~2800 words
Dear Politicians and Central Bankers,
Our financial system is deeply flawed, but so are all of the proposed solutions to replace it (a gold standard, Bitcoin, Libra, any permissionless distributed ledger, SDRs, commodity backed currencies, digital sovereign currencies...) and the reason is because they all lack a universal unit of account, so I will make another attempt to explain why this is the most important quality of a robust monetary system and how it will make financial crises obsolete.
Here are the flaws of our current Eurodollar/Petrodollar fractional reserve fiat system:
1. It's based on centralized credit issued by banks (and shadow banks) that lack personal accountability, which has led to a daisy chain of interconnected derivatives and counter party risk that makes the whole system vulnerable to a big failure of one of its parts.
2. The lack of competing currencies within a single country creates monopolies of government fiat that must be accepted as legal tender, and since there's nothing backing the sovereign currencies to restrain government spending (like gold), and the politicians in each country have no personal accountability because they will be out of office when the bill comes due, the system incentivizes endless debt to appease the voters, which inevitably puts the entire system at risk.
3. Too much of the world financial system is priced in, or pegged to, one country's currency: the US dollar.
4. MOST IMPORTANTLY (and the solution to all of this): there is no universal unit of account to act as the unchanging measurement for all currencies to fluctuate against and the master check-and-balance to keep excesses from forming in the first place.
These flaws combine to create massive and unsustainable imbalances in wealth, debt, and trade, which forces central bankers to continually reflate asset bubbles because a sizable and sustained drop in asset values will put the entire worldwide financial system at risk due to the interconnected nature of its centralized derivatives structure.
The solution is a robust, worldwide, digital system based on competing currencies, decentralized credit, and a universal unit of account. Our destiny is a globally agreed upon system that is uncompromising in its balance and fairness. It's just a matter of time before each country realizes it.
The Universal Unit of Account
The easiest way to understand a universal unit of account is to imagine all the products and services in every country of the world priced in one currency. To avoid using a gov't currency, let's use silver, which is roughly $16/ounce, so 1 US dollar is .06 ounces of silver. In this system, when you fill up your gas tank, instead of paying $3/gallon, the sign would say .18 ounces of silver/gallon. In France, instead of seeing 1.54 Euros/liter the sign would say .10 ounces of silver/liter. The silver, of course, could be represented by a paper substitute, but everything would be priced with the same universal standard. The implications of this are profound.
Using one worldwide standard to measure the purchasing power of currencies IS the restraint that limits the issuance of excessive debt because the value of all currencies would fluctuate against an unchanging standard, so if one country (in our silver standard example) ran up crazy amounts of debt, other countries could reject their currency and require their trade imbalances be settled in silver, so a check-and-balance is thrust upon the politicians of the world to keep their currency stable.
However, there is no need to use silver, or gold, or anything tangible as the universal unit of account, especially since commodity prices fluctuate to supply and demand, so you'd have to use a fixed exchange rate, which creates an unnatural force upon the market price. Another drawback of using a tangible asset to back currencies is how it restricts borrowing from our future labor to the amount of available gold or silver on hand, unless we repeated the same mistake of devolving into fractional reserve lending, which ultimately leads to breaking the chain of the asset backed currency completely because the demand for credit will force politicians and bankers to break the restraint, so returning to some form of a gold or silver standard (or any asset backed currency) would result in the same outcome. Fortunately, there's no need for a tangible asset at all. What we need is an unchanging, universal standard to measure the purchasing power of currencies in the same way that inches and centimeters measure length. This is what a fixed exchange rate with a tangible asset is trying to accomplish.
The way to implement a universal unit of account is to freeze the present value of the US dollar and use that value as the arbitrary, culturally chosen standard to convert the pricing of products and services across the world at the prevailing exchange rates into this new standard called Universal Dollars. From that moment on, all currencies would fluctuate against that fixed value of 1 US Dollar at the time of conversion, so over time even the US dollar would lose value against the fixed standard of its old self (if we continued our fiscal and monetary profligacy), but so would the Euro (and at the same time! - unlike now where they can't both go down together against each other).
So instead of using a neutral asset like gold or silver at a fixed exchange rate to settle international trade, other countries would have the freedom of rejecting a profligate nation's currency by making them go onto the market to buy whatever asset they want (like oil or steel or whatever...) and since a weakening currency will buy less and less of that asset, it forces restraint on politicians to keep their currency stable. But the benefits of not using a tangible asset as the universal standard go WAY beyond enforced stability of currencies and flexibility in trade settlement. The real benefit of a Universal Dollar standard is its capacity for truly decentralized credit and infinite currencies - something none of the other proposed monetary systems can offer.
