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YouTube is (Economically) Illiterate

In yet another hypnotic YouTube video, a channel with more than 350,000 subscribers parrots nonsense about the nature of money.



In the following paragraphs, I will dispel some of these popular myths by adding clarity and historical context for improved understanding. 

For starters, we will focus on the reported symbiosis between China and the United States.

In characterizing this international dynamic, the speaker commits a common accounting mistake: "We send money to China in exchange for goods and services, but get very little back." Indeed, the United States' trade deficit with China means the precise opposite of this. 

It doesn't even require an economist to point this out, as the ubiquity of Made in China nearly speaks for itself, rooted in China's status as the world's greatest exporter to the United States. 

In its most recent report on balance of trade, the month of October, the United States even posted its highest monthly trade deficit over the past ten years, $55.5 billion, up 1.7 percent from the previous month. Its trade deficit in goods with China struck an all-time high, $43.1 billion, while American exports to China continue to lag (-6.7 percent) behind last year's pace.

This means that the United States enjoys $43.1 billion of actual goods, while the Chinese count on $43.1 billion of additional promises. I'd say the Americans are probably enjoying the actual goods and services more than average Chinese are enjoying the paper notes and Treasury securities. 



As it turns out, the United States routinely gets real goods and services "back" from China, while China perpetuates a revolving door of credit for the United States to continue sending paper notes for those usable, exportable goods and services. 

Remember, the object of trade is to import, not to export, and in order to produce a value proposition to invite further or continued imports, one must maintain a supportable use case for holding the notes, namely a credible, productive economy capable of repayment in the form of valuable goods and services. 

Allow me to restate this with perfect clarity: repayment never takes the form of mere notes, but rather the veritable goods and services that they purport to represent. In this case, the United States has run up an unpayable level of debt with producers and creditors from all around the world, of which China is one. 

So, no, the United States is not "introducing more value into China." 

Notes represent future promises of value, whereas China has already produced and delivered on those promises. 

As American economist Barry Eichengreen articulated, when speaking of the Bretton Woods system, "It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one.” 

The YouTuber's contradictions don't end there, unfortunately. 

In confessing that the United States dollar isn't inherently worth anything, and by acknowledging that certain denominations have become too expensive to manufacture to justify their continued use, he has also, perhaps unwittingly, challenged the store-of-value condition of money. 

If indeed one aspired to replace money with alternative forms to reduce the costs of money, then one would incidentally imply that money's value, let alone the storage and durability thereof, is irrelevant to its status as money; that it's wholly irrelevant for money to possess or retain value at all.

This, then, becomes a race to the bottom, just as with the US dollar, the British pound sterling and the euro today, or alternatively the late bolivar fuerte and Zimbabwean dollar, the latter of which lost half of its value every 24 hours before it was abandoned in 2009. 

Another contradiction takes the form of rebuffing the gold standard: "But that really holds a currency back. You're not going to have many more dollars in circulation unless you invade somewhere or find a whole bunch of new gold. So, combined with the fact that many European countries have already done so, in 1971 the United States abandoned the gold standard and allowed the dollar to become a free-floating fiat currency, which just means that its value is backed by the government and nothing else." 

Scarcity is an indispensable feature of any money, and gold's inherent scarcity and predictable supply change serve to its benefit, not to its detriment. With any economy, marketable value is sourced through productive coordinations of land, labor and capital. 

The proliferation of manipulable currency does nothing to ease this requirement; it serves only to distort their coordination. As such, it needn't matter whether any additional units are discovered, as the YouTuber contends without any further explanation, as if it were purely self-evident. In fact, in such a case wherein monetary expansion lags behind productivity, one needn't fret as prices — the ratio between quantity of money and that of goods and services — will simply decline, materially enhancing the value of money. In keeping, the value or price of money can fluctuate, just as the value or price of any good or service. Gold and silver are no different in this capacity. Where supply fails to keep up with demand, this means only that its price will rise to meet its new equilibrium level. 

Therefore, in any case that gold shortage begins to challenge monetary fidelity, this means only that the price must be adjusted to accurately reflect supply and demand. 

Some contend that there simply isn't enough gold in the world for it to act as money. Indeed, this is true only at its present dollar price. In order to officially return to a gold standard, the dollar price would requisitely need to quintuple, at least, in order to merely cover outstanding notes. 

Additionally, when one contends that something "holds a currency back," what is he really saying? Is there something that a currency can do in and of itself, beyond representing real value or instilling a false sense of security? No. 

Once again, the presenter finds himself discounting the store-of-value condition of money, while confusing the source of value for that currency. The source of value comes from the productive goods and services coordinated through valuable, predictable forms of money. Printing more money, or generating more digital formations of it, fails to create more value on its own. In fact, it only diminishes the real value of holdings and settled repayments. 

