Fiat, Gold And Bitcoin

I was trained for 6 years in economics.

Not exactly proud of it, mainly because of the largely “useless” macroeconomic models that I had to familiarise myself with. They were largely unintuitive and cluttered with many unrealistic or even ridiculous assumptions.

Microeconomics was different though. Not so cumbersome and I especially enjoyed game theory and healthcare economics. What I learnt are still relevant and applicable in this day and age.

The relationships between the economy, fiat, gold and bitcoin are uber complex. But hopefully I can use my background in Microeconomics to take a good stab at explaining the issues at hand.

1. Money Printing Is A Distribution Problem

Let’s imagine there are 3 people in a simple economy and these are their current respective levels of wealth:

• 90th Percentile: $90 (Richie Rich)
• 50th Percentile: $20 (Average Alan)
• 10th Percentile: $10 (Poor Pat)

The total wealth of the economy is then $120.

Let’s say the government then decides to print another $120 during a recession to kickstart the economy.  Here comes the problem. How is it going to be distributed among the 3 people?

Here are 3 proposals:

1. Richie gets all $120…… because trickle-down economics!
2. Distribute proportional to wealth. Richie gets $90, Alan gets $20, Pat gets $10.
3. Each person receives $40 i.e. a stimulus payment

Richie benefits from a) and b) since his purchasing power will be improved or at the least maintained.  When saving businesses and jobs become the priority,  money printing tends to benefit the people like Richie.

Whereas if something like c) happens, Richie’s purchasing power will decrease. Maybe that’s why there are so many arguments against universal basic income.

2. Exacerbation With More Printing

There will be more quantitative easing and more money printing. The Pandora Box is open and politicians are expected to help mitigate every downturn and recession in the future. Not doing so will appear to be “unhelpful”, not good if they intend to get reelected.

So the distribution problem is going to crop up more and more often.

Would it be a carousel where different actors would benefit at different times? Or would one of the proposal prevail over the long run? Trickle-down economics vs Universal Basic Income.

3. The Search For Alternative Stores Of Value

If you are a net beneficiary of money printing during this turn, it also means you are uncertain if the status quo will remain the next round.

For people with considerable wealth, it’s also no longer about beating headline inflation numbers. It’s about staying ahead of the expansion of the money supply to ensure that purchasing power is not eroded over time.

You might get less the next time and you will want to mitigate the effects of receiving less. Preserving purchasing power is the name of the game.

Besides holding fiat, are there alternatives that could appreciate faster against the expansion of money supply?

4. Gold Vs Bitcoin

The answer to the above question is like a Keynesian Beauty Contest.

Basically, winning the game is not about choosing the store of value that you prefer the most. It is guessing what others like the most. The historical winner has been gold and more recently, fiat.

Moving forward, on gold and Bitcoin’s side is their relatively limited supply. These commodities are interesting as unlike stocks or businesses, if you own 100% of the supply, you don’t get to privatise it. The value just becomes zero.

With the entrance of Bitcoin and its cryptographic model, rationally, paper gold should be toast. As for physical gold, it will always retain one attribute that Bitcoin would never have.  At the very least, that attribute makes it a useful hedge against a digital asset.

Silver is also likely to be obsolete as a store of wealth in the developed world. I mean, carrying 1kg of that weight is conspicuous. To then exchange it for USD 1,000 of value would probably be not worth the effort.

In a world awash with capital searching for a destination, these beauty contests are raging and have helped to fuel the rise of Bitcoin and of course, Dogecoin.

5. What Is On The Horizon

With the huge increase in money supply and the recent rise in commodity prices, (lumber in particular), many are predicting massive inflation.

My take? It depends.

Until the most recent  couple of centuries, economics has always been more concerned about the production problem. How to satisfy basic needs more efficiently to cater to the masses.

Technological progress has solved most of that problem. There is more than enough of the basics to go around in the developed world. This includes United States, Europe and East Asia. And of course, Singapore.

The demand for basic needs in life are income-inelastic. That just means that if I triple your wealth, you will not consume three times the amount of electricity, water, rice or mobile data as compared to before.

That’s the good news as it means the less well-off are somewhat shielded from price competition for basic resources, preventing abject poverty.

Moreover, assets like stocks and cryptocurrencies has and will soak up alot of the money printing. It is already happening.

The bad news? For aspirational goods like bigger houses, cars or handbags, expect prices to escalate fast and furious. This could easily extend to Singapore middle-class culinary pleasures like durian and crabs too.

Such goods are likely not going to be included in “core inflation” indicators, which should help to convince some that inflation is not here.

Low inflation would then create justification for the policy-makers to allow the money-printing to continue.

Thank you for reading!