dollar Gold Exchange Standard arrangements between 1944 and 1971. When they decided to put these arrangements to the test, asking for their gold in 1931 and in 1971, the terribly upstanding Anglo-Saxons naturally reneged on their promises.
Since 1971 we have all had paper money. It can no longer be turned into anything of value at a fixed rate. The state can therefore print up as much as it likes. It can take resources that should have been available to the people that created them. This is what the 19th century would disdain as inconvertible paper. It was the sort of thing that used only to be found in places like Latin America which had pioneered its use for fleecing the powerless since independence in the early 19th century. It is better called FIAT money. It circulates because governments insist on its use - ‘FIAT’ meaning by government command – and on collecting taxes in it.
Over time methods of payment have moved over to the electronic rather than the physical. The powers-that-be mean to eliminate coins and paper money. This will create huge problems, especially for the USA. There is a vast hoard of paper US dollars held in savings overseas. There are more $100 notes in the world than $1 notes. Eliminating US paper notes would cause a profound economic shock and a loss of prestige worldwide. This may yet save cash in the world.
Nevertheless, the official mind seeks to deprive us of the remnant of liberty represented by the anonymity and flexibility of cash. It doesn’t understand that making money immaterial and an agent of state control makes society more fragile, not less.
In this discussion of the three competing ‘money’ options facing the world – state FIAT, Gold (with semi-token silver coinage) and Cryptocurrencies (in the form of Bitcoin) – I will consider FIAT currencies as the purely digital deals that the bureaucracy wishes to impose on us.
PRECIOUS METALS AND THE NECESSARY ATTRIBUTES OF MONEY
Economists long ago identified key characteristics of money. It has to be a store of value, something that keeps its purchasing power over time, and be storable in such a way that it cannot easily be taken away from you. A desirable characteristic of a store of value is that it is tangible and, for example, can easily be touched or held in the hand. Another desirable characteristic is portability or transferability. A store of value should be capable of being moved easily from one jurisdiction to another.
Money has to be something that can be used as a means of exchange. In other words, it has to be exchangeable for goods and services needed in the here and now to thrive or at least survive.
It also has to be exchangeable for income-producing assets including debt and equity investments, for example, shares in companies and bonds. As a related matter, money has to be fit to serve as a unit of account enabling sound long-term decisions to be made – it has to facilitate ‘economic calculation’ – without which mass poverty and political implosion are inevitable.
THE GOLD STANDARD WAS NEARLY AS GOOD AS IT GETS
The obvious point to make is that the Gold Standard, as it was operating in the Classical Liberal UK and US regimes before the First World War, met these criteria. It was nearly as good as the totally private gold-based currency that most Libertarians expect would develop in free, private-law, societies that should emerge, at least in places, in the post-Marxist future.
In 1914 you could carry gold and silver coins across national borders as easily as you could take them to the shops, or carry paper notes which were automatically convertible into gold. If you were British, you didn’t even need a passport to go abroad. There was no danger then of Capital Gains Tax (CGT) or of being stuck with decaying paper money. Neither CGT nor paper money were conceivable in Britain before the Great War.
Gold could be deposited in bank accounts, since these were denominated in effect in weights of gold. The sovereign or £1 pound coin has been issued since 1817 at the same fixed weight of 7.3224 grams of gold (in a coin weighing 7.98 grams overall). You could open as many bank accounts as you liked, wherever you liked and transfer claims on gold between them without any notion of exchange controls. Your bank balance was generally known only to you and your bank. You could also buy a gun to protect gold stored under the proverbial mattress.
Lastly, but crucially, gold could be used to buy income-yielding assets and engage in sound long-term economic calculation. It is often said that gold doesn’t pay interest. Of course not. Gold is a form of money. It is not an investment. Money never pays interest or, indeed, dividends. It’s the financial assets bought with money that yield returns.
With gold before 1914, in Britain shares and bonds could be bought with yields ranging between 2.5% and 10% in both real and nominal terms. There was no long-term inflation. There was also no tax for most people. As discussed in the AWAH post ‘Saving Your Way to Growth’, a sound currency enables the accumulation of intergenerational wealth in independent families. This is flat contrary to the current mess. Much of the population has been made dependent on state promises that will be ratted on soon.
You cannot now generally make investments denominated in gold or cryptocurrencies. That is however the result of restrictions created by governments and financial elites. They are determined to protect their lucrative FIAT currency franchises. Indeed, without ditching the Gold Standard, the West’s mega states could never have grown as they have because their debts, if denominated in sound money, would have buried them generations ago. (For more on the FIAT scam see earlier AWAH posts, including ‘Banks and the State Print Money to Steal from You’ and ‘The Cantillon Effect: Finance Displaces Productive People’.)
It was the political promise to convert arbitrary monetary units into gold at a fixed rate – the key statist element in the system – which brought the Gold Standard down in 1914.