Decentralized Credit
If we use a tangible asset as the universal unit of account (like gold, or silver, or oil, or Bitcoin, or SDRs, or sovereign currencies, or Libra...), we will remain stuck in the box of centralized credit, and limited by our capacity to acquire that asset for loans. For example, if we used gold, then the only source of credit would be someone who has gold to loan. This is how our banking system got created in the first place, and we know how that story ends: first, fractional reserve lending, then breaking the chain into fiat, then quadrillions of derivatives and interconnected counter party risk putting the whole system at risk.
One of the insights that Modern Monetary Theory gets correct is we don't have to borrow first in order to spend. Their mistake, however, is granting that power to the government, which has no accountability to restrain the spending, but there's no reason a person or a corporation couldn't spend their own currency into existence to whatever extent the market would accept because it would be backed by their product, service, or labor.
I already explained this in great detail in my Universal Dollar article. The point is: in a gold backed system, people and corporations can't spend gold into existence (which is both the point and the curse of gold), so a tangible asset backed system requires centralized banks to create loans because they're the ones who have the asset, and if you don't allow fractional reserve lending, the available credit is limited by the amount of gold on hand to loan (the same is true for all the other asset backed options - you need to possess it to issue credit). A system like that would eventually devolve into the system we have now. The only way to have truly decentralized credit is to implement a universal unit of account that isn't based on a tangible asset, which allows anyone the ability to issue their own credit because a free market of competing currencies will enforce discipline since the created currencies could be rejected at will and there would be thousands to choose from.
Competing Currencies
If we truly want to create a robust system immune from financial crises, we need to allow competing currencies within each country, and the freedom to choose or reject them. Until now, this was impractical because carrying around multiple physical currencies with different values was too cumbersome, but in the digital age there's no limit to the amount of currencies with various values that a digital wallet could handle. It does, however, require a universal unit of account for the currencies to fluctuate against.
Using Universal Dollars would allow anyone in the world to issue this worldwide currency in their own name, which they would be legally obligated to redeem with their product, service, or labor. Companies would arise to back the currencies of people on the fringe of acceptance, and everyone else would be restrained by their credit score, which would reflect the amount of currency they've already created and their income to redeem it, or in the case of a large corporation, the demand for their products and the choices the company makes to keep them viable in the future.
All of this is only possible if we utilize a universal unit of account that is not a tangible asset and only acts as the singular standard of purchasing power everything is priced in.
Let's compare and contrast several alternative monetary system ideas to illustrate why Universal Dollars is not only more robust and elegant, but it solves all the flaws of these other systems.
Gold/Silver/Commodity Backed
We already lived this story. The restraint on credit, which is the feature of a gold-backed system is also a bug, and it would cause this system to be broken once again, so we'd end up exactly where we are now. This system requires centralized institutions to create loans, so people would have to borrow first in order to spend, and unless we allowed fractional reserve lending (which would happen eventually anyway) the credit would be limited by the available gold on hand. Not to mention that commodity prices fluctuate with supply and demand, and the universal unit of account needs to be unchanging in the way a meter is always a meter. This system would fail.
Libra
Libra is definitely an improvement upon our current system of single gov't currencies since it's backed by a basket of them, which would help mitigate, but not prevent, too much change in Libra's value, but using sovereign currencies solves nothing about the lack of accountability in the issuance of government debt and it prevents decentralized credit because in order to issue it you would need the sovereign currencies or the Libra on hand to loan. Libra is no different than a new worldwide bank with a payment system via its messenger that 2 billion people already have access to, so it certainly helps bring "unbanked" people online, and makes money easier to send internationally, but it solves nothing about the flaws of our financial system.
If Libra was used as the universal unit of account, and all the world's products and services were priced in it, that would be a game changer, but it would still have all the flaws of using a tangible asset, so the system would remain anchored to centralized banks who have the sovereign currencies or the Libra on hand to issue loans. It would not decentralize credit at all, and it wouldn't do anything to limit the eventual destruction of the fiat currencies that back it. Libra does nothing but steal market share from the banking industry. Fail.
(I'm not saying we shouldn't allow it to happen because it could be the bridge to Universal Dollars in the future.)
*On a side note, all these concerns about data privacy - whether in Facebook and Google ad targeting, or with Libra - have a solution. All they have to do is change the coding under the hood, so all of our activity and purchasing patterns are tracked (for purposes of ad targeting), but it's done anonymously. Meaning, disconnect the identity of the individual from the data by accumulating their patterns to an unidentified number, then target all the relevant ads you want. We don't have to destroy their business model while protecting the individual from having their data fall into the hands of someone who can cause them harm. There just needs to be anonymous IDs and the only way to open it would be if that ID was acquiring materials to do harm to society. If Facebook and Google don't do this, someone else will. (And if you make a billion dollars from this idea, I can be reached through the contact form.) :)
Bitcoin (or any permissionless distributed ledger)
Bitcoin is a fascinating study of human behavior. I understand the ideal of having no one in charge who can impose their heavy hand upon you, but the disadvantages of no central authority are even worse. It lacks all security, it's not insurable, it's a breeding ground for fraud, it can't handle the transaction load, it's a waste of electricity, it's way too volatile, and it's deflationary, which would never work as a currency. If we made Bitcoin the universal unit of account by converting all the prices in the world into Bitcoin, it would have the same problem as gold - only far worse. Bitcoin would require centralized banks to issue loans since no one can issue Bitcoins into existence on their own, and once the final number of Bitcoins were mined, the amount of worldwide credit would be frozen despite any growth in population.
