The Fed, Interest Rates, Gold, and Bitcoin

tl;dr: a nominee for the US Federal Reserve Bank Board makes a really strong case for Bitcoin, without even realizing it.

Recently, there was an interview in the weekend edition of the Wall St. Journal entitled,Trump, the Fed, and Interest Rates.

The interview was with Judy Shelton who is up for a seat on the Board of the Federal Reserve Bank.

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Keeping in mind my efforts to disprove my own crypto thesis, I couldn’t help but read her perspective through a Bitcoin lens.

It was so strong in my mind that I asked a friend who is knowledgeable in economics and crypto to take a look at it and tell me I am crazy.

He told me I wasn’t.

Money Should be Hard

First off, Ms. Shelton is a “lifelong advocate of sound money.”

“For too long,” she says, “we’ve given central-bank officials a pass when they hint at ‘additional stimulus’ to make their own economies more competitive — without acknowledging the impact of differential interest-rate policies on exchange rates.”

Bottom line, we want money that doesn’t fluctuate in value as it moves across borders.

As far as I can tell, sound money and “hard money” are the same thing, which brought me back to Chris Burniske’s whitepaper, Value Capture and Quantification: Cryptocapital vs Cryptocommodities:

Perfect hardness is only possible in the digital world

Money Should be Stable

Next up, she talks about the dangers of using money as a tool of government.

Simply put, the temptation is too great for politicians to use money to gain political advantage. We see this everywhere in terms of lower interest rates to devalue currencies and affecting global trade rates or stimulating the economy. The other, of course, are unfunded programs that increase deficits and debts.

The impacts, she points out, can be substantial.

Ms. Shelton is most preoccupied with “the influence of stable money on the efficiency of free-market capitalism.”

She insists that “stable money is the only proper foundation for capitalism. When you start to use money as a tool of government, for regulating the economy, then that’s at the expense of what money is meant to be — which is a reliable measure of dependable stored value.”

So, we want a form of money that is a dependable store of value. Got it.

Money Should be Trustworthy

According to Ms. Shelton, the whole point of monetary policy is to establish trust.

The goal of monetary policy is “to have dependable money both domestically and internationally. Not a weak dollar, not a strong dollar — a trustworthy dollar.”

In short, “the value of money should not be an economic variable itself, subject to the discretionary and varying judgments of a small committee of people trying to decide what should be the appropriate interest rate when they meet eight times a year.”

So, we need a layer of trust that underpins monetary policy and its value should not be a variable.

As Bitcoiners will say. “1 Bitcoin will always be worth 1 Bitcoin.”

You can’t say that about the dollar or any other currency. You can’t trust that the purchasing power it has to do will be the same amount of purchasing power you have tomorrow.

The Solution?

To prevent countries from engaging in currency devaluation wars with each other, Ms. Shelton sees an opportunity to deploy a universally recognized asset to back bonds, thereby giving foreign investors some protection.

Her answer.

Gold.

“Gold is universally recognized as a monetary surrogate,” she says, “and could serve as a useful benchmark or international reference point” for exchange-rate movements.

“We are recognizing that currency manipulation is a serious problem,” she says.

“When nations gain a price advantage over competitors by devaluing their currencies, it undermines free trade and justifies tariffs. One way to address this unfair trade practice could be through gold-convertible bonds issued by governments that provide compensation to the injured party.”

So if China’s currency depreciated against the dollar, “the gold reference point would determine the extent to which China’s exports gained a price advantage.” The holder of gold-linked bonds issued by China would have the option to be paid in gold instead of depreciated yuan.

That certainly is one way.

Of course, there is a tremendous cost to the storage and transport of gold. What’s more, it favors large institutions because a small exporter in Wisconsin who wants to protect herself from devaluation for a few thousand dollars is not going to want to start having to manage and track gold reserves, plus pay the cost of storing them, etc.

But, what if it were backed by something else?

Maybe something that was equally sound (or even perfectly hard), recognized as a global store of value, outside of the manipulation reach of central banks, and easily transferrable globally.

It might be nice if that existed.

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