CAPITAL GAINS TAX AND CURRENCY COMPETITION – AN EXAMPLE FROM THE 1970s
A special place in this post, and in hell, is reserved for the proponents of CGT and other low yielding political taxes like Inheritance Tax (IHT) and Higher Rate Income Tax. The British Establishment unwisely introduced them to pander to the unquenchable Marxist sin of envy. Neither Germany nor Japan had CGT, in effect, during their post-war miracles. To any economically literate (i.e. Austrian School) observer these taxes seem designed to de-industrialise Britain. But they may merely reflect the economic illiteracy and short -term opportunistic mind-set of our political, bureaucratic elite.
CGT (like IHT) is a major weapon in the state and financial establishment’s program to use FIAT money to use inflation to steal by stealth from productive families. It also protects FIAT currencies from competition with non-state, money like Gold or cryptocurrencies.
Let me first cover the key concepts of change in value in ‘nominal’ versus ‘real’ terms. Stating financial numbers in real terms means adjusting them for retail price inflation. This is usually done using an index measuring the rise in prices that FIAT currencies create. In contrast, in nominal terms means simply stating numbers without making any adjustment for retail price inflation. Except for a relatively brief period, taxation on capital gains has been levied on nominal gains. These gains were often not gains in real terms.
In my AWAH post ‘Let’s Not go Back to The Seventies’, I described the disastrous effects of the 1970s inflation and taxation on capital allocation and profitability in smaller UK enterprises. Following the failure of the Bretton Woods international Dollar Gold Exchange Standard system in 1971, Britain experienced a tripling in consumer prices in the decade to 1980. This combined with CGT to strip away family financial wealth.
Let’s look at how high inflation and CGT did this. Let’s say a man had £1 million in 1970. His goal was wealth preservation over the decade to come. Prices tripled by 1980 in Britain. In other words, an inflation index set at 100 in 1970 would be around 300 by 1980. That means that whatever currency or securities or stores of value he relies upon would need to be worth £3 million in 1980 (£1m x 300/100) merely to have an unchanged level of purchasing power in real terms.
The traditional safe investment - recommended by all respectable advisers to generations of moneyed families and pension funds - would be a UK government bond (‘Gilt’) bought and held to redemption. A £1m bond held to redemption (when the borrower has to repay the debt) in 1980 would still be worth £1m in nominal terms. There would be no CGT liability. But in real terms the picture is less rosy. £1m in 1980 is worth just £0.33m (£1m x 100/300) in 1970 pounds. £0.67m has been stolen in real terms during just one decade. A decade of hyperinflation would obviously have wiped out the lot, in real terms.
One possibility for our ill-starred 1970s investor would be to hold assets in another sounder foreign currency. This is relevant when trying to think about currency alternatives such as other FIAT currencies, gold or cryptocurrencies. The 2020s are likely to be a highly inflationary decade. Buying foreign currencies worked in the early 1920s hyperinflations in Germany and in the successor states to Austria-Hungary. It was illegal in Germany to do this, but certainly feasible. The Swiss franc and the US dollar were still on the Gold Standard and the pound still behaved as though it soon would be.
Interestingly, as the German hyperinflation proceeded to its crash in 1923 nominal prices multiplied (basically) infinitely as the Mark became worthless. But asset prices in real terms collapsed. Share dividends were worthless before being announced, let alone by the time they were paid. Companies were very cheap. At the time, apparently, Daimler Benz could have been bought for the cost of 800 of its cars. Respectable houses in Berlin were sold for just $100. That was roughly five troy ounces of gold, or around £7,000 in present day money at the current (December 2020) gold price.
By the way, UK housing may well offer some protection, certainly compared to cash, but it is very fully priced (see the AWAH post ‘Cheaper, Better Housing After the Fall’). Protection from owning UK property may work on the face of things. A house might be worth, say, 100 million nominal FIAT currency units in ten years. But that may only be a fraction of what was paid for it originally in real terms.
In real terms may come to mean as measured in Russian roubles, or Chinese yuan (or gold or bitcoin). Russia has the gold reserves to move its currency on to a Gold Standard. China probably does too, though it has the complication of its own debt bubble to manage. In any case, neither country should see the economic destruction likely to be inflicted in Europe, and maybe in America, by followers of the WEF Great Reset crowd - assuming there is no major war.
So back to our man trying to hold on to his wealth in the 1970s. He could buy Deutsche marks, Swiss francs or US dollars. All FIAT currencies lost value in terms of real purchasing power during the post 1971 inflation break-out. But not all did as badly as the pound. Let’s pretend for the sake of argument that our man buys bonds denominated in a better-managed foreign currency. We assume his holdings are worth £2m by 1980. In nominal terms our man has made £1m, doubled his money, and made a 100% gain. In real terms, however, that £2m is only worth £0.67m in 1970 pounds (i.e. £2m x 100/300). That would still be twice as good a result as buying a UK bond.
