We are all accustomed to the fact that life is becoming more expensive all the time, and the currency is depreciating. For example, the price of cheeseburger in the United States in 2007 was $ 3.22, and in 2019 it was $ 5.74. That is, in 12 years, the cheeseburger has risen in price by 78%. And this despite the fact that the official cumulative inflation in the United States over the years amounted to about 30%.
Money is constantly getting cheaper, and we are so used to it that we take it for granted. It seems that there can be no currency that only becomes more expensive and it must necessarily depreciate in relation to real goods. Some even believe that if an asset goes up in price all the time, then such a situation is abnormal. It’s either a financial bubble or worse, the Ponzi scheme.
But is it really so?
It seems to us that the answer is no. There may well be an asset that will show constant growth without the formation of a financial bubbles.
Let’s look at the same cheeseburger example. It rises in price all the time. But this is not a financial bubble or a Ponzi scheme. Also in the long term, precious metals, real estate, etc. always rise in price. In fact, almost all things that are directly required to support human lifestyle will inevitably rise in price over time. But money is also a commodity.
So why is it then impossible to create a currency that will also always rise in price?
It seems to us that this is certainly possible. However, at first, it is necessary to solve a number of problems, which we will consider in more detail below.
To somehow designate such a metastable currency, let’s call it RESERVEUM and we will continue to use this term in our publications. Let’s introduce a definition for such a hypothetical currency.
RESERVEUM — it is a hypothetical meta-currency that retains its purchasing power in relation to a certain average consumer basket, and the composition of this consumer basket adaptively changes over time and corresponds to the current needs and market structure.
To quantify the value of a given currency, it is not at all necessary to compare it with a set of goods and services that can be purchased for it. You can simply estimate its exchange rate in relation to any liquid world currency for which the inflation is known. For example, to the US dollar.
An important practical property follows from this definition:
RESERVEUM — will retain its purchasing power if and only if its exchange price in relation to any world currency will change in proportion to inflation, expressed in the prices of this world currency.
Now let’s look at the causes of inflation in world currencies and try to formulate ways to eliminate them.
Problem 1 — inflationary pressure.
As known, inflation manifests itself in two forms:
1. Supply push
2. Demand pull
Both in the first and second cases, mathematically, this means an imbalance in the money supply and the amount of goods and services circulating in the economy at the moment.
Solution path: development of an automated mechanism for monitoring the current volume of the market for goods and services. Additional emission of money is allowed only with an increase in the volume of the real market.
Problem 2 — inelasticity of the money supply during a slowdown of the economy.
Economic growth is almost always accompanied by an increase in the money supply. However, with the contraction of the economy, it is not possible to achieve an equivalent contraction of the money supply.
Thus, the money supply tends to constantly increase. For example, the indicators of the monetary aggregate M2 in the United States more than doubled from 2011 to 2021 (over 10 years), that is, increased by 100%. Over the same time period, US GDP grew by only 45%, from $15.5 trillion to $22.5 trillion dollars. Thus, we see a clear increase in the money supply, exceeding the GDP growth.
This is the graph of changes in the monetary aggregate M2
Solution path: development of a physical mechanism for the destruction of excess money supply in exchange for the return to the issuer of a proportional share of the reserve that supports the money market.
Problem 3 — centralization of the issuer.
Almost all world currencies and many digital ones that are used as a means of exchange, rather than as a speculative tool, have a centralized emission mechanism. For example, the Tether cryptocurrency is essentially a depositary receipt issued by Tether Ltd.
That is, the volume of money supply is determined not by market mechanisms, but by the will of the issuer. In theory, the Issuer should adjust the size of the money supply to the volume of goods and services that this money supply serves. And also, to provide reserves of this currency and monitor the quality of the structure of these reserves.
However, in practice, the issuer’s decisions depend not so much on economic indicators as on policy. In addition, the issuer optimizes not so much the stability of the purchasing power of the currency, as the growth of the economy, through its stimulation by monetary methods, the main of which is the expansion of the money supply through lending to the economy.
Solution path: introduction of decentralized money emission mechanisms, for example, based on the national blockchain. Transition to digital money with a transparent protocol.
Problem 4 — lack of liquid reserve.
Initially, money was issued by mints and backed by government reserves, the bulk of which was formed via the assets weakly affected by inflation, usually gold.
But after the Bretton Woods Conference of 1944, the gold reserve began to play an increasingly smaller role in the regulation of the money supply. The final point on the issue of pegging currencies to the gold standard was set by US President Nixon on August 15, 1971. According to various estimates, at the moment the gold reserves of the leading economies do not even cover 10% of the money supply.
This means that if, say, every third person wants to request a part of the reserves from Fort Knox from the state, in exchange for banknotes, then the state will be forced to declare itself bankrupt. However, even theoretically, it will hardly be possible to demand such an exchange for the citizens. It is possible to get gold in exchange for paper money only through a regular purchase on stock exchanges. That is why gold still retains its reputation as a ‘safe haven’ asset, there are always a lot of people who want to get gold in exchange for fiat money and their number is only growing, just as the money supply is growing.
We can say that modern money, which is now in circulation, is fundamentally not backed by anything. It only makes sense to talk about the “strength” and “reliability” of a particular currency by implying the actions of the monetary authorities of the respective countries.
Solution path: each new additional emission of money must be carried out against the reservation of an equivalent liquid asset. In the event of a contraction of the money supply, that is, the destruction of excess money, the reserve must be returned to the issuer.
Learn more about the protocol Reserveum.