The business of money is the business to which I refer. The business of gathering and collecting money, as opposed to the business of producing and selling in the market to generate money.
A puerile aspect to the money business pervades back to antiquity. Money creating and gathering resembles the treasure hunt, the lottery, the gamble. It offers the thrill, the euphoria experienced when nothing gives way to everything. It is the big-bang of business enterprise.
The business of money is also a meaningless business. To dedicate your life’s work searching and gathering money means contributing nothing to human progress. The goal in searching and gathering money is to be the first to inflate the money supply, and, thus, benefit from being first in line to spend.
You might rub your chin, shift your eyes to the heavens, and question introspectively: So, what is this mysterious business to which Mauzy refers? What is this business and who are the participants?
Banks, one could argue, are money-business participants. To be sure, banks gather and collect money. Banks gather money through deposits, though deposits are liabilities. Banks charge interest, which enables them to gather money. Banks create money through fractional-reserve lending. Banks are endowed to write loans that exceed customers’ deposits and their required reserves on deposit with the Federal Reserve. Banks can inflate the money supply. When animal spirits pervade and lending turns robust, banks are net money creators. A surge in loan underwriting will increase the money supply.
But that money created through lending eventually goes away. Loans are continuously extended, and they are also continuously repaid. A surge in repayments or a drop in loan demand will shrink the money supply. We see the later dynamic at work during recessions. Banks curtail lending because of either rising risk aversion or a drop in borrower demand (usually both). During severe recessions, demand for (and a hoarding of) money surges. A credit deflation coupled with a money-demand increase can lead to a crippling price collapse in consumer and producer prices (which is why the Federal Reserve intervenes by pumping money into the banking system and the economy during severe recessions).
With all that said, I view banks as capital allocators first. They allocate money to finance either current or the capital and labor employed for those seeking profit. Banks maintain a finger on the pulse of the economy. Through their lending, they can derive market-accommodating interest rates that balance the lenders’ demand for a return on money for lending and the rate borrowers are willing to pay. Interest rates, more than anything, are a capital-allocating tool. Interest rates balance the demand for current consumption (hold money) and future consumption (investment). (BTW, the concept of interest pre-dates money, and even barter.)
Let’s stick with money creating and gathering more broadly and more legitimately and more popularly speaking. We’ll examine the historical and the modern of money: gold, cryptocurrencies, and government money.
You can argue that gold is no longer money, whose principal function is that of an exchange media. Money’s lesser functions include serving as a unit of account and as a store of value. These functions aren’t always prevalent. There are interregnums, outliers, when money loses these functions. Brazil’s money lost its unit-of-account function in the early 1990s during an inflation rage. As a store of value, the fiat money of modernity serves that function only for short bursts of time. Fiat monies (the U.S. dollar and every other government-issued money) always depreciates through time.
Through history, gold has served as money. Before the U.S. government disengaged with gold, thirty-five U.S. dollars would buy one ounce of gold. The U.S. dollar was the currency. The U.S. dollar was the exchange media, but it was representative of the money – gold. The dollar gained its currency from gold.
No nation-state adheres to the gold standard today. Gold’s principal function is as a store of value. Gold is a hedge against uncertainty and inflation – the continual depreciating of fiat monies. Perhaps we should liken gold to insurance or “ghost” money. Gold serves the function well. Gold retains a “moniness” that we fail to necessarily express, but that we acknowledge.
Striking a gold deposit is Perdition in disguise. It is the scratch to the itch. It is instant wealth. All that is true through history. And when we vet history, we also find the business of gold has been a very bad business.
No country’s citizens were more obsessed with gold than Spain’s. And a fat lot of good it did them. Spain came to possess most of the gold in the world, It, nevertheless, remained a poor country. Not only was the obsession bad for Spain, it was bad for those with whom the Spanish thought possessed gold. The Spanish left destitution, misery, poverty, and death throughout South American in their singular pursuit of gold.
After Francisco Pizarro conquered Peru, in 1532, gold from the Inca Empire began to pour into Spain. Gold mania overtook the country. Spaniards of all classes were stupefied by fantasies of the instant riches found in the New World. In February 1541, Pizarro’s brother, Gonzalo, departed Quito, Ecuador with 340 resplendently armored compatriots and 4,000 natives to explore the country in search of gold.