But enter CGT, then levied at (I believe) 40%. On his £1m nominal gain (which as we saw above is in fact a loss in real terms) our man must pay £400,000 tax (40% x £1m). His net nominal fortune will only be £1.6m (£2m less £400,000 tax) in 1980 terms. In real 1970 terms, £1.6m of 1980s money would be worth just £0.53m. He has still lost half his wealth. The message is that levying unindexed CGT – currently at 20% but perhaps likely to increase back to 40% – steals money by taxing fake, inflationary gains.
CGT also discourages attempts to diversify away from the national FIAT currency into other currencies, gold (except for sovereigns which are not subject to CGT) or cryptocurrencies. That is one of CGT’s key functions (the other is to reduce leakage from the huge income tax take). CGTs own revenue yield is relatively tiny.
We could consider what would happen to our man if he actually managed to find a taxable asset which appreciated in line with UK inflation. With the big exception of (CGT-exempt) UK housing, that was very difficult. Let’s pretend he succeeds. His stash is worth £3m in 1980 pounds. That is the same as his original £1m in 1970 real terms. So far so good, he comes out even. But there is still a £2m nominal gain on which £800,000 of CGT would be payable. So our man would be taken down to £2.2m in 1980 pounds, worth £0.73m (£2.2m x 100/300) in 1970 terms. Despite everything he does right, he must still lose a quarter of his substance to the parasitic classes.
The combination of state-sponsored money creation, CGT and IHT steals by subterfuge. But then why would you expect people, who have the legal right to take as much as they can, not to do so? State theft of wealth prevents independent families becoming the norm. The bureaucracy, and its front-of-store politicians, want as many voters as possible to be dependent on taxation-funded goodies handed out by them. The decade ahead may well be the time when these political Ponzi schemes in the West fail. That will leave a lot of angry politically-dependent people in the lurch.
I hope this explanation of real versus nominal returns, and the role of unindexed capital taxation, will make the rest of this post easier to understand. If you did understand it, you know much more than the many in financial services, let alone the general population.
PAUL VOLKER SAVES THE PAPER DOLLAR STANDARD
Meanwhile back to the story of national FIAT currencies. They went haywire in the 1970s once the remote semblance of any gold backing vanished with the final US default on its Bretton Woods obligations. Politicians found they could lean on the printing press without restraint. In the UK the Conservative Party led the charge towards irresponsibility with the Barber boom in the first half of the decade. It bequeathed a 26% inflation rate to the incoming Labour administration which tried with mixed results to tidy up the mess.
Then Paul Volker took over at the Federal Reserve. He may have been the last sound money man ever to chair the Fed. He slammed on the monetary brakes, jacked interest rates up to the mid-teens, switched off the electronic printing presses, destroyed excess dollars and brought the malinvestment sicknesses of the inflationary boom to a juddering halt.
The initial result was a severe recession at the beginning of the 1980s in the West, including in Britain where it was blamed by the socialist dominated establishment on Mrs Thatcher. That was followed by an economic recovery for which she didn’t get the credit either. However, the important thing at the global level is that, against all odds and expectations, Volker made the inconvertible paper dollar a viable money standard.
This outcome was reinforced by making American vassals in the Middle East accept payment for their oil only in dollars. Since western currencies like the pound are more colourful franchised lookalikes of the dollar, this precarious dollar stability extended beyond America. It has formed the unrecognised background to our careers and lives.
But Volker only bought a couple of generations of reprieve. People should be aware that there have been many instances of unbacked FIAT currencies in history. In every case, where the currency that was actually fulfilling the key store of value and unit of account roles became no longer convertible into a real commodity, that currency was always abandoned.
I leave aside, by the way, the case of perennial inflations in Latin America and elsewhere in emerging markets. Everybody of substance there has used more stable currencies as stores of value, first sterling and then dollars. And it is the dollar, the linchpin of what passes for money in the West, and its vassal currencies like the pound, that are on the line now.
By ‘abandoned’ I don’t mean that previous versions of unbacked currencies in history gradually fell to 1% of their original value – we have had that experience already over the past century. But most of us still treat our habitual monetary units as stores of value. By ‘abandoned’ I mean those older paper monies all became wholly and utterly worthless, every time. And all debt and debt-based ‘pension’ and other promises denominated in them disappeared too. This fact ought to be known to every graduate, at least. Strange to relate, it is not in the State’s propaganda pack, I mean the compulsory state education curriculum. They say that those who don’t know history are doomed to repeat it.
TIMING AND NATURE OF NATIONAL FIAT MONEY HYPERINFLATION
My model for the breakdown of the West’s bloated Democratic Socialist status quo is the collapse of the totalitarian socialist Soviet empire from 1989. Nobody expected it, except for Austrian School economists. But the steady loss of public support, inexorable increase in the weight of the state and the continuing abject failure to achieve prosperity made change inevitable. It’s the same in the West now, but with much, much more debt, and clearly declining living standards – albeit from a higher level.
The Soviet system had to default on its promises. It did this by trashing the currency in which they were denominated, the Russian rouble. In a matter of a few years, the rouble collapsed. That is what could happen in the West to all its linked FIAT currencies including the central US dollar.
