Just what is money?

  • A new standard for money
  • NOT for ‘lazy’ investors
  • In the mailbag

It’s official, Bitcoin isn’t money.

It’s true, a Florida judge says so.

But just as importantly, the judge said something else: Gold is money.

Actually, it’s not quite that clear cut.

Here’s the report from Bloomberg:

Miami-Dade Circuit Judge Teresa Mary Pooler cleared Michell Espinoza in what prosecutors called the first state money-laundering prosecution involving the virtual currency.

“Bitcoin may have some attributes in common with what we commonly refer to as money, but differ in many important aspects,” Pooler said in a ruling made public Monday. “They are certainly not tangible wealth and cannot be hidden under a mattress like cash and gold bars.”

We don’t quite know what to make of the judge’s ruling.

Of course, we wholeheartedly agree with the judge on the issue of gold. Gold is money. And it most certainly is tangible.

We suppose the judge is also right on the question of cash being tangible. And, like gold, you can hide cash under a mattress.

Naturally, we would also say that the similarity between cash and gold ends right about there.

While it’s true that you can’t hide a Bitcoin under your mattress (unless that’s where you keep your computer, tablet, or smart phone), Bitcoin has other attributes that make it more ‘money-like’ than cash.

For instance, like gold, Bitcoins aren’t easily replicable. You have to ‘mine’ for them, and they are in limited supply.

But if Bitcoins aren’t money (in Florida, at least), what would that mean for central bank plans to abolish cash and replace it with purely electronic money?

That’s easy; we’re sure governments would ensure their electronic money was classified as money. Not only that, they would have to go one step further.

In Florida, according to Judge Pooler, Bitcoin is classified as ‘property’ rather than money. Hence, Mr Espinoza couldn’t be guilty of money-laundering since he wasn’t laundering money.

But in order for any government-controlled electronic money to be successful, the government must do to competing electronic money what it did to competing paper and gold money — make government electronic money the only form of legal tender.

That wouldn’t necessarily mean that it would be illegal to possess Bitcoins; it’s just that it would be almost impossible to use Bitcoins as money.

They would become (or remain) an asset or property, valued in dollars, euros, and pounds, rather than being a medium of exchange on their own merit.

The topic of the definition of money is something to watch closely in the months ahead. Not so long ago, the mainstream would have considered the idea of abolishing cash as the domain of the lunatic fringe.

But today, it’s a completely mainstream idea, with central banks seriously looking at viable alternatives to paper money. Not as most would have you believe, in order to put a stop to money laundering, but, rather, in order for the government and central bank to have complete control over the value of money.

And when that happens, it won’t be good news for savers. That’s why we continue to advocate for the ownership of what we believe to be the one and only true money — gold.

Now over to the markets…

Markets

Overnight, the Dow Jones Industrial Average fell 77.79 points, or 0.42%.

The S&P 500 index lost 6.55 points, or 0.3%.

In Europe, the Euro Stoxx 50 index gained 0.99 points, for a 0.03% rise. Meanwhile, the FTSE 100 index fell 0.3%, and Germany’s DAX index added 0.5%.

In Asian markets, Japan’s Nikkei 225 index is down 254.17 points, or 1.53%. China’s CSI 300 index is up 0.43%.

In Australia, the S&P/ASX 200 index is down 18.26 points, or 0.33%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$43.23 per barrel. Brent crude is US$44.93 per barrel.

Gold is US$1,318 (AU$1,753) per troy ounce. Silver is US$19.62 (AU$26.08) per troy ounce.

The Aussie dollar is worth 75.21 US cents.

A new standard for money

Our old pal Greg Canavan dropped us a line this morning, pointing your editor towards an article in today’s Australian Financial Review.

I’d like to be able to show you the contents of the email, but this is a family show, and the censors wouldn’t approve of the language!

Only kidding. There were only a couple of ‘blue’ words.

What was Greg’s beef with the article?

The easiest response is to just say that the whole darn thing got Greg’s back up.

But the opening paragraph of the article sums it up perfectly:

The aggressive bid for a bigger share of the country’s lucrative $90 billion grocery market by the German-owned retailer Aldi could keep a lid on inflation in the June quarter, clearing the way for a further interest rate cut, according to economists.

To paraphrase Greg, ‘Huh!?’

The article quotes AMP Capital chief economist, Shane Oliver.

Dr Oliver said it was possible to argue that the downward pressure on supermarket prices was “just bringing low global inflation to Australia”.

