Money: A Basketcase [A Deep Dive]by@TK
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Money: A Basketcase [A Deep Dive]

by Thomas Kuhn, CFAApril 19th, 2020
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Failure of the USD as a global reserve currency means we must reimagine money. Money is a topic bound to emerge throughout the rest of 2020 as an important issue whose definition embodies the failures of the global financial system. The Federal Reserve Banks have emerged with a single role – to support asset prices with the rolling put offered to capital markets as the last 4 or 5 ‘governors’ of the US Fed have come and gone. They thought they could kick the can down the road forever, and somewhere along the way that can shifted into something a lot more like a grenade.
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The failures of the USD as a global reserve currency mean
that we must reimagine money.


Money is a topic bound to emerge throughout the rest of 2020 as an important issue whose definition embodies the failures of the global financial system.

The situation is simply that the US Government is forced to rapidly expand the money supply (USD being the pre-eminent form of money globally) in a monetary and fiscal expenditure binge to support global financial markets damaged by the previous expansionary monetary binge that occurred after the Global Financial Crises (GFC) (caused by essentially the same thing before that).

A confused and incoherent neo-liberalism decided that intervening in markets to support asset prices was sound as long as inflation was not an issue. That it would warp the global financial system out of shape was ignored even after it did, during the GFC. The Federal Reserve Banks have emerged with a single role – to support asset prices with the rolling put offered to capital markets as the last 4 or 5 ‘governors’ of the US Fed have come and gone. 

We are not in any doubt that central banks now know what a hole we
are in, the tailspin of a feedback loop within the financial system. That system is supposed to relate to the economy – to real things that perform real tasks in real organisations that produce real outputs. It doesn’t. Trillions of dollars are linked to nothing at all, and in boosting asset prices with the leverage offered to banks in the global financial system, without any connection to reality they demand, trillions more.

They must – it is now an inevitable outcome of the structure of the global financial system that trillions become tens of trillions.

This dislocation of the proper role of risk – to create frameworks to control risk and to ‘beat the business cycle’ as it were, removed the essential purifying fire of risk from markets.  They thought they could kick the can down the road forever, and somewhere along the way that can shifted into something a lot more like a grenade.


Entrepreneuers, business leaders, traders and the financial
sector should love risk.  Risk, danger, opportunity and general flux all come together to create possibility and innovation. Risk is for the healthy and competitive to thrive and for the weak and degenerate to pass along. This is noted in the Japanese language, where a well-known anecdote points out that the word crises means danger as well as opportunity.  (Wriggling out of their cultural inheritance, Japan is, ironically the deepest in the hole of system gaming and has been the central bank most desperately in need of USD liquidity in swaps recently organised by the US Federal Reserve.)

That a crises could be dangerous but also have opportunity within itself goes against the Western paradigm, where things have a linear relationship and there is a highly vaunted rational answer.  It goes without saying that the rational answer must come from the consensus view – how else could we recognise it? This conformity towards the pre-existing conditions that could only have caused the problem completely escapes the prevailing linear, rational, scientific paradigm and it settled into a degenerative cycle where the solution causes the problem and so on and so on.

Our holiest of perceptual paradigms, scientific rationality, cannot grasp the self-realising, self-reinforcing and paradigm shifting reality of markets. Our paradigmatic reality is at odds with these events and our rationalisations attempt to reframe everything in a way that is essentially seeking conformity. To rebalance the status quo.

Into this confusion of diagnostic problems comes problems with how solutions come about. Political solutions naturally emerge in the place of real solutions, due to their aggressive nature, especially in the face of a failing system without an ability to correct itself.  

Try to give a nuanced, dichotomous answer to a political operative – they are perfectly happy to advertise their inability to grasp the problem, potential solutions or even admit that nuance exists. The political answer is the obvious answer, as far as they are concerned. Political answers are also self-realising, but in a degenerate way that announces a victory on a sinking ship. Just try to walk back a mistake like the interest rate policy that
created the GFC with people like that around.

And, they are everywhere now, because the system has doubled down on itself again and again. It has fewer answers in 2020 than it had in 2008, and you can actually see the complexity taken out of the financial system
in its charts.