But why would hyperinflation in national FIAT currencies happen in the West now? Firstly, because states have been saddled with unaffordable political promises in terms of pensions, healthcare and welfare payments. To these have been added high deep-state military expenditures, especially in the USA. These have been justified by propaganda depicting Russia and China as necessary enemies. This has been funded through heavy taxation, by historical standards. Taxation has depleted inherited stocks of capital and repressed productive effort and behaviour.
But spending has also been funded by state debt as well as taxation. Government debt is now high in relation to the size of national economies. Indeed, it is generally over the 90% of GDP level at which economic and political stress tends to develop. Debt levels are still higher when the largely unproductive state sector is removed from the equation. Debt service depends on what can be extracted from just the private sector.
Ever since Paul Volker stabilised the paper dollar forty years ago, interest rates in the vast government debt markets have been in steady decline, pushed down by determined money creation by central banks. Deliberately inflating old debt away and driving nominal interest rates down towards zero (in Europe below zero) has been needed to enable governments to borrow without apparent difficulty.
Neither state budgets, nor the banking sector, nor myriad politically influential zombie corporations, could now cope with a return to normal interest rates. The only way to prevent a return to such rates (say, 2.5% above the rate of consumer price inflation) is for central banks to create infinite amounts of new national FIAT currency. In March 2020 this is precisely what the Federal Reserve promised to do. Stock markets immediately reversed recent declines. They have been rising ever since, despite declining real-world business prospects. This bubble has got to the point where barely profitable TESLA is worth more the rest of the world’s car industry. There is no realistic likelihood of money creation ending any time soon.
This year, the problems caused by a developing world slump have been masked, but also worsened, by the damage done by western governments’ insane responses to a respiratory virus which is less serious than flu for the working population. The coronavirus, as an epidemic, ended in June in northern temperate zones like Europe and the Northeast USA. But the damage caused by repeated lockdowns will become starkly evident in the course of 2021. It speaks volumes for the economic ignorance, irresponsibility and callousness of the political classes that they neither knew nor cared how much harm their lockdowns were doing – and they now know, or should, that lockdown, masks and social distancing do no good at all, just great harm. Only massive money printing is preventing serious unrest.
OFFICIAL ECONOMIC FIGURES MASK THE PROBLEMS
State GDP figures suggest that the fall in economic activity has been serious but not catastrophic. This is giving a false sense of security. One problem is that GDP figures include state expenditure. State spending has risen rather than fallen, but this represents economic drag. What matters is private sector output. Another problem is that GDP figures measure changes in the sum of money transactions connected with final consumption. When Central Banks create money out of nothing, nominal GDP figures are massaged upwards.
This fiscal year, the Bank of England is likely to have created around £500bn of new money. That is equivalent to around half of private sector production. Without the money pumping, the decline in recorded marketable production would have been much greater. A straw in the wind could be the more than 750,000 unit fall in sales of new petrol or diesel cars in the UK (not remotely offset by a 40,000 uptick in sales of subsidised electric cars) so far this year.
It is hard to know how much lasting damage will have been done. We may never know. The costs of the lock-down fiascos will merge with those of the global business-cycle slump and the losses of wellbeing caused by zero-carbon policies. But the damage is bad enough to encourage the British government to rely on money printing rather than taxes indefinitely. In America the US Federal government is also expecting to fund more than half its spending this year by borrowing. All of that borrowing is coming from new money creation.
As any Austrian School economist would point out, money printing doesn’t help production. It enables the predator, parasitic sections of society grouped around the state – the people who tend to waste resources - to extract more resources from the productive sector. This undermines production and wellbeing still further in a vicious circle.
DEFLATIONARY FORCES DURING A HYPERINFLATION
That is why I think that a general western hyperinflation is beginning. But Keynesian trained economists employed by the state and the financial establishment still focus on staving off the falling prices or ‘deflation’ that they wrongly think economic contractions always cause.
Vicious circle is also a key concept in understanding hyperinflations. Hyperinflations happen when people suddenly decide that a currency’s purchasing power is certain to fall a lot soon. Most people haven’t reached this point, although a noisy group of clued-up cryptocurrency enthusiasts are likely to speed up the rate at which they get there.
Under the Gold Standard, signs of inflation led to a run on gold reserves and banking deposits. That brought money creation to a halt. But our bureaucrat masters have been closing off these stabilising escape routes over the decades. They think that a banking system which nobody can exit is unable to fail.
They have merely made things worse. People cannot withdraw gold from banks – and soon they will be unable to withdraw cash. So there won’t be pictures of people moving wheel barrows full of banknotes this time. People will simply start to buy anything else which might have value, before they too shoot up in price. They will try to cut their bank balances to the minimum needed for daily transactions. But if money cannot be withdrawn from the banking system as a whole, the least aware people will simply get left holding the whole FIAT issue once it no longer buys anything. That will be the anatomy of a modern hyperinflationary collapse.
