03.03.09

A fiat currency parable

Posted in All Categories at 12:30 pm by Michael Goode

I had done everything right. I had five handguns hidden throughout the house, all always unlocked and loaded, in case I should ever be surprised by a burglar. This is exactly what the security consultant had advised. And yet despite my precautions, my son was dead, his brains slowly dripping out of the back of his head. He had found my gun under the couch, next to my favorite reading chair. I kept wondering, what could I have done differently?

The aftermath was surreal … the police officer consoled me, saying “Yeah, you did everything right, but sometimes accidents happen, you know? At least you were prepared for an assailant. Kidnapping is up big these days.” My wife cried for our loss but made sure that I did not fall into the parasuicidal behavior which always accompanies my melancholy. “You didn’t do anything wrong, honey,” she said. “Sometimes accidents happen.”

After Daniel was in the ground I went home, drank 375ml of Kracher #6, picked up one of my guns, and held it to my head. The sage words of Richard Feynman’s first wife came to me, “Who are you to care what other people think?” What if everyone was wrong? What if the risk of an armed burglar was lower than everyone thought? What if our obsession with preventing armed burglary led to more accidental deaths than could ever be prevented?

I put the gun down and sidled to my computer. I had to hack the government’s servers to find the data, but find them I did. Fifty times. Fifty times more accidental gun deaths than deaths or even injuries from armed burglars. Everyone was wrong. I had believed them, ignoring my own common sense. The guilt overwhelmed me.

My wife came home to a quiet house that night.

… … … … … … … … … … … … … … … … … … … … … … … …

Now, perhaps you think that is a horribly absurd (and absurdly horrible) story. And yet it exactly describes the absurdity of having hundreds of different fiat currencies. Economists tell countries that controlling their own currency with a central bank is smart. It gives them the flexibility to devalue their currency to remain competitive in a downturn. Yet how many countries does that flexibility save? The flexibility destroys far more economies than it ever could save. Most small (or large) countries inflate their currencies, many disastrously so (can you say Zimbabwe?). In a severe downturn like what we have now, many other countries suffer runs on their currencies. Here are but a few: Ukraine, Hungary, Poland, Iceland, Armenia, Turkey, South Africa, South Korea, Australia, Latvia, and Estonia. Currency troubles could turn a depression into complete societal collapse in Ukraine and other East European countries.

Yet there is still the same poor advice from economists. Every country needs its own currency! Bollocks. Ecuador and Panama are doing quite nicely by using the US dollar. If I were to advise any country with a small economy, I would tell them to switch to using either the US dollar as their currency (or maybe the Euro if the country is closely tied to Europe).

Of course, if I were to advise a large country, I would suggest something more radical. Why not use equity as currency? While gold is nice and all, there is no reason we can’t do better. Using equities as a base for a currency, each Goode (as they should be called) will be a real asset–ownership in all the public countries in the world. Cash itself would have a yield–without any need to give it to an untrustworthy bank. In a world where cash has an intrinsic yield, there will be little desire for fractional reserve banking (the source of today’s problems).

Another benefit of using the Goode while there are still many countries using fiat money is that worldwide recession would automatically devalue the currency to keep a country’s labor competitive. Gold would have the opposite effect, leading to troubles exporting (as Japan is experiencing). The Goode would, like gold, be impervious to politicians’ attempts to inflate it.

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