The Future of Money

Traditional currency systems are being assailed from several directions. Some propose digitizing national currencies as a means to decrease transaction costs, facilitate tracking, and discourage illicit uses of currency. Some suggest a single, global currency system is inevitable. Others propose creating non-government-backed forms of currency to eliminate the ability of government to control transactions, as well as to decrease transaction costs and enable anonymity.

What does the future hold for currency?

For more information on currencies and Bitcoin, see my previous blog, “Bitcoin: Wave of the Future or Flash in the Pan?”

 

Why Barter Systems Don’t Work

Before there were currency systems, the barter system was used by people as a means of directly exchanging one good or service for another. However, the barter system had several fundamental disadvantages, such as

  • Need for Double Coincidence of Wants: Barter transactions can be possible only when two people have goods or services that are mutually useful to each other.
  • Lack of Divisibility: Commodities and services cannot be easily sub-divided to effect an evenly valued exchange.
  • Lack of a Common Measure of Value: Barter systems lack a common measure of value.
  • Lack of Store of Value: In a barter system, value can only be stored in the form of commodities, which do not have a stable value over time.

Will the Fed Raise Rates? Will the US Dollar Lose Reserve Status?

The purpose of this analysis is to better understand the inter-relationships between prices, interest rates, and inflation and to use this understanding to answer two specific questions:

  1. Will the Fed increase interest rates to stem the current bout of inflation?
  2. Will the US Dollar lose its status as International Reserve Currency?

 

  1. Price Level
  2. Inflation = Increase in Price Level
    1. Duration
    2. Purchasing Power
    3. Zero Inflation Does Not Automatically Imply Price Reversion
    4. Affordability
  3. Interest Rates
    1. Real vs Nominal
    2. Recent Low Interest Rates
    3. Factors Increasing Interest Rates
  4. Will the Fed Increase Interest Rates?
    1. The Debt
    2. One-Time vs. Ongoing Shock to the Economy
    3. Will the Fed Increase Rates?
  5. US Reserve Currency
    1. About
    2. History of US Dollar as International Reserve Currency
    3. Benefits of Being a Reserve Currency
    4. Costs of Being a Reserve Currency
    5. Will the US Dollar Lose its Reserve Status?

To provide some context, in January 2015, the average price of a gallon of gasoline in the US was $2.21. Over the next five years, the price of gas wandered between $2 and $3, averaging $2.51 over the 2015 – 2020 period (Figure 1).

In January 2021, at the time Biden entered the White House, the average price of a gallon of gasoline in the US was $2.42, just at the average of where it had been for the past five years. However, by February 2022, the month Putin invaded Ukraine, the average price of gas in the US had reached $3.61, an increase of 49% from the January 2021 price. In July 2022, the average price of gas was $4.67, almost double its January 2021 price.

Figure 1

1 gas price 

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Strategic Maneuvering in Dynamic Markets
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