Blog : The Currency Conundrum

by Ed Zwirn on December 7th, 2013

The Yankee dollar is standing atop a house of cards. The U.S. Federal Reserve is a mysterious cabal of bankers perpetrating a massive fraud by printing this paper money, and the whole shebang will come to a sudden, catastrophic halt soon with the dollar collapsing as the cabal prints even more of the stuff in a vain attempt to pump up Wall Street.

Or so goes an increasingly popular (and potentially dangerous and demogogic) argument. Despite the evident strength and stability of the dollar, ideologues are lately given to argue in favor of two alternatives to the system we now have of a paper currency regulated by a central bank, one new and the other very old. Let's start with the new one:

Bitcoins:

And you thought penny stocks were volatile: Imagine staying up all night last night watching the erosion of your hard-earned BitCoin savings. In one 10-minute interval (between 10:50 p.m. and 11 p.m. New York time), I saw BitCoins fall in value from $785.30 to $748.60, a fall of 4.7%.

This volatility is no exception to the rule. As recently as Wednesday the so-called crypto-currency was worth a record $1,237.96, but has since plummeted following a Thursday statement by China's central bank discouraging its use. The Bitcoin ideologues, who believe what they want to believe, had up until that point embraced the totally unwarranted hope that the Chinese - who have muttered against the dollar's use as the international currency - would embrace the Bitcoin as an alternative.

Bitcoins were fetching about $20 as of a year ago. The price shot up to $266 in early April, when  fears of a bank run in Cyprus led to worries about the euro's stability. Once the Cyprus crisis was resolved, the Bitcoin fell back to $50 later that same month. Since then, strong demand in China has caused the medium of cyber exchange to rally, a trend which seems likely to continue to reverse given the Chinese bank stance.

The Old: Gold:

While the 2010 advent of the Bitcoin may be considered unprecedented, gold has been a medium of exchange for time immemorial. Up until the late 19th century, the U.S. medium of exchange was minted in gold, with no U.S. Federal Reserve Bank to regulate its supply and thereby limit its ups and downs.

This was not a happy experience for many Americans struggling to get by in those days. The supply of gold for minting was limited, and many farmers and other poor people were unable to get their hands on dollars. Of course, these dollars gained in value throughout much of this period, as deflation reared its ugly head. It was not for nothing that William Jennings Bryan's acceptance speech spoke of mankind being crucified on a "cross of gold."

And gold, while not quite as volatile as the Bitcoin, has also been on a rocky road as of late. So far this year, gold is down 26%, on track to break a streak of 12 years of consecutive gains. Similar in timing to the Bitcoin retreat caused by the calming down of the Cyprus situation, the yellow metal has been sliding since April, pushed down by both the rally in stocks and the absence of inflation.

Penny stock investors take note: Be careful what you wish for. It is easy enough to decry the U.S. dollar. The Fed does indeed face risks in winding down its $85 billion monthly bond-buying stimulus program. Either this stimulus continues for too long and results in an inflationary resurgence, or it can end too abruptly and cause the rug to be pulled out from under financial markets.

But in reality everybody knows that neither of these catastrophes is probably going to occur. Like them or not, the Fed governors know financial markets better than even Ron Paul, and they are not about to pull any abrupt maneuvers.

Peter Leeds was recently quoted by the New York Times as comparing the Bitcoin to Paris Hilton: "In a matter of months, you won't be hearing about it," he said. "It will go the way of Paris Hilton. People will move on to the next thing." Let's hope he is right.

In the meantime, don't be misled by headlines about people buying high-end automobiles or even booking spaceflights with this bogus excuse for a currency. The merchants in question are getting some terrific publicity, and in the few cases they do accept the Bitcoin for tender they undoubtedly cash it in even before the customer leaves the showroom door. They'd probably do the same with gold, assuming they accepted it for payment at other than a deep discount.