Episode 6: Why The Dollar Isn’t Money

Despite what Google Images serves up, money and currency are not the same thing. This view differs from that of mainstream economists, and this episode illustrates how those mainstream misconceptions might materialize to everyday folks. So what is it today that gives the dollar – or any fiat currency – its value? And how do we plan for the possibility that its value could change significantly?


In this episode John Flaherty & Keith Weiner discuss:
    • A new perspective on the definition of money
    • How J.P. Morgan’s 108 year-old quote still holds true
    • An enlightening definition for fiat currency
    • What gives the dollar its value today
    • Why trading all your currency for gold doesn’t make sense



Episode Transcript


John Flaherty: Hello everyone, and welcome again to the Gold Exchange podcast. I’m John Flaherty and I’m here with Keith Wiener, founder and CEO of Monetary Metals. Keith, as a leading expert in monetary science, we’d like to get into some basic definitions today about money.

As usual, we’d like to understand a little bit about how your views might differ from mainstream economists and how the consequences of those mainstream misconceptions might materialize to everyday folks. So with that, Keith, when you when you Google money at its basic level, you get definitions of some basic characteristics, that it’s portable, that it’s durable, that it’s divisible, that it’s fungible, that it’s a store of value over time.

You’ve written extensively on this topic, and we’d just like to understand from you how how would you define money and are there any other characteristics that are a bit more nuanced?

Keith Weiner: Well, I would define money as the most marketable commodity. Let  me break down what I mean by that. So commodity means it’s a physical, tangible good. And the reason why that’s necessary….it’s not that every transaction needs to be settled in money, there’s other ways of settling things.

But at the end of the day, there is a need at times for certain people to take their marbles home and not play in the sandbox anymore. If you don’t think that the banking system is sound. If you don’t like the interest rate on offer, there are other reasons why, as a check on the system, you have to have the right to be able to take your money home. And the only way to physically take something home is to physically take a good home.

And what is the most suitable good for taking home and performing that function? So that has to be a commodity, and what’s the most suitable commodity? So I use the term marketability to refer to that, there’s always a loss if you buy and sell something. Let’s say you go and you buy a thousand pounds of copper and then you sell it. Or you buy a thousand board feet of lumber and then you go sell it, or you buy a thousand pounds of food and then you sell it.

And what you’re going to see is that there’s a loss. When you buy it, you have to pay the ask price. And when you sell it, you’re going to accept the bid price and the spread (the difference between ask minus bid is the spread) that spread determines your loss. The wider that spread, the bigger loss. And so the commodity that is money is the one selected because it has the narrowest spread or the least loss, and that happens to be gold.

John: So the old oft quoted, J.P.Morgan, that gold is money and everything else is just credit. Is that still true? Or is it true?

Keith: Absolutely. And even today, if you look at all the commodities, you see that gold has by far the narrowest spread and everything else is some sort of promise to pay. Now, it’s made slightly more confusing by the fact that most of the promises to pay today are irredeemable. That is, they are a promise that has a little asterisk. And if you go to the fine print at the bottom, it says the promise is not to be honored, never to be honored.

So it’s a promise that isn’t going to actually pay what it promises to pay. And then people say, well, then therefore it must be money. But I’d say no. Just because you make it dishonest doesn’t doesn’t change credit into money. It doesn’t turn lead into gold.

John: So, of course, when we refer to credit, most people would recognize this as fiat currency. How would you draw a distinction between money and fiat currency?

Keith: So if money is the most marketable commodity, or good, currency is the most marketable credit. And so it’s the credit, it’s the piece of paper that trades with a narrow spread. So of all of the credits in the financial universe, it’s not the Venezuelan bolívar or even the euro. It’s the US dollar that trades with the least frictional loss. However, it used the term fiat. It’s fiat because this is really only accepted because of various laws, including the tax code, including prudent investment regulations for investment advisors.

There’s a lot of different forces that force people even down into the government education system. The government schools teach children what is money. You know, if you do a search on Google Images today and you type in money, you’ll get pages and pages and pages of pictures of pieces of paper with green ink on them. You will not see pictures of gold coins when you search for money. So there’s a variety of different ways the government forces us to use their debt paper as if it were money.

