Nobody except economists think that hard about money. Admittedly, it’s the root of all evil (which is why it appeals to us black-hearted-rational-robot-like economists), but other then working hard to get it and using to buy food and beersies, most people don’t really think about money all that deeply.
The US Dollar as a Vehicle Currency
I was talking with a friend about money in the weekend, and how the $USD is used by all of the other countries in the world to fund their spending. So Australia will buy XXX of something from India, and pay for it in $USD, despite Australia using the Australian Dollar, and India using the Rupee. That’s what’s meant by a vehicle currency: a currency which other countries use for trading with. Of course, if the seller in India wants to buy their food and beersies for the week, they’ve got to convince someone in the world (normally a bank) to buy their $US in exchange for selling them Indian Rupees.
But where that leaves the US is that there is all this $USD money circulating in the world which is used by other countries for the different things those countries want to use $USD for. Its seen as a stable currency. Its seen as a currency that will always be there.
Take it! Take it! Printing Money
And what that means for the US is that it can.. Print money rather than pay money … and everyone around the world will take their USD and not try to convert it back into Euros, or Aust $, or Polish Zoloty (its their actual currency). When the US “prints money” its spends about 5cents “making 1USD”, which will by 1 USD worth of goods. The difference between the 5cents it takes to make 1$USD and the value of 1$USD (or the 95 cent difference) is called “coinage” and means that someone will give the US government 95 cents “for free” – at no interest rate.
The example is, I’m the US, I get my minions to spend 5 cents printing a physical 1 dollar bill, and then I give it to you if you buy me a beer. You’ve gone off to the pub and brought me, the US govt a beer for 1 dollar. But me, as the US government, has only paid 5 cents in … making you buy me a $1 beer.
All that’s good from the US’s point of view, up until the point that you want to take your $1US and return it to Australia. Currently, $1US might equals 63 Australian cents. So you’re going to turn up to a US bank and ask for 63 Australian cents. Which is now bad news for me – America – because I’ve got to find 63 Australian cents to give to you, for every $1US you return to me.
And that’s money.
Free Stuff as Long as No One Cashes it in
Its the ultimate in the US getting all the goods and services it wants an writing out “IOUs” which effectively the whole world has used since 1974 to trade between non-USA countries in. So Poland will send goods to Russia as long as Russia sends it a $USD figure, which is really and IOU from the US that it will pay anybody that hold’s the IOU that value of the $USD back in their natural currency.
Well, it turns out that the US has also been worried about how much “paper money” is circulating around the world and has been buying up bitcoin. This could actually be a big deal, because now the bitcoin is backed up by the gold in Fort Knox.
… so… the US is almost in a place where, if the USD “failed”, they have an alternative way of funding their country’s spending with the rest of the world: Bitcoin backed up gold.
.. this is actually…. a little bit of a big deal… and something to watch in the future. It means that the US MIGHT be getting themselves into a place where if all the countries in the world (or China, Russia and other ‘axis of evil’ countries) try to swap USD for some other country and “break the US bank” because it doesn’t hold enough of those other currencies to pay that transaction, there’s a gold-back BITCOIN alternative that the govt could use to pay for overseas goods and services.
I’m not saying the USD is going to default, and the government not honour the conversation of every USD its issued to the world since 1974, but if it did, the gold-back bitcoin is potentially one way the US might be able to continue to buy goods and services from other countries. As long as other countries will accept Bitcoin then… the historical paper money (which has never been backed gold) is… worthless.
If pushed, the US might be able to renege on honouring the conversion of USD back into other overseas currencies because all USD has never been backed by gold or any other fixed commodity. Bitcoin in the US, is now fixed against a fixed physical (gold) commodity.
The US has taken out “insurance” against someone (countries) doing something “evil” (from its perspective) on its currency, like trying to get billions or trillions of USD converted to Polish Zoloty in one single (or quick series) of transactions.
This might actually be a big deal.