Hell was the buzzword from day one. The expedition was hit with torrential rains, which rotted the food and rusted the armor, soon after departure. Desperation backed by tyranny soon set in. Pizarro interrogated the natives he met along the trek. Those he thought were withholding information, or those clueless to the provenance of the invaders, would be tortured and killed. Word of the Spaniards murderous ways spread among the natives. They learned to fabricate stories to save their hides. Pizarro was sent down dead end after dead end in search of non-existent gold.
It all ended in futility eighteen months later. Pizzaro returned to Quito with a hundred emaciated, diseased, filthy, sore-covered remnants of men. The vast sums invested in the expedition yielded no gold, much less the coveted El Dorado of lure.
What does one do when one is obstinate and delusional? One doubles-down on the effort. Pizzaro’s disaster failed to temper the lure of the fantasy. The Spanish continued to launch expedition after expedition in search of South American gold.
Yes, South American gold did find its way back to Spain, but the influx of gold only fueled the pace of Spain’s demise. The gold was invested in either more gold-seeking expeditions or on the purchase of luxuries for the fortune few. Little of the gold was invested in productive, sustainable activities – agriculture, commerce, trade. Some Spanish towns were depopulated of their men, as they departed to seek their own gold fortunes. Farms fell to ruin, commerce shrank, the military was depleted. By the end of the seventeenth century, Spain had lost half its population.
Had the Spanish focused on the business of developing markets, they would have prospered. Instead of continually trundling ahead in the fantastical quest for gold, they should have stopped and smelled the roses – literally. Ecuador is a major flower exporter. Yes, a flower will fail to survive a three-month journey home, but its seeds and bulbs will. Cocoa and coffee were for the taking, as well as potatoes, rice, tapioca, walnuts, and sugarcane. A little more curiosity would have focused the mind on the profit potential of eucalyptus, mangrove, pine, cedar, and balsa.
History offers an illuminating juxtaposition. While Spain pursued the business of money, the Dutch pursued the business of commerce and trade. The fortunes of the Dutch far exceeded the fortunes of the Spanish. Indeed, the stark contrast was noted at the time by a fellow named Guillaume-Thomas-Francois, abbe Raynal, in a 1770 essay titled “A Philosophical and Political History of the Settlements and Trade of the Europeans in the East and West Indies”:
The Spaniards though possessed of all the gold in the world remained or became poor; the Dutch presently acquired riches, without either lands or mines. Holland is a nation at the service of all the rest, but who sells her services at a high price. As soon as she had taken refuge in the midst of the sea, with industry and freedom, which are her tutelary gods, she perceived that she had not sufficient quantity of land to support the sixth part of her inhabitants. She then chose the whole world for her domain, and resolved to enjoy it by her navigation and commerce. She made all lands contribute to her subsistence, and all nations supply her with the conveniences of life.
When we trek closer to modernity, we find similar follies in the California gold rush and Nevada silver rush of the 1800s. No lasting wealth was forthcoming. Like the Spanish of Pizzaro’s time and the inveterate gambler of today, any fortune was recycled in pursuit of more instant money, until it was all lost. The California gold miners of the 1800s failed to create durable wealth with their business practices, but the businesses that supplied them with products demanded by them and other consumers prospered, and prospered for more than a few glorious years. Levi Strauss is a notable gold-rush hsurvivor.
The business of searching for and gathering gold remains a fool’s errand to this day. Gold-mining stocks offer some of the worst long-term returns found. Gaze at a stock chart of the gold miners that have survived for a couple decades: Barrick Gold, Newmont Corp, Agnecio Eagle Mines, Kinross Gold. You will see the equivalent of an EKG reading. You’ll see intermittent spikes up and spikes down, but it’s basically a flat line through time. Where you will end is likely where you started. You might gather a few dividends over time, but the payouts are a pittance. The yields are on par with a U.S. Treasury note of today. Yes, the opportunity exists to sell at the peak of one of the spikes, but you won’t.
My experience with gold bugs has been off-putting more often than not. I have noticed that many exhibit hoarding mentality – an ugly and repulsive trait, and one that further raises the probability of ending in poverty.
