End Of The Road

For in Argentina, where the annual rate of inflation in 2022/2023 was above 100%, it's pesos, a fiat currency, cannot be considered a store of value as it can only buy half of what it did a year ago. To be a store of value, and therefore to be money, a currency must have intrinsic value, which comes from coupling it with assets such as gold and other precious metals, as done in the past.

But since 1971, over 50 years ago, the World has been using fiat currencies to transact goods and services with mixed results. Intra-Country transactions rely on local currencies which stability depends on the supply expansion policies of their currencies. If the supply growth is careless and expansive, the currency will depreciate rapidly as is the case with Argentina, Venezuela, Lebanon, Sri Lanka, and Türkiye.

For cross-border transactions, the US was able to convince other countries that its currency, the US Dollar, is stable and worthy of use in global transactions especially in transactions of gas and oil energy products, a massive market. So other countries held on to dollars and dollar assets as their reserve currency. This created a tremendous demand for dollars which the US gladly met by churning their printing presses, referred to as Quantitative Easing. But too much of a good thing invariably causes problems. The US and Europe started creating so much of their currencies, mainly to pay for debt and to grow their economies, that interest rates approached zero and real rates were negative. Further, because of the dollar status, the US found it could sanction other countries whose policies and actions it disagreed with by cutting them off from the US dollar. Countries started losing confidence in the dollar for cross-border transactions and as a reserve currency. Other alternatives are under consideration, such as a BRICS currency, with a move to a multipolar world of influence.

As the unipolar world is undergoing upheaval, it is time to scrap what exists and establish a comprehensive cross-border currency system. We've already shown that a currency must have intrinsic value to ensure stability. A second desirable attribute is the elimination of the need to determine relative values between currencies, as required when countries transact with each other.

This is accomplished with a universal currency, administered by a World Central Bank, and backed by marketable assets to the World including arable land, minerals and metals, and carbon sinks. All countries have some combinations of these assets and therefore have wealth as indicated by the amount of the universal currency assigned to them by the World Central Bank. As these assets are transferrable and change over time, countries' universal currency also changes and can be updated periodically by the Central Bank.

Fiat currencies may continue to be used in intra-country transactions but for cross-border trade, they should be no longer acceptable and replaced by an asset-backed currency.

But instead, debt continues to be used by households to purchase consumer goods, by commercial interests for stock buybacks, thus artificially expanding the bubble of this asset group, and by governments to fund social programs. None of these uses of debt would lead to future streams of income thereby reducing income with its repayment.

In the US, the public debt is more than $32 trillion, or roughly $97,000 per capita. And this is a country where 58% (CNBC survey) live paycheck to paycheck, and 40% (Fed survey) don't have $400 of savings. This debt cannot and will not be paid. Yet there are those who continue to fund these debts unaware, as if in a stupor, of the sacrifices they will be forced to make.

As creditors start dumping debt designated in dollars, the price of Treasuries will fall, and interest rates rise. Debt will become so costly in the US budget that it will no longer be practical. The market will make the artificial debt cap placed on public debt by the US Congress, obsolete. Market-driven corrections of the abuse, high interest rates and recessions/depressions, will take hold leading to much anguish and despair.

The Truss administration in the UK recently tried increasing its budget deficit with tax cuts and energy subsidies while tightening to address double-digit inflation rates, inconsistent measures. The market intervened, forcing interest rates significantly higher and driving bond prices down. This was a corrective solution to the resulting effect of policies that increase public debt beyond acceptable levels.

Large quantities of public debt in the US were only possible because of the currency the debt was incurred in, the fiat dollar. When the cost of its creation is negligible, fiat currencies are wont to expansion beyond practical and feasible levels.

And what are practical and feasible levels? As stated before, debt should only be incurred when the present worth of its future income stream equals or exceeds the debt. In that way, the repayment of debt from income will not have a negative impact on future growth.

Money supply expansion, though inflationary, affects asset classes, due to the Cantillon Effect, which holds that those benefiting from the distribution of a currency are those closest to its distribution, such as capital markets. This inflationary pressure on asset classes, for example, corporate stock, is then touted as a solid performance of the economy, instead of what it is, asset inflation or bubble. Effects from increases in the money supply tend to trickle down to consumer prices, due to high interest rates on credit card debt. But the personal consumption expenditure index is what the Fed monitors for regulating the money supply, an index with low elasticity to the supply, and results in over priming the economy.

The second is the impact on the cost of living. At an annual inflation rate of 2%, the cost of living doubles every 35 years. And as labor rates are adjusted to meet the cost of living, they become uncompetitive with technological substitutes, and with countries not engaged in inflation targeting. Shipping jobs overseas is a clear sign that the country's labor is overpriced and uncompetitive.

Corrective action would require labor to be unfettered by labor legislation setting wage floors above market levels, and legislation setting benefits (holidays and vacations) and increasing its bargaining powers from unionization. The so-called gig economy represents such an environment for labor to operate freely from these legislative restrictions and is natural for labor to adopt, as is currently the case, when faced with redundancy.

If freeing up the labor market takes place while the cost of living is still high, then some labor, though paid, would not be able to cope. These are the working poor and many of the unhoused population is from this subset. These workers need support and until the cost of living falls to market-determined levels, should receive a periodic stipend from the government to afford then a basic lifestyle.

On a country scale, the countries with the largest wealth gaps, as measured by the Gini Index, are Kazakhstan, Egypt, Namibia, Ukraine, South Africa followed by the US. It is not accidental that the Countries with the worst wealth equality, except the United States, are not among the most advanced/developed. These skewed distributions are not conducive to development.

Past civilizations have dealt with these inequalities in rash, violent, and ruthless ways and all major revolutions have as its basis the overthrow of those who were benefiting from rent seeking and systems that unfairly distributed the income of a country. That was the case with the French, Russian and Chinese revolutions which all had the notion of égalité foremost in their upheaval of the existing order. And current trends of social unrest with both income and wealth inequalities will be no different. The pushback to inequalities started in 2011 with Occupy Wall Street, a protest in Zuccotti Park, New York City, against economic inequality. It continues in more recent times with protests in France with the gilets jaunes (yellow vests) movement. Who would imagine Paris burning, again, by protesters seeking economic justice?

Some inequality is justified to incentivize innovation and discovery. Although it makes no sense to stifle innovation by placing caps on income, some sort of bifurcation of income is needed to address income and wealth inequality. The bifurcation should be for tax purposes, only. So, a proposal could be for setting an upper income level comparable to Plato's 5 times, which could be whatever a country decides is just and would not retard innovation, let's say for this discussion, 20 times, but all income earned above that level by any individual would be taxes at a much higher rate, say 75%. Part of the additional tax revenues would then be used for income-support programs to the lowest-income members of the society.