Hyperinflations have strange characteristics because, underneath the spectacular daily price increases, there is a deflationary (in real terms) reset in progress. It is just as powerful and very similar to the overtly deflationary effect of a falling price business-cycle depression under sound money conditions. As Mises said, once money creation gets under way, you cannot avoid for ever the eventual hard landing. Accumulated unsound malinvestments in commerce, and government, must be liquidated before progress can resume.
The difference is that in a hyperinflation, debtors, in particular governments, get their debts and promises cancelled while pensioners, savers and creditors get crushed. Under the healthier sound-money depression scenario, creditors and savers are protected (they are after all the indispensable enablers of growth). Governments and other debtors go bust.
How can a hyperinflation be deflationary in real terms? Well, in the rush to dump money at all costs, consumer prices rise faster than money creation. In a game of musical chairs, money balances are hastily converted into goods, services and assets, including shares – though not necessarily enough to keep real property or share values from falling. The real inflation-adjusted value of the money supply falls.
Meanwhile the economy is also contracting because the crucial price mechanism coordinating production cannot work without a functioning currency. In 1923, despite heroic efforts, the German central bank couldn’t pump in printed notes fast enough to prevent the real value of the German money supply from falling. One may assume that with digital money the real inflation adjusted value of the money supply could be maintained in future inflations. I think it just means that the fall into an infinite currency collapse will simply be faster once it begins.
From the German point of view in 1923 nominal prices were shooting up daily. From the point of view of holders of sound foreign currencies and gold (the same thing in 1923) German prices, property and shares were all becoming ridiculously cheap. From the outsiders’ point of view a deflationary falling-price depression was indeed in progress.
INVESTMENT OPPORTUNITIES IN POST HYPERINFLATION ECONOMIES
In this post, I assume that a hyperinflationary collapse of western FIAT currencies will occur in the relatively near future. The desire of each Central Bank to keep more or less to their habitual exchange rates would tie the whole system together as the collapse proceeded.
A key point to take away is that investors who survive this scenario would be able to pick up cheap assets, a bit like a carpet-bagger with his greenback US dollars in the American South after the Civil War. The South created its own hyperinflationary disaster trying to fund the war. Assets became dirt cheap in the absence of any local money with which to buy them.
Characteristically, the Rhett Butler figure in ‘Gone with the Wind’ keeps his wealth in sterling in Liverpool. For him too, in pound terms, assets in the South became cheap. Which explains his prosperous lifestyle in a devastated country. Distasteful as his approach may seem, it is surely better than being ploughed under by relying on FIAT money.
But if all national FIAT currencies in the West were to go down this time around, cheap assets would only be affordable during the ensuing reconstruction for purchasers equipped with other, surviving forms of money. What might they be? The candidates broadly seem to be Central Banks Digital Currencies (CBDCs), cryptocurrencies, and precious metals.
CENTRAL BANK DIGITAL CURRENCIES
Central Banks are working on introducing CBDCs. As governments try to eliminate cash, they are tending in this direction anyway. FIAT money is already mostly digital. There are however a number of ideas associated in practice with CBDCs which are worth bearing in mind. They are envisaged as controls on your freedom and as a means of tax-collection.
They will be used to ensure all transactions are caught by the tax net. They may well also prevent you spending money on things you didn’t oughta, for example guns, whores, and arbitrarily defined ‘illegal drugs. Indeed, the number of limitations bureaucratic power grabbers would like to try will probably be, well, unlimited. Big Tech is salivating at the opportunity to run the software to control your life, and to replace the banking system.
Next time the state feels like locking everyone down again, with CBDCs it could just deem such and such shops or products ‘inessential’. You won’t be able to use your CBDC money on them. Why not go the whole hog and make any dissenters ‘inessential’? You won’t be able to buy food unless you kowtow to the Wizard of Oz. (The Wizard of Oz’s fine yellow brick road leading to the sham greenback Emerald City is popularly supposed to be an allegory about the replacement of the Gold Standard in the USA.)
The scope for corrupt corporations to use their influence to take competitors’ products off the list of allowable purchases would no doubt also be exploited. It all amounts to an infantile, totalitarian fantasy for the Karens and kill-joys who have grown in power by promoting pointless lockdowns and mask-wearing.
I suspect that using CBDCs to suppress huge markets such as drugs, booze (only one unit a day allowed - you can just imagine it!), prostitution, gambling and any other forms self-indulgence could lead to the emergence of new physical currencies within weeks.
There are other possible physical currencies. Cigarettes were popular after the WWII. US prisons are said to operate illicit markets using packs of a brand of washing powder – with discounts for packs past their sell-by date (I love human commercial ingenuity). My money, so to speak, would be on the hundreds of billions of bank note dollars that would be orphaned by creating wholly digital currencies. Especially the billions of US dollar bank notes. At least the Americans would no longer be printing them.
It seems likely that states would wish to ban holders of CBDCs from buying any alternative types of non-state money. However, illegality may well be beside the point by then. Everything may be illegal at the state’s discretion. The state would then have achieved peak complexity, peak meddling, peak extortion and peak ludicrousness. Looking on the bright side, this experience could create generations of libertarians.