I don't understand the argument that it's a store of value. If it can't ever be used as a currency due to all its flaws, then it has no utility at all, so what exactly is the value being stored? Why would the nations of this world use Bitcoin when they can create their own digital currencies? Bitcoin only has value because people believe it has value. If you park US Dollars or Euros in Bitcoin to avoid a depreciation of the currency, then what? One day you still have to transfer your Bitcoins back into a currency that can actually be used in transactions, which is another way of saying you hope to one day sell your Bitcoins to someone in the future at a better price. This isn't a serious proposal for a monetary system, it's a call option on price appreciation.
Unless one of the other permissionless distributed ledgers can solve the problem of preventing the smartest hackers in the world from stealing the private key of grandma's wallet and taking ALL of her life savings, then none of them will ever work as the basis for a complete monetary system. In order for a digital currency to be viable you have to think about the reality of digitizing EVERYTHING you own. Are you going to do that without insurance? And who's going to insure a currency like Bitcoin when the reality is once grandma loses her life savings to a hacker, it's GONE, POOF! Forever. Fail.
(This is not a comment about the price path of Bitcoin - just its functionality as money.)
Digital Sovereign Currencies
Allowing central banks, and the governments of this world, to create blockchain versions of our current system using the US dollar, the Euro, the Yen...is the worst possible system that could happen by orders of magnitude. This would take our deeply flawed, corrupt system, and make it WAY worse. Imagine if the central banks created a permissioned ledger so they could control the monetary system and force everyone to digitize all their assets onto it. Sure, they'd be able to control fraud and save grandma from losing her savings to a hacker, but they would also be able to impose negative interest rates on everyone and there's nothing you could do about it.
There would be no way to know how much digital currency they created. If you wanted to design a monetary system to enslave humanity this is how you would do it. Any of the other alternatives would be exponentially better than this. Mark Zuckerberg in charge of the entire monetary system would be better than this. In our current system, if the banks charged us negative interest on our savings, at least we can withdraw our money and keep it under the mattress without the fee. In a world of digital sovereign currencies, our savings would fund banks and governments with increasing negative interest. This would truly be Orwellian in nature. Double fail.
The Universal Dollar
This is the only system that solves the flaws of centralized credit and a lack of personal accountability tied to its issuance. It should start as a hybrid system of sovereign currencies and our largest multinational corporations as a permissioned ledger run by the G-20 and the selected corporations and based on a universal unit of account to keep them in check. Over time, we could invite more of our largest multinational corporations to create their own currencies by spending them into existence as they create their products and services, which would then be redeemable for their currency and therefore backed by real value. Eventually, everyone would be able to issue Universal Dollars in their own name to whatever extent the market would allow (based on their credit score, and demand, and it could be insurable) because its issuance isn't restricted by a tangible asset backing the currency. (Compare a system like Universal Dollars where the currency is backed by real productivity against Bitcoin where the currency is backed by what? A consensus network funded by sovereign currencies? How is that anchored to economic growth? This is not value.)
The digital wallets of the future could be user-customized to prevent money from being extracted over a certain amount without multi-step authentication, and because it's a permissioned ledger the transactions can be insurable and reversed to prevent fraud, so we can all put everything we own onto the digital system without concern over it being stolen and gone forever. Everything could be trackable to an anonymous ID. Yes, being a permissioned ledger means there's an authority (the hybrid combination of multinational corporations and G-20 who run the ledger), but the advantages of fraud protection and the rule of law is the only way to digitize everything safely. A distributed permissionless ledger is just not viable as the basis of a monetary system.
For a more in-depth look at this, read my article The Universal Dollar.
The Choice
This is a clarion call for the leaders of this world. There are two divergent future paths ahead of us. We can bury our heads in the sand and pretend everything will be okay, or we can be proactive and prepare the future monetary system now - before our current one implodes. Devaluing the debts of the world into Universal Dollars will deliver us into an unbounded age of prosperity fueled by decentralized credit and worldwide competing currencies anchored to our ever evolving productivity, which will make financial crises obsolete. Let's hope it doesn't take a worldwide crisis to force the need for change.
If you are in a position of power, you stepped into a story already in progress with problems caused by the people who came before you, so your choices have been constrained by the rippling effects of history and the institution you serve, but you still have a choice. You can do what's in your personal self-interest and serve the institution you work for to preserve the status quo, or you can look to the bigger picture and serve the greater good of humanity.
The choice is yours.
