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Why Do Some People Hate Paper Money?

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Photo by Sara Kurfeß on Unsplash

And Is It Justified — An Exploration

(Not intended to be investment advice. My opinions only.)

Whenever I hear someone say crypto is the only true money, I chuckle to myself because people have been saying that about gold and to a lesser extant silver for ages.

Among both the crypto HODLers and the goldbugs, there’s this idea that the world would be a better place if we moved from a fiat (a.k.a. paper) currency system to one backed by either precious metals or based on crypto.

But why is there such disdain for paper money? Let’s think about it.

The big one is that paper money can be printed by governments and have its value inflated away.

When the going gets tough, governments get printing or so they say. Usually, governments print money in order to fill the gaps in lending and consumer demand that occur during a serious recession. This tends to be OK in inflation terms as the printed money is a temporary substitute for the portion of the money supply destroyed by credit contraction.

Other times, governments print money in an attempt to finance either fiscal or trade deficits that it otherwise can’t afford. These cases are usually for governments that can’t borrow in their own currencies. This is obviously inflationary. When a government gets really behind on its debts and attempts to pay by printing, holders of the currency become extremely skeptical of the currency’s ability to maintain its purchasing power. This skepticism causes a rush out of the dodgy currency and into real assets (precious metals, real estate, commodities, and stocks) or foreign currencies. This pushes the value of the currency down massively relative to goods and services — hyperinflation.

The key point is that hyperinflation (and the economic collapse that accompanies it) typically only happens in countries that primarily borrow in foreign currencies (with extremely high debt loads). Moreover these countries are usually plagued with imbalanced economies and corrupt governments.

Despite a bias towards printing as it’s the easiest (but far from the best) way to solve economic problems, developed countries tend to be reasonable stewards of their currencies’ purchasing power (at least during times of peace).

This is a legitimate worry — politicians tend to be shortsighted and prefer the easy temporary fix to the harder permanent one.

The current debt expansion in the U.S. is highly likely to continue. It’s just too easy — when stocks go down, hit the QE (Quantitative Easing) button. When GDP growth slows or the unemployment rate spikes, more QE.

This is actually why I invest in gold. When a government needs to induce investors to hold its debt (like the U.S. does because it has such high issuance needs), then it must make the returns on cash even worse than that on bonds. It can do so by printing cash (devaluing it further) to buy bonds.

Governments of the world will try hard to keep their cash very unattractive over the next few years for two reasons. 1) Doing so makes their sovereign bonds relatively more attractive (at least investors can make money from the spread) and 2) it boosts exports. The cheaper your currency is relative to other ones, the more attractive your goods are. On the other hand, making cash more attractive means allowing short-term rates to rise, which risks throwing their economies back into recession.

So from the perspective of government mistrust, I think it makes sense to own some hard assets like precious metals, which benefit from instability. But to me, one should be opportunistic about their precious metals investment and trade out of it when the price is right. Longer term, it’s my personal opinion that when debt expansion finally hits its end and the debt bubble unwinds, it will be deflationary rather than inflationary.

That’s because the debt bubble will probably burst when debt is no longer able to serve its primary purpose — to stimulate the economy. At that point the expansion of federal debt will be eclipsed by the contraction of private debt causing both the money supply and the economy to shrink (which would be deflationary).

There’s this fantasy shared by goldbugs and crypto enthusiasts that the U.S. dollar will collapse and be replaced by something akin to the gold standard (or the crypto standard).

This is wishful thinking. It’s much more likely that eventually the dollar loses its reserve currency status to another powerful country’s currency than the world adopting a commodity or crypto backed monetary system.

There’s just too many constraints, inflexibilities, and risks around a commodity backed system. For example, under a gold standard, the world’s money supply and therefore inflation would be dictated by gold production. Something random such as a reduction in the pace of gold mining or a natural disaster destroying a central bank’s gold vault could cause deflation and an economic depression.

Barring war, the current economic system is probably here to stay for at least a few more decades (with some scary deflationary hiccups along the way). This will hopefully give our country an opportunity to rectify things enough and maintain reserve currency status. I’m not optimistic, but I’m not overly bearish either.

Coinsmart. Beste Bitcoin-Börse in Europa
Source: https://medium.com/alpha-beta-blog/why-do-some-people-hate-paper-money-263e84b88f89?source=rss——-8—————–cryptocurrency

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