MODERN MONETARY THEORY (MMT)
Anyway, leaving aside the Orwellian control aspects of CBDCs, there is the link with Modern Monetary Theory to consider. This is the last, craziest version of Keynesianism (‘last’ because after it blows up nobody will ever own up to being a Keynesian). The idea is that instead of the whole apparatus of banking, government borrowing and taxation, all you need is Central Banks and their Big-Tech allies. They just create all the money the state needs every year. And not just the state.
The Intellectuals yet Idiots (IYIs) of the World Economic Forum (WEF/The ‘Davos Crowd’) envisage people turning over their assets and pensions in return for a universal basic income. Remember in 2030 ‘you will own nothing and be happy’ according to the WEF website. The basic income will come from, you’ve guessed it, creating still more CBDC money from thin air every year. This comes straight from the leftist continental-scale La-La Land of unviable ideas. It includes new, impossible, Green New Deal fantasies, and old, impossible socialist or (same thing) technocratic fantasies. But the violence and misery that will ensue, as the power grab that started in March intensifies, will be real enough.
The poster boy for MMT is Japan. Japan has been stagnating for thirty years. It had a money creation splurge in the banking system in the 1980s with a bubble stock market peak which has not been remotely approached again. Over the last decades the Japanese Central Bank has been creating yen hand over fist and buying government bonds and even shares.
There are two key takeaways. One is that – contrary to Keynesian dogma - this did nothing to revive Japan’s economy. But it also admittedly did not create much inflation, still less a hyperinflation. Any self-respecting Latin American or Middle Eastern society would have indulged in a monetary collapse years ago. Mises would say that the Japanese population’s money holding preference had gone up in step with the Bank of Japan’s money creation. If Mrs Watanabe, the archetypal Japanese saver, ever decides to dump all those surplus yen, the inflationary crash would be truly biblical. Still the Japanese experience is, I admit, a conundrum for now.
MMT proponents also ask Austrian School economists why there wasn’t so much inflation after the Central Bank money printing during the Great Recession from 2008 onwards. The answer is a mixture of 1) there has been a lot more inflation than official figures show, and 2) the money mainly stayed on Wall Street where it has caused financial market asset inflation. Banks didn’t create so much new money in Main Street America. In any case, a lot of this is about timing, psychology and confidence. The timing and the (lack of) confidence now feel right. I could be wrong.
CBDCs are planned to come on stream over the next two years just as national FIAT currencies may be losing public confidence. I don’t think that converting national currencies, which used to be somewhat tangible things, into a wholly abstract, politicised currency, is going to inspire confidence. The new CBDC money would come complete with politicians promising unlimited amounts of new money creation for ever. That’s probably the one political promise anyone can rely on.
And just imagine if a multinational CBDC appears. Nation-state governments will be competing for the highest possible allocations of newly issued moolah. Would Sheffield or Lagos deserve more of the latest digital wad of redistribution? The euro has enough problems, even though European countries are broadly similar and Germany has been willing so far to bail out the rest of EU. I think CBDCs would be unlikely to halt a general FIAT hyperinflationary collapse, even if they could be implemented properly in time.
CRYPTOCURRENCIES, BITCOIN AND GOLD
I propose to cover gold and bitcoin together by discussing their characteristics in terms of the concepts preferred by the cryptocurrency community. I will only talk about bitcoin as the cryptocurrency entrant. It is by far the biggest such coin and has distinct conceptual advantages. Readers should be aware that bitcoin could be replaced by a later development, for example one with better privacy protection from the state (current contenders for this role, interestingly, still rely on the bitcoin blockchain).
I expect that future free, private-law societies will ultimately and naturally use gold and or silver as money. This would look very like an updated version of the pre-1914 Gold Standard. There would be precious metal cash, as well as notes and electronic payment methods. But there would be no unreliable state promise tying a weight of gold or silver to a monetary unit such as the pound or the franc. Because there would be no state. Instead, money would simply be denominated in standard weights, probably grams or troy ounces.
But the question is what happens in the difficult period immediately ahead? Gold is currently deliberately hobbled by governments. Could bitcoin be an alternative lifeline?
Bitcoin is the earliest and biggest cryptocurrency. It is a product of a computer program which awards a bitcoin – I conceive of it as an entity comprising a standard piece of computer code – to owners of computers that use them to solve mathematical problems of steadily increasing difficulty. The computer power and the energy supplied by would-be bitcoin ‘miners’ provide the heft to track, verify and record transactions made while the bitcoin is being ‘mined’. The successful miner gets a bitcoin, and the mass of transactions confirmed in the interim using this computer power becomes a discrete ‘block’ of done deal permanently recorded, agreed bitcoin transactions. Then the next mining effort creates a new block of new transactions to add to the chain. The result is the ‘blockchain’.