Next, he continues to refer to Federal Reserve Notes (FRN) as dollars. However, the Coinage Act of 1792, which officially declared the United States dollar as the nation's standard unit of money, defined the dollar as 24.1 grams pure silver or 27.0 grams standard silver. Thus, FRNs are not dollars, as they neither represent silver nor a claim on a future repayment of silver. Moreover, the United States abandoned the gold standard in 1971 because of the radical imbalance between government-owned gold and outstanding foreign-held notes, the difference between which can be traced back to the inflationary era of the Vietnam conflict, the Cold War, the Space and Arms Race, the War on Drugs, and the War on Poverty, each of which drove up the costs of government, which the government paid with unsubstantiated dollar notes. This means that the United States simply created far more debt than its assets could repay.

From 1950 to 1969, as Germany and Japan recovered from the depths of WWII, the American share of the world’s economic output declined from 35 percent to 27 percent, coinciding with a negative balance of payments, a growing public debt and monetary inflation. 

By 1966, non-US central banks held $14 billion, while the United States held only $13.2 billion in gold reserves. Of those reserves, only $3.2 billion was available to satisfy foreign holdings as the remainder covered domestic supply. In 1971 alone, the money supply increased by 10 percent, and West Germany abandoned the Bretton Woods system, unwilling to devalue the Deutsche Mark. In the following three months, this move strengthened the German economy, while the US dollar declined 7.5 percent against the Deutsche Mark. Shortly thereafter, other nations began to demand redemption of their dollars for gold: Switzerland and France redeemed $50 million and $191 million, respectively. 

As the US dollar declined and nations began to leave the Bretton Woods system and demand gold, pressure mounted on the Nixon administration. Instead of admitting the insolvency of the United States, Nixon "temporarily" closed the gold window, which unilaterally cancelled the direct international convertibility of the US dollar to gold, thus essentially ending the Bretton Woods system, which France's Minister of Finance Val√©ry Giscard d'Estaing appropriately termed America's exorbitant privilege

Not to be outdone, the United States would later secure another privilege by perniciously buoying the value of the US dollar by negotiating with the Saudi Arabian government to erect an informal system, whereby Saudi Arabian oil exports, and later all OPEC sales, would be denominated in US dollars, in exchange for promised American-supplied security in the region. This became known as the petrodollar system.

This leads me to my next point about yet another one of the content producer's contradictions: the value of the US dollar. 

Traditional fiat currencies, such as the US dollar, contemporarily operate from the manufactured benefit of enforced tax liability, in addition to the psychological benefit of a history of reliable uses, predicated upon redeemable representative money. 

Moreover, his characterization of bitcoin is wildly incomplete. Bitcoin differs from fiat currencies through features of decentralization and reliable unit projections, otherwise known as inflation. And no, bitcoin's collapse needn't coincide with the demise of the US dollar or other currencies that comprise the SDR. In fact, in addition to a short history of unpredictable volatility, bitcoin and the broader crypto market have proved to be remarkably non-correlated to economic data and market gyrations, meaning there's little to no relationship between the S&P 500 and bitcoin, nor between the US Dollar Index (DXY) and bitcoin. 

Additionally, Federal Reserve Notes (FRN) are indeed notes, as one may have noticed from the name, meaning that they are in fact debt instruments held as liabilities on the Federal Reserve's balance sheet; as such, they operate loosely as currency, not as money, as they purport to represent a store of value that is nominally backed by mere mortgage-backed securities (MBS) and Treasury securities, ultimately payable in FRN. Ignoring the obvious obfuscation and keeping score according to their own rules, the Federal Reserve still has a negative net worth and a bottomless floor for the unit of account. 

Thus, FRNs fail as a store of value, while their supply is neither fixed nor positively predictable: M1 money stock reflects an increase of 17 percent per annum since 2008, while Fed ownership of Treasury securities has spiked a full 420 percent over the same period, even discounting the roughly $2 trillion of mortgage-backed securities, so-called assets, on their balance sheet. Over the last year alone, M1 money stock has increased fully 7 percent. This is even understating real inflation, as the implications of growing fiscal and current account deficits, burgeoning quantities of U.S. Treasurys and insurmountable levels of future and unfunded liabilities, combined with an environment of climbing interest rates and anemic economic growth, altogether serve as added pressure for future inflation and large-scale debt monetization.  

Meanwhile, bitcoin has declined by more than 80 percent since its peak in December of 2017, while high costs and limited usability have accompanied diminished optimism to guide the cryptocurrency (or crypto asset) lower. 

