Today I’m going to share a piece by Charles Hugh Smith, which if you’ve never read, you might like, because he cuts through the crap and tells things in a no-nonsense manner. I’ve read a few of his early books, and he was instrumental in my early days of seeing through the facade and deception of modern finance and money. In this piece, he examines and compares fiat to cryptocurrencies and which is more likely to retain value over the long haul.
“Charles Hugh Smith is a contributing editor to PeakProsperity.com and the proprietor of the popular blog OfTwoMinds.com. He is the author of numerous books, including Why Everything Is Falling Apart: An Unconventional Guide To Investing In Troubled Times.”
You can also follow him on Twitter
As always, do your research and use your discernment. Any financial decisions you make is all on you.
Enjoy.
Bitcoin vs Fiat Currency: Which Fails First?
December 11, 2017
What if bitcoin is a reflection of trust in the future value of fiat currencies?
I am struck by the mainstream confidence that bitcoin is a fraud/fad that will soon collapse, while central bank fiat currencies are presumed to be rock-solid and without risk. Those with supreme confidence in fiat currencies might want to look at a chart of Venezuela’s fiat currency, which has declined from 10 to the US dollar in 2012 to 5,000 to the USD earlier this year to a current value in December 2017 of between 90,000 and 100,000 to $1:
On 1 December, the bolivar traded in the parallel market at 103,024 VED per USD, a stunning 59.9% depreciation from the same day last month.
Analysts participating in the LatinFocus Consensus Forecast expect the parallel dollar to remain under severe pressure next year. They project a non-official exchange rate of 2,069,486 VEF per USD by the end of 2018. In 2019, the panel sees the non-official exchange rate trading at 2,725,000 VEF per USD.
If this is your idea of rock solid, I’ll take my chances with bitcoin, which currently buys more than 1 billion bolivars. Of course “it can’t happen here,” which is precisely what the good people of Venezuela thought a decade ago.
Gordon Long and I discuss Fiat Currency Failure (The Results of Financialization – Part IV) in a new 31-minute video. The bottom line is that fiat currencies are debt-based claims on future profits, energy production and wages, claims that are expanding far faster than the real economy and the productivity of the real economy.
In effect, fiat currencies and debt are like inverted pyramids resting on a small base of actual collateral.
If you look at the foundations of fiat currencies, you find loose sand, not bedrock. Massive mountains of phantom wealth have been created by central-bank inflated bubbles, bubbles based not on actual expansion of net income earned from producing goods and services, but on financialization, the pyramiding of debt and leverage on a small base of real assets.
“Free money” that accrues interest isn’t free. Eventually the interest eats debtors alive, regardless of the debtor’s size or supposed wealth.
Creating “free money” in unlimited quantities impoverishes everyone who holds the currency. In the initial boost phase, the issuance of “nearly free money” to borrowers, qualified or not, generates the illusion of prosperity. But once the boost phase ends, reality sets in and marginal borrowers default, inflation moves from assets (good inflation) to real-world essentials (bad inflation), and creating more “free money” ceases to be the solution and becomes the problem.
Yes, cryptocurrencies are risky–but so are fiat currencies. Illusory “wealth” evaporates, and expanding credit-based “risk-free money” at rates that exceed the rate of expansion of the real economy reduces the purchasing power of all those holding the currency. Eventually trust in the currency, and in the authorities who control its issuance, erodes, and a self-reinforcing feedback loop turns the rock-solid currency into sand.
What if bitcoin is a reflection of trust in the future value of fiat currencies?Those dismissing bitcoin as a fad might be missing the point: trust in the authorities who control the expansion of fiat currencies might be eroding fast in a certain segment of the populace.
And more importantly, they might be right, and everyone who placed their trust in the authorities who control the expansion of fiat currencies ends up holding a handful of sand.
At readers’ request, I’ve prepared a biography. I am not confident this is the right length or has the desired information; the whole project veers uncomfortably close to PR. On the other hand, who wants to read a boring bio? I am reminded of the “Peanuts” comic character Lucy, who once issued this terse biographical summary: “A man was born, he lived, he died.” All undoubtedly true, but somewhat lacking in narrative.