Bitcoin depends on an inbuilt ‘trustless’ transfer recording system. It needs no intermediaries such as banks or brokers. When you ask for an intermediary to transfer money or, say, shares to third parties, you expect your account to be debited and another one to be credited in the same amount. But why wouldn’t they send two or more amounts, rather than one, and to other accounts? It’s all digital nowadays, with few if any fuddy duddy paper checks. Apparently, there have been publicly traded companies who have gone private by buying back all the shares that their accounts show to be in issue, and yet ‘extra’ shares have continued to be traded. They are assumed to have been created by duplications, or worse, during transfers.
In the bitcoin world, elements of the overall mega-program sit around on different computers voting on whether each transaction in each block is good. Short of a, by now probably impossible, ‘51% attack’, nobody can kid the program into creating duplicate bitcoins through a transfer error.
Clearly gold does depend on trusted intermediaries if you store physical gold elsewhere, and it is then vulnerable in principle to confiscation by the state. It can be held directly but it is still possible that the state can trace such holdings and steal them. The state could attempt to make gold’s use illegal. Nor can gold legally, easily or safely be carried across borders in any quantity at the moment.
In a world dominated by states trying to prop up their profitable but doomed FIAT currency franchises, bitcoin has some advantages over gold. You can transfer it freely over the internet without regard to political borders. States could try to identify who has bitcoin by unpicking the code in previous blocks (a more advanced privacy cryptocurrency coin would probably be designed to stop this). They could try to hunt the owners of ‘cold wallets’ where cryptocurrency coins are increasingly kept securely off-exchange.
But that level of control implies a great, perhaps impossible, effort on the part of states whose tax bases and therefore funding will be contracting steadily. In any case states’ controlling elites will have their own private uses for cryptocurrencies, as well as gold. They will have assets to manage and they won’t be able to use failing FIAT or CBDC currencies as a store of value. One need hardly add that FIAT currencies, especially CBDCs, will be totally at the states’ mercy. Soon, when cash is scrapped, they will be wholly without privacy or protection.
Meanwhile at the public, state level, Iran, for example is proposing to accept bitcoin rather than US dollars for its oil, though I understand that private ownership remains illegal. China appears to have begun to build up stocks of metals rather than US dollars since the Federal Reserve’s promise in March 2020 to create potentially infinite quantities of dollars.
Gold and bitcoin score highly on the cryptocurrency fans’ concept of ‘Proof of Work’ criterion. Proof of work is the underlying concept behind the need for bitcoin miners to expend energy and capital to mine bitcoin. Mining a bitcoin has a real cost, as does mining gold. The energy needed to mine each new bitcoin increases with each successive ‘halving’ in the number of bitcoins created by a certain input of resources. Gold and bitcoin cost resources to ‘mine’. So, exchanging goods and services for gold or bitcoin is not a something-for-nothing exchange. Creating government FIAT or CBDC money does not cost anything, which makes exchanging goods for them a something-for-nothing scam, and makes infinite FIAT expansion possible.
Eventually, around the 22 million mark, no more bitcoins will be permitted to be created – over 18 million have been created already. This figure, less whatever allowance is made for the many bitcoins that have been lost, enables projections to be made of maximum bitcoin market capitalisation. At current levels of just under $19,000 per bitcoin, the maximum possible bitcoin capitalisation would be just over $400bn. Whilst there is no comparable limit on the production of gold, there is certainly great expense in mining new supplies which means that little more would be mined if its value fell below a certain point.
All the gold in the world would apparently fit in a cube measuring just over 20 metres and containing around 170,000 tonnes. It would be worth about $10 trillion ($10,000bn) at current prices. That is equivalent to half the size of the USA’s economy or one eighth of the approximately $80 trillion world GDP. It is about a thirtieth of the bloated sum of world debt of all kinds (not including unfunded welfare state liabilities), which is currently estimated at $280 trillion. Gold held by state central banks is believed to amount to around 33,000 tonnes, worth roughly $2 trillion.
So how do gold and bitcoin rate as stores of value and units of account. Gold was superbly stable in value over millennia. In the 19th century it tended gradually to increase in real value. It was therefore the ideal unit of account on which to base economic calculation during the glory days of Classical Liberalism from the Glorious Revolution of 1688 to the twilight of the Great War.
Since then, the price of gold has whipsawed. It was held down to $35 a troy ounce by 1971 when the breakdown of the Bretton Woods Dollar Gold Exchange Standard showed it was grossly undervalued. It peaked around $800 ten years later on fears that the paper dollar would be inflated away. Then it fell steadily for over two decades as the Volker dollar standard seemed to work. Now it is back around the 2011 peak at about $1,800. It has varied in line with changing perceptions about the US dollar’s likely long-term value.
For what it is worth, I suspect that the current level of gold in real terms is somewhere between ‘already fully priced’ and ‘a third to a half of its correct level’, in today’s currency terms. It all depends on whether gold would have continued its 19th century increase in real terms during the expansion of the global economy from 1950, and in China from 1990. In any case, in real terms, owning gold now may be mainly about wealth preservation.
