A Matter of Belief

One of today’s more visceral debates is centered on the (de) merits of cryptocurrencies versus fiat money and, at times, gold. Often juxtaposed in mortal combat hypo-stasis, one being the Holder of True Value while the other being portrayed as The Scam of the Century they foster passion if not invective. Not a long while ago, a dear friend, ex-university junior of mine, during a late night, post-wine-tasting walk, gestured rather theatrically towards a large bank HQ building and raged: “why do consumers need to pay for such architectural extravaganza; we should break free from fiat-money and establish our own, common currency (ies) ” .

Come to think of it, he has a point with the “extravaganza” part. Why must banks make history-of-architecture statements? Why not mold their building after McDonald’s, after all? Wouldn't that be cheaper? Wouldn't those cost savings trickle down to us, humble checking account holders? Is it just to impress upon us that no one should ever-ever attempt a bank run on such large and imposing buildings?

At the other end you have central bankers, politicians, accountants (generally speaking: people in their fifties) decrying cryptocurrencies as the scourge of God, not very different of Attila’s plundering of Europe in the mid-four hundreds A.D., only this time on a global scale. A more entertaining argument is the “helicopter money” hypothesis, according to which the continuous increase in crypto-value poses mortal hyperinflation danger to our dearly-beloved world economy. The argument is made even though there are only a couple of readily convertible cryptocurrencies, the market cap of which is probably in the region of $200B or so, while the world’s total money supply is either $37-38 trillion worth of “physical money” (bank notes, coins, and money deposited in savings or checking accounts), or $90 trillion in “broad money,” which is physical money plus money held in “easily accessible accounts” such as margin accounts. To this folly we must add the opinion of gold purists, whose beliefs regarding fiat money mirror those of the fiat money proponents about cryptocurrencies.

I argue that gold, fiat money and cryptocurrencies are in fact all the same, a matter of belief alone, differentiated only by the size (and demographics) of their respective believing tribe. Let us start with gold. Its perceived value as storage of value is exclusively based on a common understanding of history and nothing else. (There are certainly other elements harder to come by. Don’t say “unobtanium”- it’s not real, it’s Hollywood). It used to be that in the aftermath of Mao’s takeover of China one needed gold to pay for a boat ride to British-held Hong Kong. It used to be that the US dollar value was based on its gold content. But not anymore. If you want to pay for anything today in gold, the seller will weigh the gold and then convert it in USD at market prices. Then maybe (s)he will take your gold in payment. Gold is currency and store of value only insofar both parties to the transaction abide by the same belief.

Same goes for fiat currency. The paper and the engravings on a US$ 100 bill are worth nothing, except the quasi-religious belief that someday the American economy may produce goods and services that you may need, hopefully worth more than whatever you have just given up to acquire the banknote.

Now, if you think long enough, as dear Professor Akerlof used to say in his Macro Econ classes at Berkeley, the exact same is true about cryptocurrencies (I really hate the term; it seems to describe currency hidden in a crypt) . They too are a strictly matter of shared belief alone and nothing else. In this respect they do not differ an iota from gold or fiat money. I even argue they offer more granularity; most cryptos are tied to specific ideas/startups. Classical finance teaches us that each investor has his/her own risk aversion quotient. What better than having each startup issue its own currency, the market price of which reflects the combined risk aversion of its holders?

The largest tribe of all of us still believes in fiat money of which the US dollar is one example. Let’s not get into the Euro/Swiss Frank/RMB controversy yet. These are the Pragmatics. Next comes the rose-tinted nostalgia gold standard crowd, which, incidentally, still conducts daily transactions in, horribile dictu, fiat money. These are the Neanderthals (yes I know, I am asking for it). Last but not least comes the crypto-crowd. These are the Futurists.

In essence we are all the same. How is gold coin debasing different from government-sponsored currency printing presses, from the over-proliferation of crypto-currency? Not very, isn’t it?

We Pragmatics, Neanderthals and Futurists should learns how to co-exist and exit the tribal winner-takes-it-all mentality, once for all. Let’s enter an era of currency peace and trade in the market via whatever means, and count them beans 25 years from now.