While I don’t consider the downgrade from S&P to be particularly significant, as I recently commented, I do think it is yet another data point illustrating that the situation with the global economy is unsustainable. There is simply too much debt and too much reliance on debt, which means that there are lots of downgrades in the pipeline until this mess gets resolved.
But can this mess ever really get resolved? Well, part of the solution certainly is gold, as gold has historically done well during transitional times given its ability to store wealth unencumbered by liabilities of any kind. Though gold is not the entire solution, most of us will agree that it seems unlikely, or at least undesirable, for the entire world to go back to swapping gold coins for daily transactions for an extended amount of time. Some type of regulatory system and financial system is needed as the current system continues marching to its demise.
Bitcoin has received some attention of late for its ability to serve as a new currency, unattached to the politics of nation-states and central banks. And a stock exchange that transacts in Bitcoins - meaning companies can raise money and have their shares priced and traded in Bitcoins, has emerged as well, with 23 companies listed at the time of this writing. I wonder what rating the S&P would give this.
Ultimately I’m skeptical of Bitcoin’s approach to monetary policy. I believe a central bank issuing some type of commodity money (i.e. linked to gold) is the real solution here, rather than a completely decentralized system in which money supply is managed entirely by some algorithm. However, Bitcoin is illustrating the potential for cyber-communities to self-organize and self-finance, to the point where a real exchange can emerge.
So as the U.S. financial economy continues its decline, investors will face two options: place their capital in a world economic system managed by the IMF, World Bank and other supranational institutions – or take the renegade route and invest in P2P cyber-economies like Bitcoin. For something like Bitcoin to succeed, some real investors with deep pockets and a real commitment to launching such an economy will need to step in. The social media companies in Bubble 2.0 are well-positioned especially due to the virtual currencies many of them use, and as the market crash begins to crush their IPO dreams, perhaps they will explore some more radical, revolutionary options. If that happens, or if any big money steps in, investors may have a new stock exchange built on a stable currency that they’re looking for.