The financial sector became completely risk-averse, wanting to game itself. When we bailed it out last time they demonstrated their mastery of the finance world in their minds. This time demonstrates the delusion they had all along – going as far back as Greenspans ‘Tequila Crises’.

So if we can take the failure of the US Dollar as pre-determined by now, we have to take a look at what money is, and what the point of it is, in a financial system.

What is Money?

Modern, technocratic explanations of money that fit our prevailing scientific paradigm are typically superficial, at arms-length and designed to fit neatly into our schema of clean, concise and especially nice, rational answers.  It is, of course, a delusion of having packed away the problem neatly and satisfactorily, without any progress made whatsoever in divining the essence of the thing.

Money! Is a ‘medium of exchange’. Wow

It has the following properties, durability, portability, divisibility, uniformity, limited supply and acceptability (these are actually the qualities of currency rather than money).

Of course these definitions do nothing to help you understand what money is. It has been, and remains a particularly perplexing and historical problem to define money, noted by most who have dared to comment
on it.

The best definition comes from cryptocurrency pioneer Nick Szabo, who realises it as a qualitative and subjective phenomenon.

Money is a token of reciprocal altruism and must be secure, unforgeably costly and easy to approximate in value.   These are its intangible qualities. If something is not secure, if it is not costly to reproduce or approximate in value then it loses status as money.

The most money-like thing is the thing with the highest degree of these qualities, agreed on collectively but also self-realising in action.

Whatever has achieved this status becomes the lifeblood of the material world, representative of physical potential, of labour, of material things, a complex metaphysical concept that greases the wheels of industry and sits behind the economy in a role of ultimate trust.

Whatever we accept as money must maintain its status in the role, of being secure, unforgeably costly and easy to approximate.  Without getting into the ontological nightmare of separating monetary value, money and currency, let’s take this in good faith and view the USD from that prism.

USD: A Basketcase

The USD is secure from the perspective of it being in a bank - as long as there is trust in the bank and the financial system. Banks do, and have gone bankrupt and runs on banks have also precipitated collapse.

The USD is not at all costly to reproduce or approximate in value. Trillions have been created recently. The USD has now failed at this essential aspect of defining itself as money.

The USD could become difficult to approximate in value. Although there is not a lot of inflation for consumer goods at the moment, holding USD has become undesirable with negative rates on the horizon and ballooning asset prices reducing the value of holding USD.

Not only are USD difficult to approximate, but it is easy to approximate them as losing value in a death-spiral.

If we can take Szabo’s definition at face value, it is easy to see the failure of USD as money. An impending failure – a basketcase.

Monetary Value

We will take a look at some things that are, or could be used as monetary value in a new money-system.

These things must have monetary value, as defined by Nick Szabo and we will take a first principles approach of the things that we have used as money in the past.

There will be an obvious criticism that there are practical reasons why these things could not be held as monetary value. The most obvious, the volatility of these assets does not take into account the impact of actually using these commodities for their monetary value.

We have already seen with the petrodollar how currency used in transactions creates a stability and structural importance beyond monetary value.

For example, as a currency is used as the functional settlement choice of transactions whether retail, institutional, industrial or otherwise, it creates a structure that constantly rationalises and affirms the status and price.

We believe that this structure created by using something as a currency creates stability in the price.

To support this view we review the change of the silver to gold ratio after the invention of banknotes.  Where the silver to gold ratio had been stable for centuries while it was used as currency, it has blown out over the 176 years since the English Central Bank was established in 1844. Over this time we developed banknotes as money and gradually reduced the role of Gold until its complete removal during the Nixon shock of 1971. Although the silver:gold ratio had changed dramatically, it wasn’t until 1990 that it went to 100:1 and more recently 127:1.  (We also suggest that silver is unlikely to make it back as a form of

So, if actually using something as money improves its profile of being money then we should take that into account. In fact, the USD as the worlds settlement currency is likely the main factor in its recognition as
money today.

Two questions arise fro this

1. Are there forms of monetary value that act like a
currency without being used as a currency?

2. As something is used more as a currency does it act more
like a currency?

We think the answers are no, and yes.

