Russia insider asked me to share my opinion on why gold, or a gold backed currency is not be sufficent enough to safeguard the Russian Federation against western economic warefare. The following is my response:
“The ruble is the most gold-backed currency in the world. Can this help Russia safeguard against western economic warfare?”
The immediate answer to the question is no. Unless the entire world moves to a gold exchange standard, the Russian Federation will not be fully insulated from western ability to manipulate markets to their advantage.
First off, the price of gold relative to most other currencies will still be determined in western controlled markets, and that will have an effect on the quantity of goods/services the Russian Federation will be able to acquire in exchange for either their gold or their rubles.
If the value (price) of a unit of gold as expressed by the number of units of goods/services that may be acquired by an exchange (aka a ‘purchase or sale’ or a ‘trade’ or a ‘swap’) of the said unit of gold can be manipulated or otherwise controlled in anyway, by any party, other than the parties to the exchange, then that situation wouldn’t differ much from the situation exist at the moment now wouldn’t it?
Secondly, when valuing (pricing) an exchange, it’s important for all the parties to the exchange to know how many total units of the item/object to be exchanged were in existence in the local supply pool.
For example, back in the days of barter, parties to a trade (exchange) valued the exchange in the context of the local supply. So if the trade involved a cow and a pig, and there were 10 cows and 5 pigs available in the local supply pool, the value of the pig involved in the swap would be double that of the cow involved in the exchange.
You will notice that I will use the terms ‘trade,’ ‘swap,’ and ‘exchange’ instead of ‘Purchase’ or ‘sale,’ interchangeably throughout this essay. I’ve done so because it’s important for us to understand what a purchase/sale actually is, I believe that a lot of significance is lost in language as time and memes progress, but the linguistic terms that are supposed to represent them remain the same.
I digress, it’s almost impossible to arrive at a true market value if the quantity of the supply of the items involved in the exchange are unknown, The gold markets are a bit opaque in that regard, now aren’t they? And is the gold really limited? It certainly is not steady! I’m sure that technology will do for mining (you have no idea really) what fracking did for drilling, don’t you agree?
So if the gold supply cant be quantified without any degree of certainty, how will trading parties arrive at true market value? The current system of fiat money drives home the point in that regard.
So long story short, gold will not protect the Russian Federation against financial warfare. A gold based monetary system will however, empower those who control the current and future supply of gold, just the controllers of fiat currency can print themselves up additional monetary advantage the tap of a key, those who control the gold supply could do likewise simply by directing their automated mining systems to produce more gold among other things (that’s not even scratching the surface of what they’ll be able to do in a decade or two!).
Is the Russian Federation willing to cede them this advantage?
If gold wont do the job, then what will?
Well, if the gold supply can’t be reliably quantified either now or in the future, what’s out there today that can?
The answer is digital peer-to-peer payment tokens (aka crypto-currencies)! The first of these tokens is called bitcoin. Bitcoin was the first, however, several derivatives have since been produced.
The quantity of bitcoin tokens is limited by protocol and can only be modified with the consent of all the users of the protocol. Thus the bitcoin token supply is much more transparent than the gold supply. This the value of goods and services can be derived in a much more mathematically sound manner.
This is much better for long term valuations as well as the supply of bitcoin tokens can be calculated forward and if the supply of the item being valued against bitcoin tokens can likewise be calculated, then price determination is a lot more straightforward than what happens now. That’s not the case with the current fiat currency units.
Bitcoin like gold id simply a representation or token of the current consideration requested, held, and being tendered in an economic exchange (trade). Like all forms of money, consensus and consideration are the only things which back gold. In that sense gold is simply a derivative instrument (medium), as all derivatives are derived (and thus ‘backed’ by) from an underlying. Forms of money ‘backed’ by gold are in effect derivatives of a derivative, a stand in for a stand in, if you will.
This is a very important concept to get your head around, you’ll never understand money until you understand this concept.
“Our economy goes where the money is, and because money doesn’t come from here, the economy shrinks.”
Like gold, digital P2P payment systems are not controlled by anyone party, unlike the swift, Sepa, Visa, and Mastercard payment systems controlled by western interest. Therefore it’s not possible for western interest to restrict with whom, the Russian Federation or it’s citizens, engages in financial transactions with, if bitcoin and/or another digital P2P payment system were to replace these western based systems.
However, western interest may still be able to interfere in the delivery of goods/services, after they’ve been paid for, if the exchange involved physical goods or performance of services in the physical realm. But they couldn’t interfere with the financial transactions or the provision of virtual or digital goods/services (well maybe).
With the ability to transact freely with anyone globally without fear of financial sanction, the Russian Federation and/or its citizens could build additional could start trading and catering to markets outside their own, in effect, expanding the market for their goods/services.
Western jurisdictions have prospered due to the fact that they cater to the demand of a global market and not just their own. They cater to the needs and desires of a population many times the size of their own, and thus receive excess reward for their production. This excess is what we call wealth.
Wealth is more than just the sum of the units of money one may have in one’s possession. Real wealth is the excess goods/services one has at one’s disposal. In the old days the wealthiest kingdoms were the ones with most excess grain (food) at their disposal.
Russian value went where Russian money went, to the west in exchange for imports! While western wealth went east to China, again in exchange for Chinese imports.
If the Russian Federation desires to grow wealthy, it must expand and diversify it’s industrial base beyond the production Energy. It must facilitate the development of neglected markets, whose consumers have been put in the same position as the Russian Federation by the western controlled financial system.
In doing this, the Russian Federation will be developing new consumers who will be loyal clients of the Russian Federation’s industry. It’s important to understand that the populations of these markets will expand as they are facilitated and this produce more consumers for Russian industry over time.
At the same time, the Russian Federation needs to facilitate new lifestyles among it’s own population which results in a demand for goods and services not currently consumed by the population. This will result in a demand for new industry to service these demands. This in turn will result in demand for labor to service the needs of these industries, which in turn will result in a higher capacity to consume by the current and future generations of Russian citizens.
Do you see the logic?
Three cheers if you do!