The Jewish Bible warns explicitly about the downside of hoarding: Proverbs 11:24 says, “One person gives freely, yet gains even more; another withholds unduly, but comes to poverty.” A couple verses later, Proverbs 11:26, King Solomon warns, “People curse those who hoard their grain, but they bless the one who sells in time of need.” The Christian Bible gives us Matthew 25 and the parable of the talents. Those familiar with the parable know it ends poorly for the gold hoarder.
If you are gold bug of a more materialistic bent, Aesop offers the fable of The Miser:
A miser, to make sure of his property, sold all that he had and converted it into a great lump of gold. He then hid the gold in a hole in the ground and went continually to visit and inspect it. This roused the curiosity of one of his workmen, who, suspecting that there was a treasure, when his master's back was turned, went to the spot, and stole it away.
When the miser returned and found the place empty, he wept and tore his hair. A neighbor who saw him in this extravagant grief, and learned the cause of it, said, "Fret yourself no longer, but take a stone and put it in the same place. Think that it is your lump of gold. As you never meant to use it, the one will do you as much good as the other."
Moral: The worth of money is not in its possession, but in its use. Every gold-bug I have encountered believes the opposite.
Now, for modernity: cryptocurrency. Can you see its parallels with gold? You have the limited supply. Nature limits gold, imagination limits cryptocurrency. Unlike fiat money, which can be created at little cost (a printing press, paper, ink in physical form; a bit of electricity and computer storage in digital form), gold and cryptocurrency require an investment of capital and energy. (A bitcoin mining company called TeraWulf will buy 15,000 computers designed to “mine” bitcoin.) In the case of cryptocurrency, a helluva lot of energy: Warehouses of Bitcoin mining rigs run 24 hours a day. They consume more electricity than the whole of Argentina.
You want your money to exhibit stability in daily pricing. I’ll concede ignorance. I’m unsure how you price a good or service in a money that can be worth $50,000 one day and $40,000 the next (as the case for Bitcoin). Just transferring a cryptocurrency to seller from buyer can be a costly proposition. Mark Cuban, who admits holding 60% of his cryptocurrency portfolio in Bitcoin, concedes Bitcoin is too slow and too cumbersome to work as currency. He sees cryptocurrencies value as a store of value, which is a function gold serves, as do many other assets: a 1970 Plymouth Barracuda, a Rembrandt, an Elvis Presley jumpsuit, a Chateau Lafite-Rothschild. Unlike these other stores of value, gold and cryptocurrency can be called into duty as a medium of exchange. Cryptocurrency serves the purpose dubiously, given its price volatility.
Gold bugs assert they hold the upper hand in the currency wars. They frequently chat up their metal with talk of “intrinsic” value – something that imbues gold, but not cryptocurrency and fiat money, with value. Gold bugs fail to see the malleability embedded in “intrinsic value.” They fail to see the word |intrinsic” resembles the words “justice,” “fair,” or “value.” The meaning is bespoken to the mind of the beholder.
Warren Buffett is famous for invoking intrinsic value in relationship to investments. Based on his projections of future earnings and cash flow and the proper discounting of future earnings and cash flow, intrinsic value can be calculated. Intrinsic value can be then be compared to the market share price. If the shares are priced below intrinsic value, a potential buy is on offer. If above intrinsic value, a potential sell. You see the issue? Projections are estimates. They are not concrete numbers. Two people vetting the prospects of the same company will arrive at different calculations of intrinsic value.
Gold bugs, in contrast, assert gold’s physical presence naturally imbues it with intrinsic value. Gold is durable, divisible, fungible, and scarce. It’s also tactile. It can serve double duty in commercial applications. Gold is an excellent heat and electricity conductor. It is inert (even edible) and useful as dental fillings.
Despite its commercial applications, gold’s value is neither intrinsic nor objective. Gold was not dropped from the heavens with a pre-ordained mission. Value, all value, is subjective. If someone beholds value, the object has value. Someone’s willingness to pay is proof enough. Gold’s demand in commercial applications is coincidental.
