On Bitcoin, Gold and Monetary Policy, Part 2

2) Misconception: Gold is a great alternative to the US dollar as well because it is not manipulated and is a hard asset. Gold prices are indeed not at the whim of the Federal Reserve, but can be influenced by non-stable factors as well -after all, isn't the gold supply determined by how much gold is mined? Buffett noted that all the gold in the world could fit inside a baseball infield (when melted down to pure gold, etc.). If one miner such as Barrick Gold finds a large deposit that would add 5%, 10% to the supply (exaggeration), is that addition to the money supply warranted?

This actually happened in the 16th century Spain, where gold from the New World led to inflation. Yes, gold - like any other currency - can lead to inflation. The point is this - the usefulness of gold as a currency is of stability, not because you can see/touch it.


3) Misconception: US dollar and most other currencies are fiat, not based off anything tangible and are therefore prone to manipulation, excessive printing by governments/politicians, and ultimately lead to  fiscal/monetary instability.

The history of government printing can be bleak to review. Liaquat Ahamed's "Lords of Finance" shows how excessive money printing leads to inflation, using the real life example of the Weimar Republic after WWI.

The problem with "fiat" money (money that has no direct asset backing) is not that it is fiat, but that it is money. Any currency depends on the confidence of those using it - in this case, this confidence is based on the (taxing) power of the United States Government. Indeed, the US dollar is an implicit bet on the country's stability and well-being going forward. So the question is, do you have more faith in a gold bar or the United States?

As for monetary stability, the US money supply is indeed being manipulated. Is that always a bad thing? Are markets always self-correcting? One only has to look to pre-Fed panics (1907, others) to recognize that panics are an inherent part of the world economy. The question, as always, is the trade-off between intervention now vs. costs later. Both have consequences.

A discussion of current monetary policy may never be complete and may be as political as academic, but using the fiat currency system critique as a sledgehammer is far from correct.
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The upside to this is that it continues to demonstrate that the market is far from efficient. More specifically, the level of ignorant vitriol directed at the Fed, the US dollar and economy means that the vanilla long equity trade remains viable. I hope to not be ensnared by my own ignorance, however, and will continually reevaluate the above.

From The Big Short/Tolstoy:

"The most difficult subjects can be explained to the slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of a doubt,what is laid before him." —Leo Tolstoy,1897 [ix]"