Sunday, April 12, 2009

My Essay on Digital Gold Currencies

By Bartleby
The Ultimate Apocalypse
Saturday, April 11, 2009;action=display;threadid=21954

Before the advent of digital currencies backed by precious metals, the issuance of money was controlled by Central Banks. Banking has a long history, but from 1971, the US Federal Reserve abandoned the gold standard, which all world currencies were tied to under the Bretton Woods system, so that there was hypothetically no limit to their ability to issue credit in the form of loans. Many countries began a process of financial deregulation and their currencies were 'floated' to compete on the international currency market. This unlimited credit no longer tied to a commodity with real value such as precious metals contributed/caused many economic recessions and devalued the currency so that, according to the Consumer Price Index (CPI), one US dollar today is only worth six cents of what it was approximately seventy years ago (Measuring Worth 2008). Private digital gold is a move away from fiat currencies issued by governments that have nothing to back it's value with.

Most countries have central banking - usually (especially in the case of the Bank of England, The US Federal Reserve and the Reserve Bank of Australia) non-government entities that have been given power via legislation to determine the monetary policy of the country. They do this by controlling how much money is in circulation through open market operations (buying and selling currency on the open market). This allows them to determine interest rates and the cash rate which in turn influences inflation, productive output and unemployment.

Another function is that they loan out money to the federal government at interest and this becomes government debt. This is done by the Treasury printing up a number of bonds and these are sold on the open market (mostly to banks as they carry low interest rates). The sale of these bonds transfers to money in the Treasury accounts where it is then used to pay for government programs. The Central Banks then buy these bonds from the bank, using money it created from nothing, and that is how money is created (Martenson 2009). Commercial banks then "loan" out this money at many times what they actually have in their deposits (if there is a deposit requirement), and many of those dollars end up in other banks where it is again loaned out many times, multiplying the amount of debt money in the economy.

Even under the gold standard, the banks lent out many times what they had in their reserves, which led to several recessions and the gold standard was repeatedly abandoned then re-instituted for various reasons of financing government spending (Money As Debt 2007).

So money is created out of thin air, which they then loan out in the form of credit with interest. Thus, all money is based on debt. Eventually the banks make too many bad loans and there is a credit crunch. People go to withdraw their money from the banks before they become insolvent. It then becomes a banking crisis. The central banks then step in and bail out the banks or pay out deposit insurance (Diamond 2007).

An alternative currency was needed, one that is not controlled by central banks and the overzealous spending of governments. The world wide web caused a growing free market to emerge in transactions for goods and services (digital or real). The response to this was to introduce a secure digital currency for ease of global transactions. Some of these digital currencies were backed by real reserves of precious metals (E-Gold, GoldMoney). Being free to open an account, anybody could exchange their fiat currency for gold-backed digital currency. This can then be used as a form of online digital payment for goods and services or in possible P2P transactions as a way of sending money to anybody around the world. The digital gold currency can be exchanged from fiat currency by a number of global exchange providers. Governments had difficulty regulating this because it was a global digital currency issued through secure electronic payment systems through the internet, and gold reserves (often insured) are held in numerous vaults around the world, such as in the case of Goldmoney (Goldmoney n.d.).

Digital gold currencies are easy to use as transactions are electronic and therefore instantaneous, there is no need to carry around gold coins to pay for your wares. You can also buy anything around the globe using the world wide web. Although not many companies accept digital gold currencies as payment, it is possible to obtain a prepaid debit card funded by a gold, which will exchange that into the appropriate currency whenever you use the card to make a transaction. The only downside to these cards is there are higher fees involved, charged by the issuer (E-Forexgold n.d.).

Another downside to using digital gold currencies is fraud. Many ponzi schemes have been built up around them, called High Yield Investment Programs (HYIPs) ,advertising high returns yet only paying out the funds they get from other investors. Eventually, they cannot get enough investors and the scheme collapses, they then steal all of their investor's money (Zetter 2006). Identity theft is another problem as people's accounts can be hacked over the web using spyware installed on their computer (E-Gold n.d.).

Sustainability, which is the property of being sustainable - to be maintained as a viable property ( 2009), refers, in the case of IT sustainability, both to the net internal/external 'costs' of the IT industry (Meyer 2008) and it's present and future viability in the current world economic, political and social environment. It's use, though, can be applied to a number of specific areas depending on the context in which it is used - but mostly it refers to economic and ecological sustainability.

Sustainability is often used to refer specifically to environmental sustainability with the run off costs from that, and the alleged impact human activity has on the environment and the response to this by different sectors of the population. Certain politicians, who have the ability to make and enforce laws, have seized upon the opportunity of using sustainability in the environmental sense to justify drafting new regulations and imposing various forms of taxation.

Environmentalism has a long history, which goes back to the days of Thomas Malthus and his theories regarding overpopulation (Malthus 1798), but in modern times 'sustainable development' has become an often-used term by various interest groups and government agencies to refer to the industrial expansion across the globe and it's impact on the environment. Governments have responded to this by enforcing costs and regulations on ICT so that what are termed 'external' costs on the environment are actually made into internal 'costs' on the agents responsible (Meyer 2008). These legislation requirements have an impact on the business, thus they are forced to adapt or risk the penalties.

The first move to create standards across the IT industry in response to environmental concerns was probably the ENERGY STAR initiative, which is a "joint program of the U.S. Environmental Protection Agency and the U.S. Department of Energy". Set up in 1991 and first applied to IT through applying energy ratings to monitors and personal computers in 1992, this then expanded to include other aspects of the industry and more initiatives relating to environmental sustainability. It then expanded globally to many other areas including Australia, Canada, Japan, New Zealand, Taiwan and the European Union (Energy Star 2008).

