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27 November 2013

Value



With all the monetary instability we are facing on a global scale at the present time, should we continue to trust the role of central banks and governments to manage our money, or should we push to allow free markets to self price interest rates and money supply, and allow money to evolve of its own free will? It is clear to date that central banks, coerced by governments, have forced interest rates to historic lows and printed billions in fiat currency in the pursuit of buying time in the vain hope of avoiding the natural cycle of debt deflation, commonly known as bankruptcy to the man in the street! But how do we derive true value from our current money as its debasement is being systematically managed?

The Dollar

The dollar has lost up to 98% of its value since the Federal Reserve (US central Bank) inception in 1913. The Fed has run monetary policy to help government and elites by creating an inflation bias that robs savers of their hard earned wealth, allows government to run deficits in order to buy votes by promising voters unsustainable policies and provides asset price inflation for wealthy elites to benefit. The Federal Reserve continues to devalue the dollar with its QE to infinity programme (money printing) in order to keep interest rates low and banks solvent. By engaging in this manipulation of markets it is able to maintain the status quo. However, the dollar will almost certainly lose value further while these policies are maintained.

Gold

Gold is history’s most well known form of money. It has everything that the dollar has and a little something else. It is a "store of value." Sadly, recent history shows us that a high price of gold is something that the monetary authorities fear. If gold were to double or treble in value over a short period of time it would immediately indicate true devaluation of fiat paper hence the price of gold has to be controlled. Market manipulation by central banks is commonplace as previously discussed. However, other manipulations of particular markets have hit the news in recent times such as the LIBOR rigging scandal. The UK government is also up to no good in this respect in the housing market. By pumping in around £130 billion in tax payer guarantees, the help to buy scheme is a massive market manipulation where the true value of property is hidden. Therefore, to believe that the gold market is somehow not manipulated would be foolish. It is counter intuitive to see the price of gold drop while seeing massive monetary expansion by indebted governments! Maybe that is why we are seeing a run on physical supplies in the west, only for them to re-emerge in the east as the surplus nations use to attempt to hedge their dollar reserves against a sudden devaluation.

Bitcoin

Bitcoin is a digital decentralised currency which can be accessed from anywhere in the world with an internet connection. Value however might seem to be a mystery! Bitcoin derives value through the genius of the system that has been created for its distribution, its ultimate limits to expansion, its freedom from control and its potential ease of use. So why has Bitcoin suddenly increased in value since its inception in 2009? Quite simply, more and more people are becoming aware of how the current status quo of government monopoly of money is damaging them. As awareness of Bitcoin and its freedoms expands just as the internet did 20 years ago, so the value of Bitcoin will really be seen. Based on its scarcity and its impending usefulness and utility plus its lack of counterparty risk, Bitcoin is fast becoming seen as a modern version of a gold standard. Western governments are actively trying to regulate Bitcoin and generally discredit it at any opportunity. They are scared of Bitcoin and rightly so. It has been suggested the Bitcoin is in a "bubble" but we are only at the beginning of this revolution in money so that type of comment seems implausible. The expansion of Bitcoin supply will continue until 2040 when there will be 21 million in circulation (each Bitcoin is divisible to 100,000) so we have a long way to go and a lot of time for people to understand and recognise its beauty. Current prices I believe reflect the potential in the currency but also the fact that governments do not control it in any way. Unless of course they switch the power off; unlikely I suspect! So what of Bitcoin’s ultimate value when compared to the dollar? Based on dollar supply expansion, particularly as we enter 2014 with Janet Yellen, the new Fed governor and her dovish stance, taper being off the agenda and expansion of QE very possible, Bitcoin could very well see significant gains. Be prepared for massive volatility though as liquidity is still limited. That said, one should not be talked out of getting involved.

Conclusion

Value at present seems to be in the eye of the beholder. The paper bugs will tell you that the current system of money is undergoing a little reform but will be maintained. The gold bugs will tell you that the US dollar is doomed as the reserve currency and the advent of a hard money standard is just around the corner.

Bitcoin remains an interesting phenomenon. Perhaps it deserves its rise against fiat currencies as it offers some of the essential qualities of money that they (currencies) do not, such as the need to expend time and energy to produce it, a promise that it will have a defined rarity value, the absence of counter party risk and its current lack of government manipulation or regulation. It is a better pretender to the monetary throne than the rest of the rabble and may have its Oliver Cromwell moment in history. Those over 40 with a dot com bubble behind them may remain quietly sceptical as its ability to demonstrate true intrinsic value is as yet untested. Is it just a currency based on a vulnerable tulip bulb belief structure, albeit one with more credibility than the current paper in our wallets? Its success may well be the source of its downfall as it starts to appear large on governments’ radar screens. Institutions with the abilities  remotely to take down an Iranian nuclear installation or successfully outlaw widespread use of cheaper readily available forms of diesel which would work perfectly well in our cars will surely react if their currency is materially threatened. But for now Bitcoin is sending a message to the government money printers about the boxes they fail to tick in their pursuit of money creation for the status quo.

       

 This article is written by Richard Horswill. All views expressed are his own.

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