One of the more interesting recent developments in finance has been the creation of Bitcoin and other crypto-currencies. They are being touted as a revolution in how we think and use money; characterised as an internet of money to accompany the internet of information. It is certainly futuristic.
Alternately, there are many who want to go in the opposite direction — return to the past. This group argues we should go back to the gold standard that was dismantled by Richard Nixon in 1971, mainly in response to the soaring cost of the Vietnam War.
Returning to the gold standard is seen by this group as a way to solve the problem of soaring global debt levels, which are out of control. The global stock of debt is about $US200 trillion, the equivalent of 230 per cent of global GDP.
Both sides have a common enemy: what they call fiat money. This is money whose credibility and value is determined by government dictate (fiat). Allowing governments to dictate in this way, both sides argue, is the core of the problem.
To a significant extent, both sides are wrong. For one thing, private banks, not governments, create most money. As economist Nicholas Gruen has argued we would have far fewer problems if central banks were to create money instead.
Worse, in recent years the problem has been not so much government fiat as the lack of government fiat — or what is known in financial circles as 'deregulation'. For about three decades, the mantra to 'deregulate' the financial markets has been deafening — and successful. Governments progressively withdrew from the financial markets, allowing traders to make up new forms of money.
These were known as derivatives. In effect, they were 'derived' from traditional forms of money (which continued to be subject to government fiat or regulation). The global stock of derivatives, according to the Bank for International Settlements, is now over $US750 trillion. To give some idea of how that compares, the global value of cash is about $US31 trillion; the world's gold stocks are worth about $US8 trillion and the market capitalisation of the world's stock markets is about $US68 trillion.
It is a mess. So where is it headed? To get a sense of that, we first need to understand what money is. Since Henry VIII reduced the amount of gold and silver in the mid-16th century (known as The Great Debasement), money has been more