The Intergovernmental Panel on Climate Change (IPCC) was formed in 1988 and was set up by the World Meteorological Organization (WMO) and the United Nations Environment Programme (UNEP). The aims of the IPCC, in their words, was to be an "objective source of information about the causes of climate change, its potential environmental and socio-economic consequences and the adaptation and mitigation options to respond to it", for use by policymakers. It's latest report "Climate Change" was released in 2007 and it stated that human-caused greenhouse gases were most likely contributing to an increase in global average temperature and that global atmospheric concentrations of carbon dioxide, methane, and nitrous oxide have increased as a result of human activity (IPCC 2007).

These recommendations outlined in the IPCC Climate Change 2007 report is going to have a definite effect on the IT industry. In 2008, the SMART 2020 Report, authored by the Global e-Sustainability Initiative (GeSI) and The Climate Group, a non-profit organisation that according to their press release "works internationally with government and business leaders to advance climate change solutions and accelerate a low carbon economy" (GeSI 2007-2008), was released. This report looked at the impact of ICT on global warming and how ICT could reduce emissions in other sectors of the economy. It found that ICTs could deliver approximately 7.8 GtCO2e of emissions savings in total by 2020 and also that ICT accounts for about 2% of global emissions of carbon dioxide (SMART 2020 2008).

The effect the recommendations had and the increasing awareness led to more direct changes within the finance and economics of the business environment. The environment effects economics and economics effects the environment, because both deal with scarcity of resources which is the key thing behind sustainability practices. Financial sustainability refers to cash and capital resources whilst economic sustainability is how the organisation fits into the wider economy (Sustainability Report 2005-2006). Finance and internal economics of the business directly relate so that can mean profitability, productive efficiency, longetivity and re-investment into the business. Outside of the business, it's how the organisation promotes sustainability by choosing 'green' ways of doing business (IE: managing waste and recyling), using ethical practices, buying/supplying to sustainable organisations and generally having a net positive impact on the local and global community (Weston 2008). It has been found by international consulting firm McKinsey that "investment in energy efficiency of about $170 billion annually worldwide would yield a profit of about 17 percent, or $29 billion" (Knickerbocker 2008). International investors are also pledging more money to 'green business', governments issue them tax credits and the rise of the carbon emissions trading market (Knickerbocker 2008). Some surveys have also shown that some consumers prefer to buy products from environmentally-friendly corporations, which directly affects the bottom line (GreenBiz 2009).

Since, as explained above, economics directly relates to sustainability issues, the possible effects of digital gold currency (if widely adopted) on economics could lead to positive sustainability practices. This is because the current system of credit creation - creating money out of nothing - is unsustainable and is likely to lead to another severe economic collapse. The Global Financial Crisis of 2008-2009 is evidence of this. But history also shows it too, as in the 20th Century across the world there were several recessions, periods of hyperinflation and even a global Great Depression (a particularly severe recession). Because of globalisation, the economic effects of a downturn in one country will inevitably affect the entire world. This impacts on sustainability because the current system leads to these unsustainable practices of environmental degradation, via exploiting natural resources through massive economic expansion, in the first place.

Thus, economists look for reasons behind these calamities and discover that each time it can be traced back to how money is created is used. The issuance of debt-based money was started by the Bank of England in 1694, beginning the modern era of capitalism. By lending out more money than they had in their reserves (called fractional reserve banking) they were able to substitute paper for gold. This process hereby indebted all sectors of society to the banks and thus began the credit expansion that continues today. The difference now, is that currency is no longer backed by gold, and through the Bretton-Woods system instituted after World War 2, the whole world abandoned the gold standard to use paper money (all currencies were tied to the US, and so when the US abandoned the gold standard because they had used up all their reserves, so did the rest of the world) (Schoon 2009). And since then prices, which were fairly stable before, have exploded upwards, according to the CPI (Murphy 2009).

This system is completely unsustainable because every dollar is based off debt, and is created through loaning it out at interest. So for the economy not to go completely bankrupt it has to produce enough wealth in order to cover both the principle and interest of the loan. Problem is, the interest is compounding and so when the repayments can't be made, the only way to pay it off is to take out another loan to pay off the previous loan. This leads to an out of control spiralling of debt.

This creates a vicious cycle and the people who suffer are those who pay taxes through 'active income' and the future generations that are going to be laden with debt, because they are the slaves who have to do physical/mental work in order to fund the ever compounding loan repayments that materialise from this debt-based currency. There are few alternative options, as governments either put taxes on any sources of value or completely monopolise it if they don’t ‘prohibit’ it. For example, any transaction not recorded by government or barter trade is referred to as an 'underground economy' which involves many unrecorded transactions and barter trade. This is mostly done because either the transaction has been deemed 'illegal' or to avoid paying taxes. Therefore, even the use of an alternative currency as 'legal tender' has been made 'illegal', even if it's lawful in some cases as a genuine barter trade (Von NotHaus 2007).

According to Jerome Corsi when the dollar collapses, as it inevitably will under this unsustainable system of debt-based money, international transactions will instead come to rely on digital gold as a private, bank-managed currency (WorldNetDaily 2009). Unlike fiat money, digital gold currency is directly based off the value of precious metals such as gold and silver, with gold being the most popular. Thus it cannot be devalued by oversupply as there is a fixed amount of these commodities available in the world. This is because they are rare to find, but not only that explains their value as gold is used in many different materials and electronics so that it's value will never diminish. Historically, gold prices are quite stable (until recently when they exploded upward as a result of the abandoning of the gold standard) and are often a good investment in periods of hyperinflation. The price of gold tends to rise during recessions, as shown recently when it hit 1000 USD/Oz, which is an historical high (Kitco n.d.). It can also co-exist fine along with fiat money, as it can be exchanged according to the current price through digital gold currency exchangers (Murphy 2005).

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