Special: The BRICS Gold Convertibility Problem

"For Gold-backed money to work, 100% convertibility is needed. Paradoxically, convertibility only works when no-one actually converts."

Contents:

1. It’s All About Trust
2. QUESTION #1: What do they need to make it work?
3. France Converted… Just Once
4. Blockchain Trust
5. QUESTION #2: What are the risks?
6. Gresham’s Law in Action or What Would Joe Do?
7. Bottom Line
8. GoldSeek Article

IT’S ALL ABOUT TRUST

Authored by GoldFix ZH Edit

We just read a piece by Kelsey Williams for GoldSeek entitled: Gold Convertibility – NOT Gold Backing in which the author begins by saying:

The success of any fiat currency or real money substitute (in other words, anything other than gold itself as the medium of exchange) depends on its convertibility into gold – on demand.

That is right.

We spell out  up top what the BRICS need to do to succeed in their venture: permit 100% convertibility that noone uses.   Here then, is why that will be very difficult, if possible at all, to execute. 

Question #1: What are the BRICS chances of success using a Gold-backed currency to settle international trade differentials?

They would likely succeed (on paper) if their BRICS Coin  (or Yuan or whatever they call it) were used to settle current account differences (assuming that is still what they propose to do) for commodity deals provided 2 things happened:

1. Convertible on Demand: Convertibility into Gold between nations on the platform was permitted for international settlement

2. Noone Actually Converts: No country actually used the Convertibility option to take delivery.

These two seemingly contradicting statements are the essence of how trust in business manifests. The first is the written law. The second is the unwritten law. The written law here is known; that being convertibility on demand.

What of this unwritten law? The UIA Encyclopedia defines that best:

Unwritten rules are behavioral constraints imposed in organizations or societies that are not typically voiced or written down. They usually exist in unspoken and unwritten format because they form a part of the logical argument or course of action implied by tacit assumptions.

Taken together: Convertibility to Gold on demand is permitted, based on the tacit assumption you will not convert.

The written law only works if you are comfortable in that everyone feels the same way you do. Specifically, knowing you *can* convert is good enough to not actually convert.

Putting it another way: Convertibility is insurance. It is literally an option on your monetary home. The insurance underwriter can make it all work if his universe of clients are diverse. But if the users are not diverse, and one makes a claim, they all are likely to.

Beyond Trust: To the extent a cooperative’s members lack economic or geographic diversity, that cooperative is susceptible to outside shocks taking down the whole system. Circling back to the insurance analogy, if you are selling flood insurance only on the coast of Louisiana… you have risk.

Finally, some options, if exercised, can never be used again to the detriment of the user and to the systemic trust. Kind of like Survivor, but for BRICS members. Or maybe you prefer Daffy Duck?

The article mentioned above touched on what happens if you convert in recounting what happened to the US Gold Standard in 1971.

After World War 2:

Big spending presidents and the growth of government, coupled with the Federal Reserve’s gratuitous creation of new money, brought things to a point where the government could not pursue its own spending plans under the restraints that existed because of gold convertibility.

Faced with fiscal austerity or printing, the US cheated and printed more money than they had Gold to back it. They hoped no-one would notice. Someone noticed.

The Standard ended when France realized the US was printing way too much money for the Gold it had on hand and decided to convert their dollars back to Gold.

The US going off the Gold standard in 1971 laughingly “to protect the position of the American dollar” confirmed France’s suspicions were correct.

So: For Gold-backed money to work, 100% convertibility is needed. Paradoxically, convertibility only works when no-one meaningful actually converts. Mistrust is contagious.

We know the BRICS have a mistrust of the West and the US in particular now. However, do they really trust each other? That is where Blockchain comes in.

BLOCKCHAIN TRUST

The BRICS are hoping that using Blockchain for verification obviates the need for actual physical possession while preventing overprinting. They hope blockchain increases trust and lessens the need for delivery.

This can definitely work when used in combination with repeat codependent trade for economic necessities like food and energy. 

Ultimately, it is about already existing trust between nations and their belief that Blockchain can facilitate that trust better. Because if only one country takes delivery, then they all may. And then it is over. Economies grind to a halt and maybe war ensues as well.

Even with Blockchain, you are dealing with some form of centralized clearing oversight. And the entity in the center of that hub,blockchain or not, must be trusted.

Question: So if they all trusted each other enough to rely on Blockchain then it would work? 

Continues here ...