In our daily rush to categorise and pigeon hole conclusions, this might be just ‘another one’ of ‘those articles’ purveying derision for the cavalier wizards of modern finance. As a qualified professional Engineer, I don’t afford these fat comptrollers as having any real tangible grass roots knowledge on much at all, except on how to sell numbers. Good or bad, they have a systematic way of making everything sound simple post hoc, after completely avoiding the warning bells during the term of the lead up. Now the derision is out of the way, time for the real article.
To say human beings need paper money (fiat) in order to live is overstating the importance of money. Perhaps we have simply forgotten what it really takes in order to survive, but lets be honest. We would not vanish into extinction if paper currencies simply up and vanished. Sure there would be a period of social adjustment that came after the wave of violence and civil disobedience, but stick to the point. That is we don’t need money to survive, but we need something.
That something is value, and it is still here (somewhere). It is just too low in most people to register. Sadly, money (paper, fiat) has taken front and centre stage for a measure of the value of everything. But that’s OK when you understand one simple thing needed to change that around. It still only remains an option.
Everything is an Option (until it becomes a swap)
I came to thinking recently of fiat as just another open market ‘option’, and one that is consistently out of the money on everything and getting more out of the money as time goes by. i.e. there is nothing that is subject to $100 buying you MORE of in the future. So holding a $100 note/bill as an option (to buy something meaning to hold it as a certificate for future claim or payment) is worth less the longer you hold it. This is well known.
The reason I refer to paper currency as an ‘option’ comes from reading an article mentioning briefly someone in the early 1900’s using Silver certificates as formal currency for payment, and immediately thought of these certificates as a form of option trading. The option to use the silver certificates now (instead of the substitute fiat cash), or hold it for a higher silver price (using substitute fiat paper in the meanwhile) and then use it. Since both were/are formal measures of a currency swap based on agreed value. Fiat is no different – except the various Governments and their Central Bank comptrollers are issuing more fiat ‘options’ without recourse these days.
Ditto for Gold certificates (I think are still around) and are likewise an option, with the swap being the redemption into cash (fiat). In fact, many tangible ‘things’ (physical objects) can be thought of as ‘call’ options when their prices rise. So value, being just a number, is redeemed for cash (fiat paper) in response to calling the option, being the swap at the point of sale. In this light, ‘call’ options apply to anything of intrinsic and appreciating value.
It is then possible to reverse ipso facto this consideration and apply cash/paper/fiat as an option for anything, and anything as an option for fiat. With paper money being very much out of the ‘money’ option, as a representation of value. The ‘swap’ being the transaction at point of sale. So every single day, you swap currency for goods by realising the option to redeem the current value of whoever is buying into whoever is selling. Every transaction exchange is a bilateral swap.
If people realised the implications of this being a contract, then understanding the dilution of their existing ‘options’ (i.e. $fiat/money/currency) by delinquent and criminal central banking profligacy then it might entice the end user to be a bit more proactive in having it stopped, or at least better regulated.
As we already know, expanding the money supply to backstop financial incompetence is the same as diluting stock. But everyone should be thinking of those $100 options/certificates in their wallets. Nothing has changed.
I had to sit back when I thought of EVERYTHING as a series of options and swaps trades, which is actually the single longest serving financial principle since the dawn of man. The option to hold onto anything of value (a call option), in order to swap it later on.
I know, I’m slow to ‘get it’. But there is nothing formal that has changed this arrangement for millennia, and the Central/Reserve Banks have no control over the option/swap trade when you understand the fiat asset (the currency) is the single weakest financial instrument ever to hold onto.
What if all of these fiat options need to be borrowed into existence, then that’s not really a fiat system , its a credit based monetary system.
When these options are manufactured (printed) they can only be activated when someone borrows it, so all the money in the world that exists is owed to the banks.
(re: a recent conversation with ctindale)
I take the point, but to me that’s a submarket to allow people to keep trading using fiat options (using money). The Government via Central Banks only own the fiat, and whatever else legal tender. The banks are the custodians (well, were custodians, now they are more like gangsters). Is deregulating the actions of the banks really in the interests of preserving the redeeming value of your fait paper? The answer has to be no. Bailing out financial incompetence is not a satisfactory solution considering the custodian role banks have over the primary instrument of trade.
A much broader transaction remains applicable to everyone for a store of wealth, (not limited to fiat, one that encompasses the banks and is not beholden to them) is that everything is redeemable to fiat. It then identifies more specifically that 1oz Gold is not valued at $1600, but that Gold is redeemable (swapped) to fiat for $1600 per 1oz.
So buying gold at $250/oz would have been a great call option. At some point, gold as a ‘call’ option may become out of the money (the gold bubble). The same valid option/swap strategy applies to chickens, cars, houses, etc. and is a universal transaction. Previously known as bartering. How the very first fiat system was created and why I do not know.
Using a credit based fiat system has dumbed everyone down into sheep. And yes, fiat being the realm of banking, makes you beholden to the bank. Hence Thomas Jefferson’s famous quote. More applicable to delinquent spendthrifty Governments who undermine their own societies converting them into prisons run by financial institutions. Know of any?
People still need to obtain tangible and durable stores of respectable ‘value’ that represents their own level of achievement or attainment. The purported end of fiat is not/will not be the end of days, it will simply be the returning to the age old system of option/swap trading that has survived for millenia. Some call it bartering.
What is a lot harder to resolve, is the utility afforded by fiat, that has been the subject of all modern bubbles –
- Can’t carry a chicken to pay for a bus/train ride, how would they give you change
- An MRI for a Blue China plate might not be what the attending radiologist is in need of
- Your pay check consists of a dozen eggs, leg of ham, 4 movie vouchers, and 2litres of petrol.
- Those who physically cannot help themselves, must rely on the benevolence of others and social welfare. The diminishing family unit of society.
Got anything of value yet? Pay off that house, get rid of your debts, and stay out of the bank! Fiat systems have only one way to evolve, and unless you have been living in a cave (bless you if you have) recent events since Jan2008 are all you need to remind you. Financial deregulation is not the answer, effective regulation is. In any case, you can still wise up to the multitude of spinoff effects in search of better value when opportunites arise.