Money: A Basketcase

So with the USD in a death spiral, we need to reconsider what we use as money. We do not reinvent the wheel and have the following frameworks to work from.

Our basket includes

Fiat – An international network of transactions that use a currency by some practical and some legal necessity.

Gold – Has an inherent monetary value and has been used historically as the most monetary-value dense object

Bitcoin – Intelligently designed digital money with a superior profile to Gold as currency

Oil – Has monetary value at the strategic level of the Economy.

We approach the problem using the two-tiered demands of the global financial system – Money and Currency.

The first tier of the global economy is of money, and it is at the institutional level. At the strategic level of the economy, oil, gold and bitcoin can be used to back transactions. There is some level of trust required, but that trust is a low hurdle and the redemption of money at this tier could be set automatically.

The degree to which money is backed by each of these factors (the degree to which each makes up the money of a nation) should reflect the role that the commodities play in the actual economy.

If the economy is industrial, then its money should be backed by oil. Using oil for its monetary value would regulate market forces, minimising systematic risk to industrial economies. The degree to which an economy is industrial is the degree to which it should use oil for its monetary value, but if it is oil-producing then it should be backed by other assets. Volatility in the asset should be used to improve the status of the money.

All types of official monies could be backed by Bitcoin. Using Bitcoin for its monetary value makes sense in technologically advanced countries, where the entry-fee to technology will increasingly be whether or not digital assets are held. If a country is developing technology it will participate in the accrual of value in digital assets. Holding significant amounts of Bitcoin (and digital assets) is also a hedge against the long and unrelenting march of technological innovation. In holding Bitcoin, the tech-heavy economy will be active participants in their own success and the technologically weak economy holding Bitcoin will not be left behind.

Any economy who is, or wishes to be participants in the global financial system should also strongly consider Bitcoin and digital assets, to acquire meaningful ownership in the unrealised potential of the de-centralised finance space.

Gold is also worth considering for its monetary value. Gold is the most enduring form of money, briefly dipping in a way that looked fatal more than once since 1971 (RIP Bank of England) but firmly holding its value, even acting superior to USD as a reference rate for the Americans equity market.

If you are in any doubt about this, take the

S&P 500 priced in Gold

Compared to the S&P 500 priced in USD

Nobody could convincingly argue that the USD chart is the true representation of the market. The market peaked in 2018, during a time that the trade-war with China had got going and globalisation looked like it was going to stall. The high in the USD chart is during a year that global recession was expected and it suffered the quickest collapse of all time.

And how could we make the most use of structurally embedded, legally defined currency used on a mass-scale to ensure that transactions occur honestly and efficiently?

How about a second tier of currency, rather than money. Fiat currency could be redeemable to the money-backed first tier, but used in retail transactions, between individuals.

The first tier of money would back the second tier of currency. The fiat currency could be subject to monetary expansion to control deflation and use interest rates for inflation without ever impacting the operation of industry, technological advancement or the financial system backed by the assets that underwrite them – bitcoin, oil and gold.

Medium and large enterprises would collect this retail currency and manage balances of it with institutional money to satisfy institutional transactions.

First-tier money would retain its integrity by virtue of the inflation managed by the second-tier currency and its dynamic monetary policy without engaging in it itself.

The relationship between the two things would create a system that priced oil, Bitcoin, Gold and fiat currency in a way that creates a structural matrix that is a source of stability in money and currency by using assets with monetary value, providing the necessary liquid currency and providing stability to the economy in general.  

The aim would be to create a coherent, anti-fragile system that acts in a way that promotes the goals of the system (economy). It would provide stability to the economy through its mechanism.

And not only would this system support the global financial system without needing to rebuild it from scratch, but most of the hardware for it already exists and it could continue with minimum disruption.

Finally, regardless of its implementation and because of the power of monetary value, this system is likely to take form without any intention for it to do so anyway.

The institutions with gold, oil and bitcoin are going to be the only ones left holding monetary value in a massive asset inflation caused by the monetary and fiscal response. When this process is finished, with asset prices exploding in a bubble of liquidity not reflected in the real economy – something like this arrangement is likely to self-realise in any case and there are enormous cultural and social ramifications for allowing this system to develop naturally.