The End (of Money) is Nigh

In today’s Money Morning…the world’s faith in the US dollar could be shaken…a system built on faith, nothing more…a new form of money…and more…

Issues around the US government debt ceiling are rearing up again.

Bringing worrying noises out of the big credit agencies.

Fitch recently warned:

‘A failure to raise the US debt ceiling limit in a “timely manner” would prompt it to review the country’s credit rating – which is presently at Triple-A. Brinkmanship over the debt limit could ultimately have rating consequences’.

The US is definitely a weird place at the moment politically.

Trump wants to build his Mexican wall but needs funding approved by congress. This puts his own party, the Republicans, in a bind.

Democrats won’t support a bill to build the wall on the principal that they’re against such a move.

No big deal you think, the Republicans have majorities in both the House and the Senate so they have full control.

But it turns out they’ll still need Democrat support to get through stop-gap measures to deal with short term funding issues.

Who knows what’s going to happen here?

Let’s not forget it was the Republicans who shut down the US government in 2013 as a protest against raising the $20 trillion debt ceiling. There will be many in the party who are against the extravagant wall costs, despite Trump’s insistence that ‘Mexico will pay’.

This extreme political uncertainty is starting to have real world effects.

It’s the next quote from Fitch that’s most explosive (my emphasis).

Some analysts have argued that the US governments could continue making interest payments on its debt, and to delay social service payments to avoid a technical default. But Fitch warned that this approach could cause ‘damage to investor confidence in the full faith and credit of the US’.

That last part’s crucial.

It could be the start of an earth shattering change to the whole financial system…

Value and backing

For almost the whole last century, the US has been the world’s dominant power. Economically, culturally and militarily.

This balance of might and power combined with relative transparency and universal human rights has earned the US a special advantage.

Namely the US dollar.

But it’s an advantage they could be set to throw away.

The US dollar is not just the national currency, it’s the world’s reserve currency. It’s a collective act of global faith in what America stands for.

Faith, nothing more.

The US can (and does) print out dollars at will. But balancing government books requires accountability and that is why they raise the debt ceiling from time to time.

We (the world) trust the US to do the right thing — at least more than any other country. We have faith in its institutions and relative incorruptibility.

The Trump presidency is shaking a lot of this confidence. The debt ceiling issues could be the trigger for a wider range of consequences if left unresolved.

If the world’s faith in the US fails, the faith in the US dollar does too.

This is not so far-fetched.

If history is any guide, the form of accepted money can, and does change.

We no longer use farthings or half-crowns like my grandparents did in the UK, or gold coins like the Romans. Don’t forget we even had pounds and pence in Australian until 1967.

And at a deeper level, the value of most currencies was attached in some way to the amount of gold the country held until 1971.

So money is not just one thing, it can take many shapes depending on the accepted norms of the time. Shells were even legal tender in West Africa until the mid-19th century.

But the main principle of what we consider money boils down to one fact.

The essence of money is the faith that it’s acceptable to others in exchange for the things we want or need.

It’s really that simple.

I’ll take your shells for payment as long as I know I can use them myself to buy other goods and services.

Historically this has usually meant that physical money actually represented something else. Like physical gold. Or more recently the ‘full faith and credit of’ the issuer.

Let’s look at gold first.

Gold is limited in quantity and has many useful and desired qualities. It also has the weight of history on its side as being the most consistently recognized store of value.

People have faith that gold will have a fairly stable value relative to other things. Being heavy, hard to divide and very hard to move around, gold itself is far from perfect as money, though using it to back the value of a paper works pretty well.

Gold-backed money engenders confidence. But there’s still the matter of trust that the gold backing the currency is really there.

On the other end of the spectrum is ‘the good faith and credit of’ an issuer i.e. a government. That’s what we all use now. But that’s also why Zimbabwe’s currency became virtually worthless. No one trusted the government or its economic policies, (In other words, money by decree).

Now, if managed properly, this can be rather good money. It can be very mobile, flexible and secure. And it’s worked pretty well since the end of the Second World War.

But it relies on the continued good governance and political incorruptibility of those in power. Which is why Fitch’s comments earlier are worrying. And why the whole Trump presidency is worrying.

Being the reserve currency for the world is a huge advantage to the USA, so why Trump’s risking it is a mystery to me.

But risking it he is. Consciously or unconsciously.

Now, normally even a bad US currency is still better than a lot of other currencies, so the US dollar would be safe.  There would simply be no better alternative (except maybe back to gold).

But there’s a new form of money that’s just starting to evolve.

You need to know about it. Because it changes money as we know it. And if current trends continue, we could be using it a lot sooner than you think.

The new enlightenment

In this chaotic political environment we live in, where the western democracies trust their political class less and less, a new form of money has sprung up.

Just like the famous 17th century thinkers threw out centuries of outdated thought, this new enlightenment seeks to re-define money.

Yes, I’m talking about cryptocurrencies.

In a world where trust and faith in established economic systems is diminishing rapidly, this advance has come at the perfect time.

For the first time in recorded history, cryptographic currencies have entered a new sort of thing to have faith in: unforgeable transactional mathematics.

Cryptography allows us to create unique digital property that can be provably owned and transferred directly by the current owner to a new one. And importantly with no third party needed.

It’s been nine years since the birth of bitcoin and we are still at the start of this journey. But make no mistake cryptocurrencies are here to stay and they will continue to grow. In some form or other.

Critics may counter at this point and say ‘but what is bitcoin backed by?’

An economist would answer it’s backed by its ‘utility’. In other words, bitcoin is backed by having a use. In fact, it already does a load of things better than existing systems. And that useability gives bitcoin value.

‘What kind of things?’ our critic persists. Lots — beyond our imagination to come up with a complete answer for you.

It’s like asking what the internet can do, back in the 90’s. There’s a simple answer. But it doesn’t go close to describing the reality it has enabled.

For starters, cryptocurrencies allow you to send anything of digital value almost instantly and at extremely low cost.

So I could send 1 million worth of crypto-currency to you in Berlin and it would cost me 20 cents or so to do. You would receive funds in seconds or minutes.

And we would not be relying on any third party to authorise or process the transaction. It enables things like low cost share trading. Not $20 or $10 per trade. But 10c, 1c or maybe less?

These are just the low hanging fruit. But that’s already trillions of dollars worth of low hanging fruit.

There are thousands, maybe millions of possible use cases. Some will improve existing things and some will re-invent entire new industries.

But the point is this. Cryptocurrencies are useful to perform certain actions. And they will disrupt markets worth trillions and trillions of dollars.

We are nine years into this revolution and it isn’t slowing down, it isn’t going away. In fact it’s speeding up.

And to get these benefits you will need to buy bitcoin or another cryptocurrency. And even if you don’t buy it, the system you use will use it behind the scenes. That’s the crucial value that backs its use as a new form of currency.

It’s backing its actual use. Combined with its limited supply, this gives it a stronger backing than paper, money or gold which are both backed by faith alone.

As you can probably tell, I’m passionate about this new field. And I have been since 2013. I’m not new to this. I‘ve been a member of the Digital Currency Council, I’ve invested, mined and backed all types of cryptocurrency.

Currently I work with my colleague Sam Volkering on a service we offer called the Secret Crypto Network.

Our aim for the service is to help ordinary people who are starting to explore the new and wonderful world of cryptocurrencies. I believe this could be the future of finance and money as we know it. And I want as many ordinary people to benefit from it as possible.

If you’re interested you can read more here.

Good investing,

Ryan Dinse,
Editor, Money Morning

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

Money Morning Australia