Despite the horrendous track record of the US dollar, by way of debasement, and that of bitcoin, by way of volatility, the speaker specifically identifies gold and silver as foolish investments. Near the beginning, he applies CAPS LOCK to type "DON'T" before cautioning people against holding them, claiming that he would explain his reasoning later in the video. This never happens; rolling one's eyes and glossing over a mere mention together fail to suffice. 

Of course, this solitary YouTuber has a lot of company in the industry of sophistry. There are many pundits out there who erroneously denounce gold as an unreliable long-run asset; however, they are comparing gold to stocks or indices, which are not direct comparables, or they are pricing gold against dollars, which are inherently volatile in their own right. 

Naturally, when constructing a ratio between any asset and another that is unstable, the result will predictably be volatile. The so-called pundits also fail to account for capital gains taxes, which exempt gold holdings under most circumstances. 

Ultimately, gold is a monetary metal with cosmetic, industrial, electrical and medical utility, which benefits from relatively predictable supply changes year over year. 

As such, gold serves as a form of money or insurance, not as a pure investment. Investments produce cashflow, or dividends, or they rely on price appreciation for returns. 

Gold presents a value proposition on its own merit, requiring no third-party appraisal to prove valuable. Its unique elemental properties produce an innate value-add, incidentally raising a floor above zero to prevent the asset from ever becoming worthless. 

As such, gold ownership eliminates the counter-party risk inherent in stocks, bonds and deposits. Its composition of any portfolio, then, must remain commensurate with the investor's appetite for wealth preservation. 

Even in a portfolio that is bearish on the overall American economy, gold and alternative precious metals will principally serve the same purpose as liquid cash or cash equivalents in the conventional investor's portfolio. 

Of course, some silver and gold bugs will allocate greater shares of their holdings toward physical precious metals, in the form of bullion or coins, but the average investor in this camp will seek precious metals only in that aforementioned style of moderation, scheduling an allocation for stocks, ETFs or mutual funds in mining, streaming, commodities or emerging markets. 

Again, this all depends upon the risk profile of the individual investor.

Ultimately, gold and silver are both uniquely utile in the medical, industrial and technological spaces, where they have both storied and developing traditions of use: whether for their malleability, electrical and thermal conductivity, reflectivity, antibacterial qualities, resistance to oxidation and corrosion, dental, medical and electronic applications, gold and silver serve myriad functions in our world, and they have become increasingly more useful as humans have uncovered even further applications for the two metals.

It is not terribly surprising, then, to discover that coins constitute only 25 percent of all silver use, as reported by the United States Geological Survey (USGS).

 

The USGS has reported similar findings about gold, placing official coinage, exclusive of bullion, at 22 percent of its total use.



Indeed, were it not for the scarcity and the commensurately-high prices of the two metals, they would likely serve an even greater role in those aforementioned spaces. 

Ultimately, a store of value stems from the elevated floor, relative to zero, that prevents an asset from ever becoming completely worthless: this is commonly described as intrinsic value, which really means that the asset is usable in and of itself absent any third-party appraisal. With the other faith-based products, whether bitcoin or FRN, the absence of positive valuation from another bidder, or that of an intransigent enforcer, equates to a suddenly-worthless asset, whose intangibility serves only to enhance the pain of nominal depreciation. In the case of FRN, outside of its digitally-held forms, one can at least burn them for heat, use them as toilet paper, or frame them as a relic of a failed project; note that I do not label FRN an experiment, as its conclusion has always been predictable. In this sense, the post-Bretton Woods era has proceeded as a clear demonstration of the perils of unchecked, misplaced faith. 

Note also that store of value differs from basic utility by way of its portability and enduring resilience over time, and also by its general application. Whereas most commodities are unwieldy and perishable, they are also widely consumed and exhausted upon purchase; monetary metals and other stores of value, on the other hand, carry dense and portable value that will neither degrade nor sacrifice utility over time. Even after use, in the case of monetary metals, the elements can be recovered for reuse time and again, enabling the units to reliably preserve and grow wealth over time. This is principally the distinction between store of value and basic utility, and this unique feature is the modifying quality for preferred forms of money. While anything can theoretically serve as money, the best forms of money will store value; they won't just present it. 

Next, the YouTuber also failed to acknowledge that gold and silver originally existed as valued assets and commodities before people began spontaneously exchanging them as forms of money, and certainly before governments and central banks began to employ them for this use. Bitcoin fails against this standard, and fiat currencies merely operate from the psychological benefit of so few understanding the great con now lost under layers of lonely history. 

As Henry Ford famously stated, "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

It appears that YouTube and its talking heads corroborate the old Chinese proverb: "Who thinks an inch, but talks a yard, needs a kick in the foot."

Meanwhile, gold endures brilliantly, withstanding the tempests of time and abuse, as "real gold does not fear the furnace." 

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