Kilowatt-hours, cigarettes, gold, and fine wine: new currencies to replace the U.S. dollar?
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Here is a comment  I have posted in a LinkedIn forum on the global economic crisis, in which various serious and fanciful proposals for replacing the U.S. dollar as the world’s reserve currency have been discussed.

Carbon emissions credits or kilowatt hours are a poor medium of exchange for the same reason that cigarettes or rare wines or tulip bulbs or even barrels of oil are: they are unstable and they have utility apart from their value as units of account. Until we have batteries capable of storing all the electricity generated and a much more efficient electric grid, a kilowatt hour produced but not consumed is lost forever. You can’t save it and use or spend it tomorrow. And because of transmission loss, a kilowatt hour generated in California is something less than a kilowatt hour when it reaches New Jersey.
If used as currency, even if you can overcome the storage and transmission problems, every transaction based on the kilowatt-hour becomes a decision about consumption. Do I use it to keep my refrigerator cold, or to spend on something else? Once consumed, a kilowatt hour – like a cigarette – is no longer usable as currency.

This is why we typically use something stable and unsuited to most other purposes as currency. Gold bars and coins fit the bill remarkably well. They don’t biodegrade, and apart from dentistry, they have few other practical applications. Silver, copper, and platinum, because of their many industrial uses, are much less useful as currency. The huge stone wheels used on the island of Yap are also a good currency, since they meet another important standard: it is not easy to make more of them.

It is possible to make (or extract and refine) more gold, but the high cost of digging new mines limits the potential rate of increase of a gold-based money supply. This is where fiat money – paper or strings of zeroes and ones on a computer screen backed by “the full faith and credit” of a government – becomes problematic. Highly-indebted governments are tempted to inflate their way out of their debt. If your currency is worth only 10% of its previous value then so is the amount you owe. This solution, poetically known as “debauching the currency,” does not work so well for savers, creditors, and pensioners, who end up getting only 10 cents on the dollar, like the General Motors bond-holders. Germany did this in the 1920s and Zimbabwe earlier in this decade, though instead of 10 cents it was more like one-billionth of a cent.

Remember the phrase “sound as a dollar?” We don’t often hear that any more, and we are likely to hear it even less now that Presidents Bush and Obama, having super-sized the national debt, have all but guaranteed future inflation.

Neither our government nor any other is likely to return to the gold standard any more than they will adopt electric power as a new backing for the money supply. As individual investors, though, we have a number of options. We can buy gold, of course. We can short the dollar, though in favor of what? We could even start to collect rare wines and fine art. There may be plenty of good reasons to put up a wind turbine in your back yard, but giving yourself a hedge against inflation or a perpetual money-making machine is probably not one of them

Posted 07-08-2009 10:21 AM by Anonymous


Miguel Chavez wrote re: Kilowatt-hours, cigarettes, gold, and fine wine: new currencies to replace the U.S. dollar?
on 05-24-2010 12:09 PM

There has been a lot of talk in Mexico in recent years regarding the convenience of returning to a monetary currency backed by silver. In fact, in Congress there has been talk in this respect, and even one initiative or two have been studied by the respective commissions.

One of the main problems with this initiative, and which is pretty much in line with your description of why silver is not suitable for currency, is precisely the many industrial uses of the metal, which could cause a fluctuation of its value due to old-fashioned laws of supply and demand. We could risk seeing a demonetization of our currency because coins get melted at factories to extract the silver in it to use it in other industrial applications, because their inherent value could become higher than their facial value. Or viceversa: we could see our currency's value fluctuate wildly from one week to another, because of changes in the (industrial) value of silver around the world.

Not so long ago, Mexican bills still included the legend "The Bank of Mexico WILL PAY to the bearer the amount of..." That was a carry-over from the times when the currency, like most in the world, was backed by gold and silver reserves stored by the government in the central bank.

But we've been using foreing currency reserves for this purpose for several decades now. U.S. dollars make up a sizable percentage of Mexico's reserves, and I can only imagine what could happen if the currency, once considered the standard of the world, suddenly lost its value.