And so the net result is their debt paper is certainly currency. It is certainly highly marketable. That is it trades at the narrowest spread or in many cases zero spread. There is no bid-ask spread between checking account deposit, Federal Reserve notes and other forms of dollar cash they trade at par. So it’s extremely low friction and extremely efficient for trading. But that doesn’t mean that….Let’s use the analogy of you have a fish that’s a really fast swimmer, but no matter how fast the fish is able to swim, it doesn’t become a bird. It’s not flying. It’s still swimming.

John: So you have written and spoken quite a bit about the fatal flaw of any currency in namely that it cannot extinguish debt. And I know this is a very deep topic that we intend to get into in a future podcast. But I wonder if you would just sort of set up the principle and how how that affects and is part of the distinction between currency and money.

Keith: So, currency is ultimately a promise to pay, even if it’s a promise to pay that has the fine print that says will never be honored, the promise will never be made good. It’s still a promise to pay. So if I owe you a debt and then I pay you in paper, that is itself an IOU, a promise to pay, I’ve merely shifted the debt around. Now I may feel good and I may even argue with some righteousness, “Hey, it is extinguishing the debt. See, I used to owe you a thousand dollars. Now that I’ve turned over 50 of these 20 dollar bills, I don’t owe you the thousand dollars anymore.”

But that’s not extinguishing. That’s just simply getting me out of the loop. The debt is still there. Now you have 50 of these 20 dollar bills. Each one of them says Federal Reserve note. Now “bill” is an archaic term for credit, and “note” is a term for credit. So you have these credit notes from the Fed. The debt hasn’t been extinguished. As if I had given you a one ounce gold coin, or at today’s prices, approximately half an ounce gold coin, would extinguish the debt. The debt would go out of existence instead of merely being shifted. And now the Fed owes you.

John: So, Keith, what do you hear or what do you think about when you hear the question or the statement, rather, “worthless fiat currency” or “the dollar isn’t worth the paper it’s printed on.” Does fiat currency have value if it merely is just debt notes that are sloshing around between parties?

Keith: Sometimes I think the would-be advocates of the gold standard are their own worst enemy. And that phrase is so glib and so glibly rolls off the tongue. “Worthless fiat currency.” And all it does is it reinforces to the non-gold people that the gold people are either fools or liars. Because obviously that piece of paper does have value. Everyone knows you can go buy food with it, you can go buy gas for your car with it, you can even buy gold with it.

So in a more formal way of saying this, the the gold people are committing the fallacy of assuming that which they must prove. And not only must they prove that the dollar is going to be worthless, but they also have to prove something that will occur in the future. And so, like with everything in our political arena today, that’s really hard to prove beyond a reasonable doubt that the dollar will become worthless in the future. And so a lot of people think to foreclose on all of that difficulty and all of that effort by just simply declaring it as if it’s so already.

And of course, it isn’t. It is not worthless today, it is quite worth-ful. The dollar is one of the most valuable fiat currencies. Approximately nineteen hundred of them can buy an ounce of gold.

John: Well, why then is the dollar different than all the other currencies throughout history that have in fact failed and ended in episodes of hyperinflation?

Keith: The dollar isn’t, I mean it is going to end the same tier as all the other currencies. But proving that, you can’t just skip over that or gloss over that or leap over that Grand Canyon by just assuming it. But proving that is a monumental task that one should not shy away from, one should really dive into that with gusto and say, OK, well, what is it about all those other currencies and what happened and what’s happening with the dollar?

Are there signs of the dollar failing today and so forth? And one would have to make a, dare I say, a scientific inquiry of it, and then one could prove that, yes, the same fate is going to be true for the not yet. Hasn’t happened yet in 2020. It’s not likely to happen by tomorrow morning either, but it is going to happen. But proving that is a lot of work.

John: Yeah. And you’ve written extensively, in fact, in your dissertation, you’ve touched on some of the warning signs to look out for. Again, topics for another podcast. So what is it today in 2020 that gives the dollar or any fiat currency that is in wide circulation its value?

Keith: Well, it’s the willingness of or even the eagerness of people to trade their labor and to trade their products for that currency. And in our world today, the elephant in the room is the debt. Every farmer, every miner, every distributor, every manufacturer, every retailer, every restaurant that’s preparing and selling food in single serve portions, is in debt up to their eyeballs.

And what that means is you have a debt service payment due every month. If you fail to make that debt service, the bank will come and take everything you have. And most small businesses, the business owners have personally signed personal guarantees as well. So if you’re a farmer and you owe a million dollars to the bank, you’re not just going to lose your farm. You’re also going to lose your house and your cars and maybe even your retirement savings and your kid’s college fund.