Gold has value, cryptocurrency has value, the U.S. dollar has value. The willingness to pay and own is proof enough. So, to assert Bitcoin’s or the U.S. dollar’s intrinsic value is zero, and then to assert their eventual value is zero, is meaningless and wrong. They could one day be worth zero, but not because of the wispy notion of intrinsic value. They will be worth zero when no one is willing to pay a price to own them. It’s all subjective.
Buffett is a cryptocurrency detractor because cryptocurrencies are unable to generate cash flow. Cryptocurrencies are unable to replicate themselves and produce cash flow like a productive asset (an investment). But that’s true of any money. Buffett is comparing orangutans (productive assets) to oranges (money). Buffett is right on the precariousness of cryptocurrencies. Like everything, their value is subjective, and that value is fragile and tenuous. Gold and the U.S. dollar have history on their side. They have an established track record (and the U.S. dollar has the force of legislation). History instills certainty among its users.
Cryptocurrencies still have the feel of Hans Christian Andersen’s naked emperor parading through the streets before his subjects. It’s new and faddish. It’s hip. It’s not really understood. With cryptocurrencies, their supporters pretend something is there because they believe the other person pretends likewise. (And in the case of cryptocurrencies, the mass of believing, paying people will grow, and thus the price they are willing to pay for a cryptocurrency will rise.)
What’s new is frequently what's ephemeral. What’s new blazes the path forward, like a pioneer, but like most pioneers, the new are frequently slaughtered performing their sacrificial function. (See all the slaughtered internet pioneers from the 1990s.) Subjective value given to what’s new is a fickle mistress.
Cryptocurrencies’ volatility is proof enough how fickle subjective value can be. I agree with Buffett that owning something with the sole hope of selling it at a higher price in the future is speculation. That is how owners of cryptocurrencies perceive their asset. They view it not as exchange media, but as an appreciating asset, much like any collectible, except collectibles have a physical presence. Cryptocurrencies are just electronic 1s and 0s residing in computer memory. Their ethereal nature makes them highly susceptible to changes in subjective value. To be sure, they could reach the status of an exchange media, but that prospect remains a speculation.
Now, for money in the present. Money everywhere and all the time today is the business of central banks worldwide. They produce money that is the media of exchange in every country. They are the elephants among the ants. Their money is the money that everyone uses, and because we all pay taxes, and because central banks are government functionaries, we have no choice but to use central-bank fiat money. Governments are the only true monopolists. You could say that central bank fiat money is monopoly money.
The business of government-issued fiat money is a good business... for government and those it favors. It empowers government to determine winners and losers, to bestow favors, to expropriate wealth cryptically, as opposed to explicitly through taxes and debt. Government money today is no longer tied to gold; it’s tied to debt. Because money is tied to debt, central banks are able to manipulate interest rates to favor the government by lowering the cost of government’s debt burden. The central banks have always been a key functionary of colonialism and belligerence. War is expatiated by central banks, as evinced in Homer & Sylla’s informative exposition A History of Interest Rates (and a history of central banking).
Outside of the privileged few, the central-bank driven business of money is bad for everyone else. Inflation robs you of purchasing power. The fact central banks extend their tentacles by manipulating interest rates doubles the trouble. You are unable to offset the purchasing-power loss by investing in low-risk time-deposit investments. You are forced to reach on the risk curve to realize a return to compensate for the lost purchasing power. If risk-reaching isn’t your bailiwick, you either pay someone to reach for you, you educate yourself to reach, or you blindly reach on you own. Whatever the course, you are sure to incur the costs of time, expense, risk, and possible loss in your reaching.
The business of central-bank money has elevated a zero-sum activity – currency trading – to a Godzilla-sized game of speculation. And a massive game it is. The foreign exchange market is by far the largest market in the world measured by trading volume. For many, it’s entertainment sans the free drinks served by the bustier, fishnet attired pre-law-school waitress at your favorite Las Vegas casino. For others, it’s an unwanted cost. Floating money exchange rates force international companies to incur currency hedging expense. All the wheel spinning associated with currency exchange produces nothing of material improvement to the world at large. What's more, frictional costs reduce the size of the pie, as opposed to expanding it in ordinary free-market transactions.
Look away from the business of money, if your business is the business of building lasting wealth. Rarely is the immediate event the one that endures over time. There's a lot of truth embedded in tortoise and hare story.