From the September 2013 issue of Futures Magazine • Subscribe!

Ben Davies: Turning adversity into gold

 

FM: You alluded to Fed Chairman Ben Bernanke earlier; in his most recent testimony to Congress, he mentioned at one point that ‘No one understands gold prices.’ Do you?

BD: Yeah, his statement barely mentions gold. He almost was forced into a comment on it, and by being dismissive of it, he’s not providing any validity to gold being a potential alternative to what he sees as the best system or mechanism for running a complex monetary system. I don’t know him personally, but through degrees of separation I have some insights into his psyche and beliefs, and I believe he is far too dogmatic in his doctrine and he should, as I am, be open to all sorts of ways to prevent the catastrophes we have witnessed over the last few years. I don’t think I can be more fair than that.

FM: You’ve talked about alternative currencies throughout this interview. Can you talk a little about some of the different ones that have been proposed such as Bitcoin?

BD: Oh Bitcoin. Absolutely fascinating, that is a great example of what we’re talking about. I notice it is referred to as a ‘virtual currency,’ almost as if to invalidate it. I believe in the principle of Bitcoin; it meets many of the requirements of an alternative currency. 

Just to say what Bitcoin is, it’s a decentralized, censorship-resistance, digital, peer-to-peer currency that was created by someone with the pseudonym Satoshi Nakamoto about four years ago. You can use that currency to buy goods and services over the Internet without having to pay bank fees or government tax. In many ways, it’s theoretical roots do come from the Austrian school. The inception of it was the fear of the current fiat monetary system and all the interventions that have taken place by the government. So, it follows up from the belief you should have competitive currencies, and certainly this is a competitive currency, although it’s not one with any intrinsic value like gold. But, it’s very clever because it has this data-mining principle that creates supply just like gold is produced, but it limits it each year. It has something called a block chain that creates a public record of all the transactions in the system, so it has that ledger that prevents you from spending it twice. In that regard, it absolutely is fantastic. 

More importantly, whether or not it becomes a real challenge to the fiat currency system, which I suspect it won’t, it is technologically too complicated — unless you are programmer, you don’t understand the open source code that is part of its credibility in theory because everyone can look at it. I’m not convinced that the cryptology used to secure it is not perhaps open in some way to the issuer or issuers of the limited number of Bitcoins a year, which could be inflationary. In that situation there would be no constraint on currency proliferation like you would have if you were backing the system with gold, which is why I still believe gold is the best fit for an alternative currency. It has created good debate, though.

The other issue with it at the moment is Bitcoin is more a speculative instrument. I’m not sure how many people really see it as an alternative currency. Obviously, it doesn’t have a store of value yet. Security and integrity of its system, there has been embezzlement, but that’s more at the exchange end. There are exchanges where you can convert Bitcoins into fiat currency, and interestingly this is where regulators have really gotten ahold of them. Again, it’s not in governments’ interests to have potential alternative currencies vying with the official state currency that ultimately people have to pay taxes in. They want people to pay taxes to pay for the welfare system with that. 

Ultimately, it’s a natural progression that payment systems that historically have been arcane and very slow are now moving to new methods of payment. We’re going to have a cashless society. I really think biometric identification is going to come in and remove all this password nonsense that you can never remember. This is a really helpful evolution in both currency usage and the debate about who should determine what currency should be and where the counterparty risk is. At the end of the day, the bearer is the U.S. government at the moment, but why shouldn’t it be a free market concept? Why shouldn’t we decide what we choose as long as the supply of it is constrained by something that is naturally in constraint of its own supply, i.e., gold? Where I differ is gold could be the bedrock to that electronic payment system. It is fascinating and I’m learning more about it all the time.

FM: Looking specifically at Bitcoin, do you see it has a viable alternative that will have staying power and will still be around in 10 years?

BD: Sometimes you think ‘First-mover advantage,’ but as an alternative, borderless currency, I plead the Fifth Amendment. I’m not sure how it’s going to pan out. I suspect there will be systems that are better maybe in some way will work within the current system. Once that happens, that changes the dynamics of it. I would really watch this space. If Bitcoin can convince people this is not just a speculative investment, and it’s more about facilitating free trade, then it’s a real possibility. 

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