Of course, if inflation reduced the dollar to nothing, the gold price in dollar terms would become infinite. But that would be just a nominal fiction. The state would naturally try to take a CGT cut on this fake gain. But in a true hyperinflation, by the time you made this or any other tax payment, it wouldn’t even buy tax collectors, bureaucrats and welfare dependents a cup of coffee. In that sense, the monetary endgame of a hyperinflation hits the unproductive participants in the state’s rackets. And yet there seem to be no powerful political forces standing in the way of endless central bank money creation.
Bitcoin was just $50 a few years ago, and then peaked at current levels of around $18,000, and then fell to $3,000 this year. Now it is back around its earlier peak. It is not looking too reliable as a store of value. Gold should be more stable as uncertainty about the future utility of dollars, pounds etc. is resolved to the downside. However, I think one can see that in a putative hyperinflation of all western currencies, FIAT money will finish last as a store of value. It’s Hobson’s Choice, as usual in politically generated crises.
A MEANS OF EXCHANGE
The apparent Achilles heel of bitcoin and gold is their usefulness or not as a means of exchange, which is a key function of money. This is especially relevant during a putative hyperinflation. States’ electronic FIAT currency and CBDCs will remain useful as a legal means of exchange, but you won’t want to hold much of it at any one time as it will be going down in purchasing power rapidly.
Could you go and buy stuff in the shops with either gold or bitcoin? Obviously, under the Gold Standard the answer with gold was yes. At the moment however, gold coins are rather bulky and unfamiliar. The smallest useful one, the half sovereign, is worth a little under £200. The common one-ounce coins are worth nearly £1,400 (over $1,800) each.
The intermediary silver token coinage needed to make change for gold coins has been melted down. It won’t be back for a decade or two at best. During a putative hyperinflation, small regular purchases in shops with gold are not going to be practicable, at least initially (silver coins however could be a different story?). You could go to farms and warehouses to buy food in bulk in return for gold coins. More likely perhaps, you would sell gold in small amounts to acquire the state’s decaying but still accepted FIAT currency to make weekly purchases.
Bitcoin is accepted by quite a few retailers and could be accepted by many more. But it is not easy to use for small retail transactions, though it is divisible down to the level of the Satoshi, named after bitcoin’s creator. The Satoshi is a unit eight orders of magnitude smaller than a bitcoin, which I think means that even in bitcoin fans’ wildest dreams it would never be worth more than about 10p.
On the unproven assumption that states fundamentally cannot prevent the use and transfer of bitcoin stored in cold wallets within or between political boundaries, it is possible that bitcoin could become the store of value. It would enable you to live a somewhat normal life by making transfers to your soon-to-be-hyperinflating bank account when you need to make payments.
POSSIBLE FUTURE IMPLICATIONS FOR BITCOIN
Bitcoin could either be worth zero or somewhere between $100k and $200k within a couple of years. I would suggest that, on the basis of its remarkable resilience at the moment, even in comparison with gold, which has had a good year, that the latter outcome is becoming at least as likely as the former. It may just be more suitable for use in politically troubled times, if states can hobble gold more effectively than cryptocurrencies.
Even if some free societies relying on much more ‘tangible’ gold came into being in a few decades, there might well still be many benighted jurisdictions with surviving states. There the relative privacy of bitcoin would continue to be an advantage for elite and everyday users alike. You never know. You might see a world where gold was priced in terms of bitcoin – the two surviving forms of money in the world trading off each other.
Currently the western financial establishment has very few bitcoins. It remains wholly committed to the FIAT dollar standard. There are signs that that might change. Many people are growing uneasy in the vast unsustainably priced sectors of financial markets - which is to say almost all of them. With increasingly authoritarian governments leaning on their digital printing presses, lots of people will be looking for alternative forms of money as an insurance policy.
Is there is a chance that bitcoin will break through resistance at the current high levels and go much, much further? New bitcoin production will end soon. At $100k - $200k the total capitalisation of bitcoin would only around be around $2-$4 trillion. That would be very roughly about 2%-5% of current world GDP. Is there a real chance that bitcoin could become the international store of value? That would be a major historic paradigm shift.
Most libertarians and Austrian School economists would expect that - after ‘peak Marxism’, or ‘peak Technocracy’ if one prefers, in the West over the next decade - freer societies will appear and turn to using gold as money. Only those societies will really prosper. Which societies or jurisdictions they will be, we must wait to find out. The least one might suggest is that the reappearance of gold as proper money will have to wait until national FIAT currencies, including proposed Central Bank Digital Currencies (CBDCs), and their associated regulatory frameworks, have failed and been abandoned.
Might there then be bitcoin denominated bonds with market determined real interest rates, alongside the reappearance of gold denominated debt securities? Capital destruction is accelerating as clueless Western governments tax and regulate the life out of declining productive bases. You can be sure that interest rates obtainable in reviving free market jurisdictions undergoing reconstruction will be high. Families just have to survive until then.