With all the talk of reckless money printing, hyperinflation and debasement of currencies
around the world today, it sounds reasonable to have some kind of backup plan ready to
replace regular currencies should the need arise.
Now of course there are crypto “currencies” and they are great as alternative investment
vehicles, but their high transaction fees and slow processing times make them extremely
unsuitable to replace something like the American dollar, in whatever form it may take.
This is all really frustrating because a nations currency is supposed to serve the people of
the nation and it does genuinely seem like in recent years this role has mutated into
bending the economy to the whim of policy makers… who may not always have the best
ideas.
If only YOU had access to the control panel, you could stop all of this reckless money
printing (that according to some top economists and financiers, is driving us towards hyperinflation
Armageddon).
This begs the question, how could you create your own currency?
And how could an obscure old video game give us the answer to this question.
So it’s time to literally learn how money works as we look into the steps an individual
or a group could take to create a currency with the same functionality and recognition
as a those created by governments around the world.
So to get started we need to properly understand what a currency must do, to be a viable replacement
for lets say the US dollar.
For starters it must be easy to use and widely accepted.
So you need to make sure almost everybody within a desired region or as part of a desired
community is willing to accept this in exchange for the things they have to offer, be that
goods, services or their labor to an employer.
It must also be easy to use.
You want people to be able to exchange this currency quickly and easily with one another
either by handing over some kind of designation of this currency or by setting up software
to handle these transfers, which is obviously the more modern solution.
It must also remain fairly stable in pricing.
The value of a “currency” appreciating thousands of percent within a year might be
heralded as a victory in crypto communities, but for real currencies this is what we call
hyper-deflation which is a real thing, and in many ways is way way worse than hyperinflation.
A steak dinner should cost approximately the same units of your currency one year to the
next.
Minor variations are fine but anything more than 10% either way per years and you don’t
have a currency you have a vehicle for rampant speculation.
Finally as an added bonus it should be fairly cheap to use.
This has a little asterisk next to it because technically this is just part of being easy
to use, but it is easier to think of as it’s own little category.
Your currency should be cheap to store, transport and transfer.
That means you should probably avoid things like heavy metals which have historically
been popular but are not great on the cheapness front.
To this point you will also want to make sure your currency can be digitized, because if
you want it to be compatible with all of the other legit currencies in the world then this
is how the vast majority of trade back and forth between these currencies is made.
Now if you are still thinking “ooh oohh a crypto currency can do all of these things”,
you might not be wrong, but there are certainly better options.
Almost all crypto currencies work a blockchain, which is just a technical way of saying a
public record shared between everybody in the network.
This is great for making the system decentralised but it also tends to make it very cumbersome
because you are basically processing transactions via committee.
There are people that can explain the computer sciency stuff behind this much better than
me but basically crypto currencies get pretty mediocre scores across the board in all of
these categories.
And yes yes I know, before the enthusiasts blow up the comment section, there are plenty
of different coin designs that shift around these stats a bit but ultimately they still
do away with the thing that inspired this whole process in the first place – control.
Decentralisation is great in theory, but if you are going to all of the effort to float
your own currency you want to be one with your finger on the money printer button.
So a more traditional system is probably better here.
Fortunately this is also far easier to create.
You could print out paper rectangles but even easier still is just digit’s on a computer.
So here is how you should actually go about doing that.
First you want to create a secure database that is able to record and adjust who owns
how much money.
This will effectively be a glorified excel spreadsheet, and you might be surprised to
learn that most modern bank keep records of bank balances in this way.
Now you can add utilities to this database system like the ability for people to easily
update their own accounts by sending or receiving this money, and of course you will need a
secure way to host this this database.
All of this is fairly easy to pull off with modern database software and web hosting services
like AWS or Microsoft Azure, even someone with the most basic understanding of database
systems could pull this off no problem at all.
The difficulty is in actually getting people to care about these digits.
If I offered to move a billion How Money Works dollars into your account in exchange for
your house, you would be pretty stupid to take that deal because basically nobody else
would be willing to exchange those dollars for anything else.
But consider this, lets say you set this whole system up and then create a two way exchange
where you will convert 1 american dollar for 1 how money works dollar and 1 how money works
dollar back for an American dollar.
Well suddenly this means that your digits in the database do have value, because if
someone has some in their designated account then they can just transfer them for American
dollars.
Now if I offered you a billion How Money Works dollars for your house you would be more than
happy to take that deal because you could just transfer this money into American dollars.
This is of course assuming that you were confident that the exchange could honor this transaction.
