Mar 10, 2022 • 5M

Why Commodity-Backed Money Fails

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A daily letter about bitcoin & the future of money
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Good Morning Everyone,

Yesterday I wrote about the thesis from Credit Suisse’s Zoltan Pozsar, who is one of the most listened to and respected macro voices around. His thesis is too complex to rehash in detail again here but essentially he postulated that we could be on the cusp of a transition back to a commodity-backed monetary system essentially backstopped by China. This would be the transition of the world order away from a US dominant - US Dollar backed system - and toward a system where the PBoC become the new cantillionaire [Someone close to the ‘money printer’ that benefits from the Cantillon Effect] on the block.

His thesis is essential reading and while i’m open to the possibility of it playing out, I wanted to offer a little more nuance as to my thinking and why i believe the likelihood of us going back in time and adopting a metal based or broader commodity based monetary system is 1) Unlikely 2) would be sub-optimal and would fundamentally be a huge step backwards and ultimately fail; 3) Would mean a reversal in the trend away from the digitisation and adoption of technology that we have been on since the inception of the semi-conductor. Totally possible, but i would avoid temptation to fade this trend, until clear trend reversal were confirmed.

It is critical to first differentiate that there are conflicting wants and needs in respect to this. There are the wants and needs of you and I and the “middle class”, and there are the wants and needs of the political pseudo-elites and Geo-Powers. These wants and needs are, in many ways, in opposition to one another and fundamentally out of alignment at present.

The conflict here is that one class of people are forced to create value, and the other class of people benefit by confiscating that value (rent-seeking), which disincentivizes the value creation in the first place. As a matter of priority this fundamental lack of alignment should be addressed if we have any hope of course correcting and setting sail in a more mutually beneficial win/win direction.

The critical factors driving my view against the idea of a commodity-backed money are 1) trust is required but never possible 2) Supply not verifiably finite + scarcity drives value (ie: we don’t know what the supply cap is) 3) encourages centralization and has already been proven to fail (incentivising cantillion effect) 4) Elasticity - Increased price brings on more supply. This essentially means that supply increases indefinitely. Something with a perceivably infinite increasing supply is a poor monetary good (ex: Fiat).

It really is in many ways fundamentally a conversation about monetary properties and the hardness of money. We have seen gold fail as a money through time, be it in the Roman empire or the American empire, but there is an argument to be made that while it failed in isolated instances and periods across time, it has continued to be the default over the fullness of time (so far) - thus while societies based upon it have failed in the short term, the actual metal has persisted to be a primary choice for humans over the long term. This would likely remain true, if it weren’t for the innovation of the semiconductor, and the further innovation of energy-backed true digital scarcity. I believe that where gold has failed, bitcoin will succeed.

Obviously I have a very clear bias, however my bias is based upon which system actually has the capability to operate as the superior monetary good, not which one I “want” to be a money.

Ultimately while Zoltan’s thesis is conceivably possible, It is my believe that as more nation-state level actors begin to understand what this technology has actually unlocked and how superior it really is, it will be impossible to trust what one geo-power tells another they have in respect to a basket of commodities, especially when you factor in the opaque supply of said commodities; and when you factor in the option of completely transparent and verifiable digital scarcity the notion of this just seems absurd.

To go back to a commodity backed monetary system would be akin to getting rid of combustion engines and aircrafts and going back to horse and cart. It’s not that it’s “never” going to happen, but i certainly wouldn’t be betting on it.

The only way I could see a system like this being implemented is through force, and even if it were to be implemented the silver lining is that the bitcoin genie cannot be put back in the lamp. The mind virus of bitcoin and superior properties of the bitcoin network are simply too powerful, and as more and more people come to understand how much this empowers them and they begin to take control of this power, even if China wanted to install a global Yuan-CBDC backed by a basket of rocks and shiny metals, there is no doubt in my mind, that the people will choose bitcoin.

Bitcoin is freedom money. No one in their right mind would choose to adopt a centralized shitcoin issued by a tyrannical top-down dictatorship over the only truly verifiably scarce and censorship-resistant asset that gives the power back to the individual.

The design of bitcoin is just so far superior.

History has already shown us on repeat how this story goes by letting a state actor control the money. For the first time in our civilization’s history we have a new, novel and revolutionary alternative that cannot be stopped.

It’s simply a matter of time. Sooner or later everyone capitulates.

The future of money is decentralized.

Hope you have a great day. I’ll talk to you tomorrow.


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