But, he noted, “the weakness in supermarket prices — and prices for household items more generally — was a key reason behind the Reserve Bank’s decision to cut interest rates in May.”

For the ‘PhD Standard’ that famed investment writer Jim Grant often writes about, we now appear to have a ‘Supermarket Standard’.

Australia’s central bank (the Reserve Bank of Australia) is now — apparently — setting the price of money based not only on the price of groceries, but, more clearly, on the surely positive impact of competition in Aussie retailing.

We won’t pretend to understand how the mainstream thinks. Trying to understand it would likely send our heads spinning.

To take the nonsense further, the AFR article concludes:

Economists argue that the Reserve Bank will be very concerned that a string of weak CPI figures could entrench a low inflationary mindset among consumers and workers.

This could weigh on retail sales, as consumers delay purchases in the hope of even lower prices in future. In addition, the expectation that inflation will remain extremely low could reduce future wage expectations, limiting the pay rises that workers demand. So far, longer-term inflation expectations have only dipped slightly.

As a result, some economists argue that the Reserve Bank is likely to respond to a weak June quarter CPI with a further interest rate cut, particularly given the absence of pressure on wages.

They argue that the only factor which would make the Reserve Bank hesitant to push rates lower would be signs that housing prices – particularly in Sydney and Melbourne – are again showing signs of exuberance.

Mainstream commentators and economists have themselves tied up in a terrible muddle when it comes to inflation.

In this instance, the argument appears to be that the RBA is worried about falling consumer prices, and wants them to go higher, but the RBA doesn’t necessarily want house prices to go higher.

Of course, the RBA doesn’t want house prices to fall either — we know what would happen if they did. It would be bad news for the Aussie banking sector.

We won’t get into the whole ‘inflation is good, deflation is bad’ argument. Our view on that is clear and on the record.

The more worrying aspect is that, based on the AFR article, commentators and economists are now likely to say that innovation and competition is bad news for the economy.

Instead of progress, so that the costs of both production and goods fall, they will see progress as a threat to economic growth.

Not that this way of thinking is entirely new. Governments have a history of preventing innovation and competition. However, it’s not usually under the excuse of being detrimental to economic growth.

Usually, it’s because a government has given one company the ‘gift’ of monopoly status in an industry. Or that the government wants to protect locally produced goods (e.g. car manufacturers) against potentially cheaper imports.

So, get ready for higher grocery prices. The supermarkets are competing, which is helping (supposedly) to push down prices, but the heroes at the RBA will soon put an end to that.

If dastardly competitive forces insist on making prices fall, the RBA will darn well cut rates again, as it attempts to force prices higher.

NOT for ‘lazy’ investors

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In the mailbag

Subscriber Tim responds to our comments on Tesla Motors Inc. [NASDAQ:TSLA]:

Re: Tesla Stock Price

I heard similar arguments about absurd stock valuation with eBay, Facebook, Apple and many others. In the chart below, at which point was Apple overvalued? It’s even risen significantly since Steve Jobs died.



chart image

Source: Yahoo!
Click to enlarge


The reason why autonomous cars will become a reality soon is because they are much safer and environmentally friendly. Currently, 1.2 million people die a year in vehicle accidents – all but a few caused by human error. Humans are good at a number of things, but driving is not one of them – especially in Perth. If you’re in an autonomous car, do something constructive such as work – driving is a complete waste of time which costs the world $Billions in lost constructive effort.

Tesla’s stock price is high because they are one of the few companies that are making and will make a significant difference to humanity. Their share price is based on the belief that they will make a difference to the future. The internal combustion engine has served humanity well for over a century, but the world no longer wants engines that pollute and run at less than 40% efficiency. They will soon go the way of the horse and buggy, black and white TV and the typewriter – into the history books.

Keep up the good work.

Hey, Tim makes a fine point. And who are we to comment on the Tesla share price.

When Sam Volkering and I launched Revolutionary Tech Investor in 2013, one of the stocks we considered was Tesla.

At the time, the share price was around US$90 per share. It had soared in the previous few months from less than US$30 per share.

After weighing up the odds and probabilities, we decided that the share price had risen too much, and too fast. We would wait for it to fall…and then recommend buying it.

The arrow on the chart below points to where we decided that Tesla was too expensive to buy:



chart image

Source: Bloomberg
Click to enlarge


Since then, the stock price is up around 140%. Ah well, you can’t win ‘em all.

Cheers,
Kris