The Complexity of Legal Tender

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Measuring wealth with an ever-expanding ruler makes for a carnival illusion of safety, suspended in a vast, uneven web of complexity.

The longer society and culture remain detached from the nature of true wealth, the more fragile we become to ‘normal’ risk.  

Complexity is not always good or robust.

In a recent article, NY Times best selling author and Pentagon insider, James Rickards blasted the so-called myth that the developing world is waiting and preparing in the wings for the return of commodity backed currency. 

Indeed, over the last decade central banks of the developing world, represented by Brazil, Russia, India, and China (The BRIC nations) have been net buyers of precious metals as a way of shoring up reserves in a quiet response to the profligacy of what amounts to a western banking debt debacle

But reframing the issue of the US Dollar’s world reserve currency and it’s profligate, unstable, and dangerous course, Rickards asserts that in a world that has come of age under the ‘modern’ “Keynesiasm + Legal Tender Fiat system, a fiat currency is every central bankers dream come true. 

But in addition to it’s freedom from tether, Rickards goes on to illustrate how the expansive complexity this gives rise to cannot be easily unwound or quickly replaced.

The key to being a reserve currency isn’t payments, but investments. There needs to be a deep, liquid bond market denominated in the reserve currency. That way, when countries earn the target currency in trade, they have someplace to invest the surplus.

Right now, if you earn Yuan trading with China, all you can do with the money is leave it in a bank deposit or spend it in China. There is no large Yuan-denominated bond market to invest in.

In addition to a bond market, you need the “plumbing” of a bond market. This includes a network of primary dealers; hedging tools such as futures and options; financing tools such as repurchase agreements, derivatives, clearance, and settlement channels; and a good rule of law to settle disputes, secure creditors, and deal with bankruptcies.

Sounds well and good… 

Yet, what about that “good rule of law to settle disputes, secure creditors, and deal with bankruptcies”?

There is no more respected rule of law applied to the elite.  

The financial services industry exploded with the gradual, and then final untethering of the physical limitations imposed by commodity-backed money. 

The that the bulk of this investing is re-hypothecated over and over again to the point where the original collateral (and it’s true value) is no longer visible. Now only backed by the ‘belief’ that it is actually there. 

The real complexity always comes back to the truth of the underlying unit of measurement. The mechanisms that it gives rise simply feed the parasitic and unsustainable institutions that grow up around it.

Legal tender backed by nothing enables a system of finance that always eventually collapses under it’s own weight. 

A functioning system does not have to be complex. There can exist a currency or currency tickets or reserve notes that are actually backed by something valuable. A value that can be determined by a natural market place. 

Throughout history’s of the greatest amount of growth occurred during times where finance was limited. Banking existed to facilitate and service the needs of growth will real credit. Likewise, trading systems evolved to serve the needs of users and producers according to real world circumstances and needs of production to match consumption. 

Not this elusive amoral system that robs Peter to pay Paul and buys governments and laws until the point where everyone is a criminal and money is made from nothing. 

Deep pools of complexity are an illusion held by a broken mirror.



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