I am not so convinced by a return to the gold standard, because I fear it would give the same power that central banks have today to people who can mine gold, and especially to countries that have the most gold. I agree that it is much harder to mine actual gold than to create fiat money on a central bank computer, but still, someone has this disproportionate power. AFAIK, at the current price of gold, there is just too little gold compared to the amount of money. So if we introduced a gold standard in a country with a 100% full reserve (so we need gold not only for the equivalent of central money, like with a fractional reserve gold standard, but for all the money), it would basically make gold worth A LOT more (compared to other goods). I think something like what happens with Bitcoin would happen with gold: Early owners of gold would become incredibly rich and there would be a massive rush to buy gold while we are switch to gold. If gold becomes that valuable, it would IMHO create 1) a massive incentive to mine more gold (do we really want that?) and 2) it might be an issue for people who actually need physical gold for something (10% of gold is used in electronics). I was curious about the actual order of magnitude so I tried to find some numbers. It seems there is 10 T$ worth of gold in the world (at current market price) and about 80 T$ worth of money, so I think we are talking about a 10x variation in the price of gold or something like that. But anyway I am discussing this just for fun, because as you point, it's unlikely that any country will implement a gold standard (or maybe a country with a lot of gold like China?).
A more interesting thing to think about is cryptos of course. Let's imagine that cryptos actually replace part of the monetary system. Since the amount of total money is bounded, this would lead a recurrent deflation. Let's say that there is 5% real growth every year, then there would be a 5% deflation every year as counted in bitcoins. Wouldn't that be annoying for the economy, as it would create a incentive to hoard money rather than to invest it? What do you think?
Thank you for your comment. Mining 3% of the total supply of gold per year seems to be a maximum. It is hard to dig more gold even if miners want to. In my opinion, Bitcoin is better because you can't inflate the monetary supply. Whereas it is gold or Bitcoin, the price will rise if it is adopted as the new standard.
You're right that it will be deflationary versus inflationary today. I don't know if it is such a bad thing. To invest your money, you will need a hurdle rate that is superior to the benefit of just hoarding the money. It's basically an interest rate not manipulated by the central bank.
Thank you for your answer. Yes, the hurdle rate increase is precisely what worries me. Let's say lenders want a 3% inflation-adjusted interest rate. In the current system, with a 2% inflation for example, a lender would ask a 5% nominal interest rate to compensate for the inflation.
But let's say the money has a high deflation, like 5%. If the lender wants in effet to earn 3% life before, he could ask 3% - 5% = -2% interest rate, that is he would actually pay to lend his money. But that does not make sense, since keeping it would be better, and would in effect give a 5% real interest rate already. So he would not lend for a 3% real interest rate. But he could at 6% which would be a nominal 1%.
So basically, where I'm getting at is that in a 2%-inflation world, projects yielding a real interest of at least -2% can be financed, which is kind of a low bar. But in a 5%-deflation world, nothing can be financed unless it yields a real interest rate of at least 5%.
Maybe it's not really an issue if deflation is not too high, but if it reaches very high values like 10% a year, it might result in profitable projects failing to be financed.
If we go away from a right to print money (debt based) back to simply the right to have property of things, as is the case with a gold standard (work based, or "proof of work"), we get rid of the progress finance has made possible. I think better questions would be: who should have the right to use debt ; who is going to benefit from segniorage ; how does a consumption based economy need debt ; how do we promote productive individuals with money. Ethereum provides a technical solution for scaling beyond the price of computing, through proof of stake, and could keep a value bridge with real costs through a combination of pos and pow. I am not sure however how this solves bigger political issues that stem from money as an institution in society.
Thanks for your comment. Loans can be backed by voluntary savings. I save $1000 and I lend you $1000 through a financial intermediary. There is no ex nihilo money creation in this case. Debt is a wonderful instrument. It's a bad instrument when it's not backed by voluntary savings and when loans are given to people who won't reimburse.
