Part 3 – Dollars are not trustless!
Our analysis of the ‘dollar’ in respect to the ‘8 characteristics of good money‘ detailed at Good Money continues. In this post we ask – are dollars trustless?
The only reason a paper currency has any type of value is because a government says it does – not for any other reason. So we start by trusting the government to protect the value of these dollars.
So what if this government simply turned around and stated – ‘Those dollars we told you to trust… well sorry, you’re not allowed to use them any longer!’
This was exactly what happened in India. With the stroke of a pen, President Modi banned all 500 rupee and 1,000 rupee denominated notes effective 31 December 2016.
Under the guise of eliminating cash from the black economy, the plan also had the impact of flushing out savings of law abiding Indian citizens. Those savings were then forced into banking institutions.
You might think, ‘this is not so bad’. Well not so bad if you trust the banks and you were able to get to one in time to deposit your rupees. However if you were in a village without a bank and lacked the transportation to get to one, this policy change might have been a financial disaster.
Think this can’t happen to our Australian dollars? Wrong! There have been reports for many years now that the Australian Government was looking to abolish the $100 note. There is also talk about getting rid of cash in Australia altogether – thereby forcing everyone to become a creditor of the banks.
Currently being debated in Australian Parliament is a bill banning cash payments of over $10,000, subject to a two year jail sentence. Imagine, two years jail for using your country’s legal tender.
So in India, and probably in Australia – great sums of cash are being forced out of the cash economy and into the banks. So you might now ask – ‘once done, the dollars will now be safe in the banks right?’
In 2013 the Government of Cyprus simply seized a percentage of all funds sitting in Cyprus bank accounts. Account holders woke up one morning to find their bank accounts pilfered by the very people they had elected to represent them in parliament.
Other countries are introducing so called ‘bail-in’ provisions. Should a bank experience financial difficulties, the dollars of depositors would be automatically converted to ordinary shares, to ensure that other creditors of the bank can be paid out first.
When it comes to TRUST – you now know that when holding cash you are trusting your government to protect the integrity of those dollars. You also know that once you deposit the cash with the bank, you are now both reliant on the government to protect the integrity of the dollars and on the bank to remain solvent.
So NO, dollars are NOT trustless!
Of the ‘8 characteristics of good money‘ – modern day fiat currencies fail at least 3, being:
- Dollars are not a good store of value due to inflation.
- Dollars are not difficult to create, as financial institutions simply create currency with each loan they write.
- Dollars are not trustless, as you must either trust the government to honour and protect the currency in circulation; and, you must trust the banks who you deposit these dollars with.
Understanding what constitutes ‘good’ and ‘bad’ money is necessary for your Financial Awakening. This does not mean that we should be avoiding cash and bank deposits – this is not practical or even desired.
What it does mean is that we need to understand the risks and opportunities associated with holding dollars and we will structure our financial affairs accordingly.
Next time I address the topic of Our Money, I will examine types of money which have all the characteristics to be considered ‘good money’.