Soft Currencies, Taxation, Resource Claims, & Giftcards
Soft Currencies, Taxation, Resource Claims, & Giftcards
The US dollar isn’t backed by nothing. Consider the Amazon giftcard.
The US dollar isn’t backed by nothing. Consider the Amazon giftcard.
An Amazon giftcard is a piece of plastic, a digital entry on AWS. Printed at will by Bezos. Its only value is it’s a form of legal tender to consume Amazon’s vast resources. It’s a quasi soft currency, in a way. When you own an Amazon giftcard, you have a concrete claim against Amazon’s productive capacity.
How does this relate to fiat currencies, and what makes a soft currency valuable?
Access to Resources
A soft currency is one backed by no hard asset and with no fixed-exchange rate. Conversely, a hard currency is one backed by something concrete at a fixed-exchange rate. Historically, gold has been the backing.
You could issue your own soft currency, but no one would want it. Why are Bezos bucks valuable, but yours aren’t?
Because those giftcards represent a claim on the productive capacity of Amazon; Amazon has enormous resources, you do not.
By exercising a claim, I mean you can go to Amazon and literally commandeer their output with it.
The Firmer-Than-Believed Soft Currency
Bezos bucks have value because Amazon has an immense amount of resources, and you can access those resources with his giftcards. Are these giftcards backed by nothing? Because there is no gold tied to their issuance.
No, because there’s plenty real and valuable at Amazon. Go on Amazon and look at all the nothing backing them. If Amazon went bankrupt or had nothing to sell, those giftcards would be worthless. The claim on resources imparts the value.
It’s erroneous to see soft currencies (fiat money) as backed by nothing because they have no fixed exchange rate to something physical. The fixed-exchange rate is an Austrian distraction. No one actually wants the gold, they want access to the issuer's resources. Fiat currency is a claim against a nation’s industrial output.
Gold backing is merely enforced discipline for issuance of the currency, not because you care about or want the gold itself. Gold has no intrinsic utility or value, discussed further here: Crypto, Stocks, Hammers, Gold, & The Meaning of Intrinsic Value.
When you fix a currency to something else, you're placing an artificial constraint on its issuance by tying it to something physical, because you distrust the decision making of governments and politicians. Fine. I commiserate with this. But understand that's the only reason to desire a "hard" currency; because it limits the issuer, not because you want the hard asset it’s fixed to.
You can call that “soft” in that there's no fixed-exchange rate that the currency can be converted to, but I see plenty of hardness there too. Understood in this manner, I’d describe soft currencies differently, perhaps as “claim currencies” (it’s tautological, but it reinforces why they have value and what you should focus on). Are Amazon’s resources hard or soft? The US's?
A currency has worth and demand the same way Amazon giftcards do: you can exercise them against the productive capacity of the issuing nation. Claim currencies are backed by the concrete output of the enterprise of that country. There are real, hard assets buttressing those pieces of paper and plastic.
This description applies to any giftcard, but Amazon is a particularly strong exemplar of this, because its business is so massive and diverse. If giftcards had a secondary market (they probably do), I bet Amazon’s would carry better trade value and “moneyness” than random retailers or restaurants’ giftcards, because the broad demand to claim their output is higher.
Country currencies operate similarly.
The US Dollar is Backed by Nothing….
$1M USD can be swapped for $1M of any US assets you please. A $27 trillion monstrosity of nothingness at your service with those fiat pieces of paper in hand. That’s not nothing, in fact that’s quite a big something. A country that has nothing worth consuming, has a currency that reflects that.
Whose resources are in highest demand? What entity is the strongest, most sound, and least likely to go under? The US dollar is the giftcard of the US economy. Respect the giftcard.
A necessary but not sufficient condition for a currency to have value is for the issuing nation to collect taxes in it.
When the state demands taxes in their currency, that means domestic businesses need the currency, and will sell their goods in it, creating demand for it. You have a claim on the output of all US businesses because the US government literally forces businesses to amass and accept USD for goods and services via taxation. This is a form of violence. The dollar is coercively imposed as a claim on productive output, as is any currency.
The US dollar is backed by nothing…. setting the claim on the $27 trillion behemoth of resources aside, here’s some more nothing that reinforces its network effects and demand:
What makes a currency carry notable value is when taxes are collected in it, AND it represents a claim on resources in an economy with a lot of things worth claiming.
You must pay your taxes in the giftcard through violence, and the giftcard represents a claim on the biggest economy in the world. In no way is that backed by “nothing”. This is greater backing than gold pebbles could ever hope to be.
Functionally Understanding the Dollar
Dollars are in-part defined as a liability of the Federal Reserve. I don’t find this framing to be useful or accurate. It's an accounting technicality. An answer that will get you an A on a test, but has no functional application.
USD is not a “liability” of the Fed. You have no claim on anything from the Fed with them. What does the Fed owe you, exactly, for your $100? There's no expiration, no interest payment, no claim you can exercise, and no principal to repay; if none of this exists, it isn’t a liability. That isn’t debt, and the Fed isn't liable to you for anything when you hold dollars.
People say this because they think the Fed creates the money supply. It doesn’t.
97% of the money supply is created and allocated by bank loan officers for the benefit of the bank. Banks create the money supply. The remaining ~3% is the Fed/cash. This is further elaborated on here, and in my Fed series broadly.
However USD is a liability of the US economy. Not the Fed.
USD as Equity?
Are dollars more accurately conceptualized as equity? I also think this is amiss, because equity is a claim on resources only in theory.
When I say “claim on resources”, I don’t mean it in a flowery academic way like we do for stocks. I’m not analogizing currencies to stocks.
Stock is also a “claim” on cashflows, company resources, etc., but why don’t you go try to exercise that claim? Go try to redeem AMZN for Amazon’s resources. Email their investor relations department and say “one cashflow please”. It’s an academic construct.
Go to Nvidia with your NVDA shares (or any tech company) and tell them you want .00004% of their GPUs or part of their treasury in exchange for your stock and see what happens. If they *decide* to give you dividends, it’s only because growth is slowing and they don’t know what else to do with the money. There is no claim on anything with stock, except sometimes in bankruptcy… and even then, not really.
For over half the Nasdaq, there are no dividends. No claims on cash flows. No cash paid out to you. Often no book value either. What is your “equity” equity in, exactly? Stocks have evolved, slowly, over time into something else, and we never updated our priors. This is further broken down in the essays Governance Tokens, Tech Stocks, Dividends, and "Utility", with a history lesson in DeFi's Dividend Dichotomy: A Capital Markets History Lesson.
In Closing
People say “fiat currency” as if it’s a guy in a wizard outfit decreeing his potions are legal tender; it’s a bit more serious than that. The resources of the issuer are what imbue the value. The coercive imposition of taxation means you must accumulate that currency to access those resources.
Not only is the dollar a formal claim on the productive capacity of the US, it’s also enforced and backed by two of the most basic natural laws and needs that govern and maintain human societies: violence and energy (oil). I’ll discuss this in later essays.
Yeah yeah USD is a shitcoin, I agree… but, some shitcoins are more metal than others.
Stop the red herring of fixed-exchange-rate economics and its understanding of currencies. The system has changed, the gold standard is gone, it’s time to update our models and understanding on how the machine works.
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