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Total Currency Collapse?

gold-coinsPeople across the globe are losing faith in traditional national currencies. In Europe, this spurred the creation of the Euro and now the popularity of digital currencies such as Bitcoin. In the United States, it is fueling renewed interest in the use of gold or silver coins as currency.

The most interesting experiment is going on in Texas, where Governor Rick Perry (who is hardly a libertarian) is pushing an effort to create a Texas Gold Depository. This proposal wouldn’t create a gold currency; instead it would create what amounts to a sort of exchange-traded fund (ETF) backed by the state of Texas. Under the Depository proposal, $1 billion worth of gold would be stored in New York and used to back transactions by Texas.

The practical effect of this would be to give the state of Texas a gold-backed line of credit separate from the U.S. Treasury. It might back a currency or just allow the state to borrow more money. Interestingly enough, the gold Perry wants to use already exists; it is owned by the University of Texas. This measure could form the basis of a central bank that creates national debt and issues a currency like the Federal Reserve or the Bank of England.

Alternative proposals put forward in Utah and Arizona would authorize the use of gold and silver coins as currency in those states. The one in Utah has apparently been on the books since 2011, but there’s no evidence any merchants in Utah are accepting gold coins as currency. A group called the Utah Precious Metals Association is attempting to develop an online payment system based on gold.

Problems with Alternative Currencies

It isn’t clear if these efforts are legal or if they are even practical. There are a host of legal issues here, including the legality of Utah gold currency in other states. The Constitution clearly gives Congress the right to regulate commerce. Modern Supreme Court rulings state that interstate banking is unregulated unless Congress regulates it. So under present federal law this might be legal, unless, of course, Congress changes the law.

Nor is there is any indication that the gold coin efforts can be integrated with the present banking system. The Texas proposal can because it isn’t trying to create a currency, simply a line of credit. Taken to its logical conclusion, the proposal in Utah would create a sort of debit card backed by gold that could be used for online payment or through cash registers.

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Another problem to consider is the banking laws. Are these efforts covered by the Federal Deposit Insurance Corporation or not? Technically, such a payment system is eminently feasible—Visa and MasterCard perfected the basic technology, which would make it possible years ago. The only problem is legality, which might take years for the courts to work out.

Should We Worry About Alternative Currencies?

A larger and more interesting question must be raised here: Should we be worried about such alternative currencies? As some observers have pointed out, alternative currencies are disruptive technologies. The Bitcoin bubble inflated to ludicrous proportions before bursting in just one day.

The same thing could easily happen to any sort of gold-based currency. After all, gold trades on markets just like currencies do. Investors that are paying attention know that gold is subject to bubbles just like stocks and currencies are. The value of a gold-based currency could disappear overnight just like the Bitcoin value. Something to remember is that what is being proposed in Texas and Utah is gold-based derivatives. Derivatives are even more vulnerable to market-based forces than traditional currencies are. The great mortgage meltdown of 2007–2008 was caused by derivatives.

Instead of making the markets stable, such experiments are more likely to make them less stable and bring on an economic collapse. There will be more economic turbulence that will hurt rather than help average people. Those who put their savings into the gold-based currency could see it wiped out if the price of gold collapses.

The Loss of Faith in Currencies

The popularity of gold-based alternatives and things like Bitcoin is exposing a dangerous trend that we should all be worried about. People all over the world are losing faith in currencies and the governments that issue them. All currencies are based on some level in faith in government; when people lose faith in a government, they lose faith in its currency.

It’s no coincidence that the popularity of Bitcoin and the gold currency proposals are cropping up right now. Recent events in Europe and Washington have shown just how ineffective governments can be. The US Congress can’t even pass a budget, and some European welfare states can no longer provide basic services people took for granted a few years back.

The lack of faith drives economic uncertainty and drives down investment, which hurts the economy. Recent news articles indicate that most users of Bitcoin are from the United States and Europe. These people no longer trust their national currencies or multinational currencies like the Euro. All the talk that the Euro might collapse or go away is driving part of the move towards alternative currencies.

The Effect on Average People

The most frightening aspect of this situation is that we really don’t know what its outcome will be. The creation of digital currencies and locally-based gold coinages are experiments that have never been tried before. Nobody knows what the effects of such efforts on the overall economy will be.

The collapse of the Bitcoin bubble shows how fragile such makeshift currencies might be. It also makes the market worse by sowing panic and destroying faith in the entire economic system. The Bitcoin collapse looks a lot like a bank run, doesn’t it? People are pulling their money out quickly because they’re losing faith.

This debacle should serve as a lesson; average people should stay away from economic experiments such as new currencies until they’ve been tested by the market. We should also realize that alternative currencies provide no protection from market forces or inflation—actually, they may be more vulnerable to these disruptions than regular currencies.

Protecting Your Assets

So how should average people protect their assets in such a turbulent environment? The answer is a simple one: diversification. That’s investment talk for “don’t put all of your eggs in one basket.” Put some of your money in precious metals, but also put funds in cash in savings and instruments such as stocks and ETFs and real estate. Having a small stash of gold coins is fine; putting all your money in gold makes no sense. If you have a lot of extra money, you can also experiment with things like Bitcoin and gold-based currencies.

The bottom line is there is no magic bullet that will protect your assets in today’s economy. Instead, you’ll have to be very vigilant and ready to shift funds around at a moment’s notice. If you don’t, you’ll be the victim of economic experiments by both governments and private groups. As the faith in currencies collapses, we’ll see more such experiments and more bubbles that will hurt average people.

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2 comments

  1. “gold would be stored in New York”

    IDIOT!

    • Unless I am mistaken, UT recently took possession of their gold. DO NOT store it outside of the state where it is subject to being stolen, especially in New York!!!
      “Under the Depository proposal, $1 billion worth of gold would be stored in New York and used to back transactions by Texas.”

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