I am not so convinced by a return to the gold standard, because I fear it would give the same power that central banks have today to people who can mine gold, and especially to countries that have the most gold. I agree that it is much harder to mine actual gold than to create fiat money on a central bank computer, but still, someone has this disproportionate power. AFAIK, at the current price of gold, there is just too little gold compared to the amount of money. So if we introduced a gold standard in a country with a 100% full reserve (so we need gold not only for the equivalent of central money, like with a fractional reserve gold standard, but for all the money), it would basically make gold worth A LOT more (compared to other goods). I think something like what happens with Bitcoin would happen with gold: Early owners of gold would become incredibly rich and there would be a massive rush to buy gold while we are switch to gold. If gold becomes that valuable, it would IMHO create 1) a massive incentive to mine more gold (do we really want that?) and 2) it might be an issue for people who actually need physical gold for something (10% of gold is used in electronics). I was curious about the actual order of magnitude so I tried to find some numbers. It seems there is 10 T$ worth of gold in the world (at current market price) and about 80 T$ worth of money, so I think we are talking about a 10x variation in the price of gold or something like that. But anyway I am discussing this just for fun, because as you point, it's unlikely that any country will implement a gold standard (or maybe a country with a lot of gold like China?).
A more interesting thing to think about is cryptos of course. Let's imagine that cryptos actually replace part of the monetary system. Since the amount of total money is bounded, this would lead a recurrent deflation. Let's say that there is 5% real growth every year, then there would be a 5% deflation every year as counted in bitcoins. Wouldn't that be annoying for the economy, as it would create a incentive to hoard money rather than to invest it? What do you think?
Thank you for your comment. Mining 3% of the total supply of gold per year seems to be a maximum. It is hard to dig more gold even if miners want to. In my opinion, Bitcoin is better because you can't inflate the monetary supply. Whereas it is gold or Bitcoin, the price will rise if it is adopted as the new standard.
You're right that it will be deflationary versus inflationary today. I don't know if it is such a bad thing. To invest your money, you will need a hurdle rate that is superior to the benefit of just hoarding the money. It's basically an interest rate not manipulated by the central bank.
Thank you for your answer. Yes, the hurdle rate increase is precisely what worries me. Let's say lenders want a 3% inflation-adjusted interest rate. In the current system, with a 2% inflation for example, a lender would ask a 5% nominal interest rate to compensate for the inflation.
But let's say the money has a high deflation, like 5%. If the lender wants in effet to earn 3% life before, he could ask 3% - 5% = -2% interest rate, that is he would actually pay to lend his money. But that does not make sense, since keeping it would be better, and would in effect give a 5% real interest rate already. So he would not lend for a 3% real interest rate. But he could at 6% which would be a nominal 1%.
So basically, where I'm getting at is that in a 2%-inflation world, projects yielding a real interest of at least -2% can be financed, which is kind of a low bar. But in a 5%-deflation world, nothing can be financed unless it yields a real interest rate of at least 5%.
Maybe it's not really an issue if deflation is not too high, but if it reaches very high values like 10% a year, it might result in profitable projects failing to be financed.
If we go away from a right to print money (debt based) back to simply the right to have property of things, as is the case with a gold standard (work based, or "proof of work"), we get rid of the progress finance has made possible. I think better questions would be: who should have the right to use debt ; who is going to benefit from segniorage ; how does a consumption based economy need debt ; how do we promote productive individuals with money. Ethereum provides a technical solution for scaling beyond the price of computing, through proof of stake, and could keep a value bridge with real costs through a combination of pos and pow. I am not sure however how this solves bigger political issues that stem from money as an institution in society.
Thanks for your comment. Loans can be backed by voluntary savings. I save $1000 and I lend you $1000 through a financial intermediary. There is no ex nihilo money creation in this case. Debt is a wonderful instrument. It's a bad instrument when it's not backed by voluntary savings and when loans are given to people who won't reimburse.