So at this point the value of your currency is determined by what you say it is exchangeable
for, and the confidence people have in you being able to honour this exchange.
For an individual that confidence might be a hard thing to build, but for a large well
known institution it shouldn’t be too difficult at all.
In fact what I have described here in this system is basically a casino.
In a casino, Individuals will willingly trade in real dollars for plastic chips confident
in the fact that they can later be traded back for an equal amount of real dollars.
Infact patrons of casinos can be very confident of this exchangeability because casinos are
legally required to keep enough cash on hand to pay out all of the chips that they have
in circulation.
But the thing is these poker chips are not reaaaallllyyy a currency.
There is nothing that a market participant can purchase with these chips apart from entires
in games of chance, their value is not propped up by their exchangeability for another currency,
their value relies EXCLUSIVELY on their exchangeability with another currency.
In fact one of the best examples of a currency that was not made by a regular government
is PED from the video game Entropia Universe, a video game that uses a currency that is
also exchangeable for real world dollars.
Just like our hypothetical how money works dollars or casino chips, this currency is
exchangeable back and forth for a fixed rate.
The game developers will exchange 1 American dollar for 10 PED and likewise they will also
exchange 10 PED for 1 American dollar.
Now for this reason this video game has often been compared to a casino, where engaging
in the activities of the game are basically like playing hands of blackjack, now this
isn’t entirely unfair, but there is one big difference especially as it relates to
the currency.
While casino chips basically have no value outside of the money they can be exchanged
for, PED does actually have some value as a stand alone unit of exchange.
For example, if you wanted to buy a house in Germany, you would need to pay for that
house in euros.
If you want to buy land in this video game you will need to pay for it in PED.
Both of these currencies have value not only because they can be exchanged for other currencies,
but because they can be used to buy goods within their own markets.
For what it’s worth some real estate investments within this game have actually generated higher
returns than real estate investments within Germany, so make of that what you will.
So for all intents and purposes Mindark the developers of this video game have effectively
created their own currency, soooo if you want to make YOUR own currecency just follow their
steps.
Create the technical infrastructure to facilitate electronic funds transfers (basically that
glorified excel spreadsheet we made earlier)
Establish an exchange with the reputation to always be able to exchange this new currency
back and forth for another currency.
And then create a market where your new currency is the only one accepted to purchase things
that people really do value.
Now the last problem that you would face is that your new currency is still ultimately
pegged to some other currency because of this exchange.
No matter what happens nobody is going to trade in their American dollars for less than
one how money works dollar, and nobody is going to exchange a how money works dollar
for less than 1 american dollar because why would they?
If either side got a worse offer they would just go to the exchange and get this 1 for
1 deal.
This means that after all of this effort your currency will still suffer the same kind of
hyperinflation that people are fearing the US dollar will.
The solution to this is to slowly but surely widen the spread that you offer at this exchange.
Start off at 1 to 1, but over time work to a system where you will offer only 50 how
money cents for every 1 American dollar, and likewise will only offer 50 us cents for every
how money works dollar.
At this point people might go this exchange rate sucks, I am going to deal with other
people that want to exchange this currency and get a better price closer to the middle.
This is how you “float” a currency, and make its foreign exchange value purely determined
by market forces.
This means if the value of the USD really does tank over night your new currency will
be immune from that impact just so long as people still see value in the market your
currency facilitiates.
Now maintaining that value will be the big challenge at this point.
Normally governments do this by mandating that taxes get paid in their currency under
threat of imprisonment, which as far as motivation goes is pretty good.
But it’s not necessary.
Freedom is just another product albeit a very valuable one) so long as people see that they
can access other things of value easily using your currency it will have value.
One institution that could genuinely make this crazy though experiment a reality is
Amazon.
Just imagine that the only way to purchase good of the largest online marketplace in
the world was using free floating bezos bucks that were slowly introduced using this method.
It would genuinely be a currency that could compete with the big global players, especially
when backed by the technical infrastructure that amazon has at its disposal to make that
a reality.
Now will it happen?
Well there was the Libra proposal which is at least 50% of the way there, so maybe we
shouldn’t be giving the real life stonks man any ideas.
But realistically there are already talks of breaking up amazons operations within the
US, so giving the middle finger to uncle sam be creating competition to his currency is
not exactly a very tactful business decision, as powerful as it may be.
Now if you want to learn more about undermining the economic power of sovereign nations go
and watch our video on the world bank and the international monetary fund to find out
what they do and if they really are the all powerful evil empires people say they are.
And if you enjoyed this video please consider liking and subscribing to keep on learning
how money works.