In order to avoid that fate, people work furiously, frantically, hard, desperately hard, in order to produce. If it’s a farmer, and produce as much wheat or rancher to produce as much beef as they possibly can. And every year they’re finding more clever ways to be able to produce more and more and more and more and more. So people are producing more in order to dump more goods and more services and more labor on the bid price. That not only gives value to the dollar, but if one measures the value of the dollar as one over the general price level, (which I think is a mistake, but most people think of it that way) then one could see the value of the dollar rising. As more people are working harder and harder to produce more commodities, they’re pushing the bid price on those commodities down. And then we say, well, look, there’s kind of a falling trend in commodities prices. And so the dollar’s getting stronger if the dollar is the inverse of the commodity prices.

John: So let’s say that our audience is is tracking right there with you that money, in fact, has to be something physical. It can’t be a slice of government debt like we’ve defined fiat currency to be. What do you do about that? Should you trade all of your currency for gold? And there’s these businesses that are trying to say, “Here, save in gold!” And then when you want to go spend it, it can convert back for you. Of course, there’s a loss there, but what do you recommend to folks who understand the distinction but want to know what to do with their dollars?

Keith: Well, the next distinction that I would make is between income and capital. So most people have an income in dollars. That is, they work for wages or they have some real estate that they rent out or they have a business that produces and manufactures something and they sell that something, of course, for dollars. So income is in dollars.  Income’s in dollars for everybody…unless you’re a Monetary Metals investor. Of course, we pay income in gold…or you’re a gold refiner or gold mint or gold mining company.

There’s a small group of industries with a primary income of gold. But for most people, the income, the overwhelming majority of people, income is dollars. So if you have a dollar income, of course you have dollar expenses. You have to pay rent or mortgage. You have to pay for food and taxes and electricity and flat screen TVs and smartphones and all these other things. And so the only real choice that anybody has, unless they just want to speculate, right, I mean, you could trade your dollar income for gold or bitcoin or whatever in the hopes that it will go up in the days or weeks before you have a bill coming due. And if your speculation is right, then you get some free money. And if your speculation is wrong, you’re going to be crying. But for most people, you don’t really have a choice. If you have an income in dollars and you spend 90 percent of your income on expenses, the dollar income and the dollar expenses cancel each other out.

And there’s really only a choice and therefore only a debate over the last 10 percent. What would you put the last 10 percent into rather than your income itself, which you can’t.

John: You personally, Keith, is there a recommendation in terms of how much of one’s income should be dedicated to owning or saving in money?

Keith: So that is also a function of what return do you expect? So, if you buy gold, you’re basically saying I expect a zero or negative return in other investments as measured objectively, as measured in gold. And so I pose the following thought experiment. Suppose you buy a $100,000 worth of gold and Joe buys a $100,000 worth of gold and just holds it. And then 10 years later, it’s worth $200,000. The price of gold doubled.

And suppose Joe’s brother John, who didn’t buy gold, instead took investment risk and bought bought shares and maybe even traded it, trading market price risk and all these things. And then net of all taxes and net of all the time and energy and the sweat – when you’re trading it can be really nervous – net with all of that at the end of ten years is $200,000. They’re both on an equivalent basis, one with simply holding a lump of metal and the other one did all this work and put in all the stress and energy and everything else.

They both ended up with the same at the end. What does that really saying? It’s saying that the net return on investing was zero as measured in gold terms. So if you think they net return on conventional investments is going to be zero or negative, then you should own gold. If you think the net return is going to be positive, then maybe you don’t own so much gold. But of course, the challenge is over any given period, it’s really hard to say whether the return is going to be negative or positive. And that’s why everybody should own at least some gold, because you don’t know that. You can only make your best guess.

And then tomorrow morning some crazy thing is going to happen and the government is going to do something completely stark raving insane. And you’re going to say, “Who in the world would ever have predicted that the government would declare X percentage of all the businesses and all the workers in the economy to be nonessential and lock them down?”

So if you had an investment in restaurants, retail, based on whatever the fundamentals might have looked like on March 11, 2020, by March 12, you got clobbered. Now, was that predictable beforehand? Well, maybe on March 11 it was predictable, but was that predictable on February 11? I don’t think so.

John: Right. Well, Keith, this has been a great discussion today. Appreciate your insights, as always. I’d like to thank you and our audience for joining us on the Gold Exchange.


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