Gold Standard or Crypto-standard are bad ideas!
Gold based currency or Crypto-based currency can never be good money. Let us understand why.
There is clearly too much money in the system. When experts look at the balance sheet of banks and financial sector they baulk. What follows are two sets of wrong arguments about the money.
One set of arguments, that we discuss here, deal with Gold-based currency or crypto-currency as money system. Take the power to create money away from the Fed or the government they say. They are wrong. The debate about alternative reserve currencies tells us more about nature of money.
The real problem is due to design of money.
Money is a carrier of value NOT a store of value. Hold on! That does not mean it should lose its value.
It was designed as a river not as a dam reservoir. The arguments for gold-backed currency stem from "store of value" side and arguments against it originate from "transmission of value" side.
Inflation helps transmission but can potentially hinder "store of value" concept. Deflation helps "store of value" but can potentially hinder" transmission" concept. Let us understand this in more detail.
What is ideal money supply?
To understand we need to look at this equation again.
M = Money supply
V = Velocity of Money
P = Price of good (product or service) "i"
Q = Quantity of good (product or service) "i" sold
n = Total number of goods and services
M*V = Money Momentum
Real Economic Growth happens in two ways. First, when the quantity (Qi) of one particular good or service or product (i) sold, consumed or used in the economy increases. Second, when new product or service is invented. i.e. the value of n in the above equation increases.
Inflation is when price increases but the quantity of goods/services remains the same AND when the number of goods/services available in the economy remains the same (or vice versa). When inflation happens money loses its value.
Deflation is when price decreases but the quantity of goods/services remains the same AND when the number of goods/services available in the economy remains the same. (or vice versa). When deflation happens value of money increases.
Ideal money RETAINS value. It neither INCREASES nor LOSES its value.
Therefore ideal money supply must tally with Real Economic Growth. If we create more money we get inflation, if we create less we get deflation. Thus, creating too much money is a problem but creating too little is also a problem.
Constant volume Money is ALWAYS deflationary
If the amount of money in the system (M) is constant then it WILL be deflationary. For every new goods/services (n) invented you will get LESS money. For every additional goods/services you create (Q), you will get LESS money. Thus, the incentive for growth will reduce.
Therefore we cannot have any money system where M remains constant (no Bitcoin) or M remains in severely short supply LESS then economic growth in the economy (no Gold).
In a gold-based money, the money supply will be limited to the extent we can find new gold. Hence gold-based money is naturally deflationary. Broadly, any asset backed currency - asset availability will determine the amount of money in the system.
These types of money create deflation and discourage people from spending. It creates the misers and money hoarders. In a way Donald Duck’s Uncle Scrooge is a product of gold-based money.
In sum
A constant volume money, like bitcoin or low supply volume money like gold both cannot be used as Money. If they are used as money they will severely constrain growth and impede progress. They will also entrench the inequality.
At the most, gold-based money can be temporary mechanism to reprice the dollar in accordance with the current supply of dollars and the level of economic development. However, absent a well evolved metric to measure the Real Economic Growth, I suggest it is best to let markets sort it out themselves.
Now if you are wondering who creates this money, we will look at it in the next post.