#Info - Gold, Bitcoin, and the Global Money Supply—A Liquidity Dilemma

Introduction

The modern global economy is defined by its vast scale and the smooth facilitation of transactions enabled by fiat currencies. Periodically, movements proposing a return to "hard money" systems such as gold or even the adoption of cryptocurrencies like bitcoin surface, with claims of superior stability. But can these constrained-supply systems support the mammoth volume of global commerce? And what are the dangers should the foundation of current fiat—the US dollar—falter? This article conducts an academic investigation into the current structure of the world’s money supply, the implications of a collapse in the dollar, and the profound liquidity challenges a return to gold or bitcoin would ignite.

The World’s Money Supply: Fiat Dominance

Currently, fiat currency—money not backed by physical commodities but by government decree—forms the backbone of the global money supply. Every major currency, since the demise of the Bretton Woods system in the 1970s, is fiat. The sheer volume is substantial:

• The physical fiat cash in circulation (banknotes and coins) among leading economies alone exceeds $4.5 trillion.

• However, the broader aggregate money supply (including bank deposits, digital balances, etc.) is far larger. In individual countries, monetary aggregates such as M2 and M3 can be several times larger than currency in circulation.

To illustrate, in India, M3 (broad money) was about ₹167.99 trillion (roughly $2 trillion as of 2020) while physical cash (M0) was much smaller—demonstrating how most money today exists digitally as bank deposits and credit.

Thus, most of the world’s money—by some estimates, over 90%—is digital fiat, not physical cash or banknotes.

What If the Dollar Crashed?

The US dollar sits at the heart of the world's monetary system, serving as the primary reserve currency for governments and the principal medium for international trade and finance. A crash in the dollar’s value has wide-ranging implications:

• Exporters' Advantage: A weaker dollar immediately aids US exporters by making their goods cheaper abroad.

• Emerging Markets' Debt Relief: Countries that borrow in dollars find their debts less onerous when repaid in stronger local currencies.

• Global Fragmentation: A sharp drop in dollar value fosters "currency blocs" and de-dollarization as nations scramble to reduce reliance, possibly increasing the risk of a “currency war”.

• Liquidity and Confidence Shock: As many cross-border contracts, reserves, and financial assets are denominated in dollars, a sudden loss of confidence could trigger liquidity freezes, force revaluations of assets, and propagate shocks throughout the intricate plumbing of global finance.

Central banks and global regulators are unprepared for a complete abandonment of the dollar paradigm, leaving the global liquidity system vulnerable to severe stoppages in trade, investment, and credit.

The Hydraulics of Money—Liquidity as Flow

In the documentary "Money & Life," the analogy of a hydraulic or circulatory system is used to describe the flow of money through society:

“Blood carries nutrients to all parts of the body; the purpose of a monetary system is to carry value to where it’s needed. Liquidity, current, flow—money was never meant to be hoarded but to circulate and uplift the community.”

A global monetary system reliant on smooth, ample liquidity is vital to making payments, trading, and investing possible, just as adequate blood flow is to a living organism.

Constrained Supply: Gold & Bitcoin—A Liquidity Squeeze

The Restrictive Nature of Commodity Money

Gold or a bitcoin-denominated system imposes fundamental constraints:

• Limited Supply: The available gold above ground (estimated at around 208,000 metric tons) is minuscule compared to global trade needs. Similarly, bitcoin’s total limit is 21 million coins, and both have slow growth.

• Historical Precedent: Under the gold standard, long-run price stability often came at the cost of severe short-term volatility, deflationary spirals, and recurring banking crises. There was not enough elasticity to allow economies to grow with demand or recover from shocks.

• Money Supply Growth: As economist David Mayer observed, "The scarcity of the metal constrains the ability of the economy to produce more capital and grow." If world GDP expands but the gold or bitcoin supply does not, liquidity dries up, choking investment and trade.

Impacts on Economic Growth and Liquidity

• Reduced Liquidity and Velocity: With a fixed monetary base, there is insufficient flexibility to expand money supply to accommodate growth or economic shocks. The "hydraulic" system becomes clogged, causing liquidity shortages and recessions.

• Deflation and Debt Burden: Scarce money leads to deflation, worsening real debt burdens and inhibiting spending—a problem observed repeatedly under gold standards and forecasted in any bitcoin-anchored regime.

• Transaction Bottlenecks: The vast daily volume of electronic, cross-border transactions—running into trillions of dollars—is unmanageable with a slow, illiquid hard-asset currency.

If the World Switched to Gold or Bitcoin: Global Stoppage?

The switch would almost certainly precipitate:

• Sharp Liquidity Contraction: Most worldwide assets, savings, and debts would face dramatic revaluation or collapse, as not enough new "money" could be created to meet demand.

• Stalling Economic Activity: The inability to expand the money supply means that increases in global trade or investment cause a rise in the value of gold/bitcoin but no proportional rise in liquidity. Economic activity would seize up, like a circulatory system deprived of blood.

• Increased Inequality and Volatility: Hoarding of scarce currency, dramatic swings in value, and heightened financial crises are much likelier in such a system due to rigid constraints and limited ability for policymakers to intervene.

Conclusion

Fiat money's flexibility has been crucial in supporting the world's immense and ever-growing economic output, with 90%-plus of the money supply existing in digital form. Should the dollar collapse, a brief window may open for alternative “bloc” currencies or even for a gold/bitcoin experiment, but the result would be profoundly destabilizing. A return to gold or bitcoin as the foundation of global money would undermine liquidity, restrict economic growth, and jeopardize the circulation essential for prosperity—the monetary "blood flow" society depends on.

The hydraulics analogy captures the essence: To keep global commerce alive, money must circulate freely and in sufficient volume—damming that flow courts disaster.

Thus, while hard currencies fascinate as a hedge or store of value, the academic evidence decisively warns against their use as a primary global medium, underlining the indispensable role of flexible fiat in ensuring the smooth functioning, growth, and dynamism of the world economy.