I was raised in southern California as a rootless cosmopolitan: born in Santa Monica, and then towed by an upwardly mobile family to Van Nuys, Tarzana, Los Feliz and San Marino, where the penultimate conclusion of upward mobility, divorce and a shattered family, sent us to Big Bear Lake in the San Bernadino mountains.
The next iteration of family took us to the island of Lanai in Hawaii, where I was honored to join the outstanding basketball team (as benchwarmer), and where we rode the only Matchless 350 cc motorcycle on the island, and most likely in the state, through the red-dirt pineapple fields to the splendidly isolated rocky coastline. In 1969-70, this was the old planation Hawaii, where we picked pine in summer beneath a sweltering sun.
We next moved to Honolulu, where I graduated from Punahou School and earned a degree in Comparative Philosophy (i.e. East and West) at the University of Hawaii-Manoa. The family moved back to California and I stayed on, working my way through college apprenticing in the building/remodeling trades.
I was quite active in the American Friends Service Committee (Quakers) and the People’s Party of Hawaii in this era (1970s).
I next moved to the Big Island of Hawaii, where my partner and I built over fifty custom homes and a 43-unit subdivision, as well as several commercial projects.
Nearly going broke was all well and good, but I was driven to pursue my dream-career as a writer, so we moved to the San Francisco Bay Area in 1987 where I worked in non-profit education while writing free-lance journalism articles on housing, design and urban planning.
Within a few years I returned to self-employment, a genteel poverty interrupted by an 18-month gig re-organizing the back office of a quantitative stock market analyst. I learned how to lose money in the market with efficiency and aplomb, lessons I continue to practice when the temptation to battle the Monster Id strikes.
Somewhere in here my first novel was published by The Permanent Press, but alas it fell still-born from the press–a now monotonous result of writing fiction. (Seven novels and I still can’t stop myself.)
I started the Of Two Minds blog in May 2005 as a side project of self-expression, and in an unpredictable twist of evolutionary incaution, that project has ballooned into a website with about 3,500 pages that has drawn almost 20 million page views.
The site’s primary asset may well be the extensive global network of friends and correspondents I draw upon for intelligence and analysis.
The blog is #7 in CNBC’s top alternative financial sites, and is republished on numerous popular sites such as Zero Hedge, Financial Sense, and David Stockman’s Contra Corner. I am frequently interviewed by alternative media personalities such as Max Keiser, and am a contributing writer on peakprosperity.com.
End conventional bio; bits and pieces
My work does not fit into any ideological box; indeed, I view all ideologies as obsolete and misleading. I doubt this is a surprise to you if you’ve read the blog.
My lifelong avocations include bicycling, gardening, guitar, camping in the American West, cooking, carpentry and fitness, all of which are reflected in the blog.
I would re-write the bumper sticker “New York, London, Paris, Hilo” as “Shanghai, Kyoto, Bangkok, Paris, Hilo.” Many people wonder where I live; I split my time between the S.F. Bay Area and the Big Island, though I visit friends and family on Oahu as often as possible.
Our heritage is Scots-Irish (County Down), English and French; via marriage the family inlcudes Hispanic-American, African-American and Asian-American members. I think the word is polyglot.
Our military history: grandfather, U.S. Navy, 4-stack destroyer U.S.S. Lea (DD-118), Pacific/China, 1920-22; father, U.S. Navy, LST, Pacific Theater, 1945; uncle, Army Air Force, 1943-44, 25 B-17 missions over Europe; stepfather: Career U.S. Air Force, retired as Lt. Colonel, served in U.S., Europe, Vietnam and Korea.
Measured in terms of money I am not rich, but measured in friendships, health and output, I feel very wealthy indeed. I like my work and feel there is purpose in the blog’s independent critiques of the Status Quo and in the positive view I have of the next iteration of our economy and society.
I lead most of my life in the real world, and as a result my time online is extremely limited. This is why email to this site is read but may not be acknowledged. I regret the limitations but I receive thousands of emails a year and am only one 60-year old person with many other duties and tasks.
In my experience, good luck is rare; the default setting is rejection, disinterest and failure. I concur with Winston Churchill, who held that “Success consists of going from failure to failure without loss of enthusiasm.” That more or less sums up my biography.
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