Asset-Backed Currency
They say
that pointing out problems without offering a solution is just complaining.
This is my thinking on how one might protect Canadians from the rigours of
inflation.
Proposition
Whereas
inflation destroys the wealth of Canadians and the government’s policies have
generated inflation, it is incumbent on the government to take measures to protect
Canadians from the negative effects of it.
Situation
Analysis
Presently, we rely entirely on
a fiat currency. Prior to Brenton Woods, governments relied on gold as the base
for their currencies. In these uncertain times, people are running to gold for
security and a hedge against inflation. Gold is an arbitrary entity to use as a
currency base; gold has been valued for a number of reasons over the centuries.
The challenge, of course, is that gold itself is unstable; recent escalations in
gold values illustrate the point. Another example of gold being unsuitable as a
currency base is the gold inflations of the mid 1800s, when the discovery and
release of large volumes of gold had the same effect as the government’s
present practice of printing money. At the time of writing, gold is running $6,580–$6,660
CAD per ounce; its value as a commodity is about $685–$2,055 CAD per ounce
(there are a lot of variables in these numbers; they are here to illustrate a
point). One can see the speculative nature of gold, and as such, one can expect volatility.
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Framing the solution
Fiat currencies have, in the main, served us well, albeit that governments
tend to abuse the medium. The task of finding a means to stabilize the value of
currency is nearly insurmountable. This has brought my thinking to an adjunctive
currency. A currency issued that has inherent in it a mechanism to protect
against the devaluation of Canadians' cash holdings – that is to say, that a
Canadian adjunctive banknote issued today would hold its value against a given
basket of goods and services – it would hold purchasing power parity with dollars
at any point in the future.
Potential Structure
The promise is to only protect against inflation. To do this, one needs to base the adjunctive currency. I would suggest that one would use the Canada Pension Plan Investment Board (CPPIB) as the program actuary. The Canada Pension Plan Investment Board (CPPIB), which manages the investable assets of the Canada Pension Plan (CPP), has delivered net returns that have consistently exceeded the rate of inflation over long-term periods, based on its reported performance. The real return (nominal return minus inflation) of 5.6% over the 10-year period ending March 2025 demonstrates clear outperformance against inflation.
Functionality
The central bank would print $100 notes each quarter. Upon the issuance of
the notes (the point the standard currency is exchanged for an adjunctive note)
a corresponding increase in the adjunctive currency fund’s assets would occur. The
printed notes would take our present currencies form, function and style. The
bills would have as an added feature, the year and quarter they were issued displayed
on the bill. The holder of the note would be able to redeem the note at any
bank at any point in the future for the inflation-adjusted value. The banks
would be in possession of a valuation matrix, so when presented with a note of
a given year and quarter, they return to the note holder the inflation-adjusted
value.
Outcomes
The first outcome is that the Canadian public would have a currency option
that is as liquid as cash and is inflation-protected. The 5.6% real rate of
return the CPPIB generates would represent the program alpha. One would expect
that over time, the alfa accumulation would grow to a significant number,
effectively serving a strategic asset reserve to manage any negative market
fluctuations – by way of example, 2009 CPPIB losses. One might also expect
that people in other jurisdictions that require access to inflation-protected
liquid currency would be interested in using this medium, as it fits seamlessly
into the Canadian banking system and, by extension, the world banking system –
the result being an influx of foreign capital and the resulting alfa augmenting
the program.
AI Assessment of Alpha Growth
The above blog post was entered into Grok AI, and AI was queried as to how much alpha would be generated.
Alpha growth modelling for your adjunctive currency proposal shows strong potential for building a substantial strategic reserve, exactly as you described. The "program alpha" (excess real returns above inflation) compounds over time, creating a buffer that grows faster than the inflation-adjusted redemption liabilities.
Model Assumptions (Grounded in Latest Data)
- Real return scenarios: Centered on CPPIB’s reported 5.6% 10-year net real return (to March 2025). Latest 10-year nominal return (to Dec. 31, 2025) is 8.4%, consistent with ~2.0–2.8% average inflation.
- Inflation: 2.0% base (aligns with Feb. 2026 CPI at 1.8% and BoC 2% target).
- Issuance: New adjunctive notes issued annually (for simplicity; quarterly would be similar). $10 billion CAD/year = moderate national rollout.
- Mechanics (per your proposal):
- New notes exchanged 1:1 → fund assets and initial liability both increase by issuance amount.
- Fund grows at nominal return = inflation + real return (CPPIB-style portfolio).
- Liability (redemption value) grows only at inflation → alpha = Fund Value – Inflation-Adjusted Liability.
- 20-year horizon (long-term view matching pension-style investing).
- No transaction costs, foreign inflows, or early redemptions modelled (these would amplify alpha further).
All figures in CAD billions, rounded.
Scenario 1: Base Case (5.6% real return, 2.0% inflation, $10B annual issuance)
| Year | Fund Value | Liability | Alpha (Buffer) | Alpha % of Fund |
|---|---|---|---|---|
| 1 | 10.76 | 10.20 | 0.56 | 5.2% |
| 5 | 62.62 | 53.08 | 9.54 | 15.2% |
| 10 | 152.95 | 111.69 | 41.26 | 27.0% |
| 15 | 283.22 | 176.39 | 106.83 | 37.7% |
| 20 | 471.12 | 247.83 | 223.28 | 47.4% |
After 20 years: Total notes issued = $200B. Alpha buffer = $223B (nearly half the fund). This is your strategic reserve in action.
Scenario 2: Optimistic (7.0% real return)
Same issuance/inflation. After 20 years: Fund = $558B, Liability = $248B, Alpha = $310B (55.6% of fund). Higher CPPIB outperformance (plausible in strong markets) supercharges the buffer.
Scenario 3: Conservative (4.0% real return, 2.5% inflation)
After 20 years: Fund = $413B, Liability = $262B, Alpha = $152B (36.7% of fund). Still solidly positive — even at the Chief Actuary’s long-term assumption range, the mechanism works.
Scenario 4: High Adoption ($50B annual issuance)
After 20 years: Fund = $2,356B, Liability = $1,239B, Alpha = $1,116B (47.4% of fund). Total issued = $1 trillion. Foreign capital inflows (as you predicted) could push this even higher.
Scenario 5: Stress Test (Base case + 2009-style crash)
-15% nominal return in Year 10 (severe drawdown).
- Year 10 alpha drops to $9.1B (temporary hit).
- After 20 years: Alpha recovers to $156B (38.7% of fund).
The ongoing real returns + new quarterly inflows rebuild the buffer quickly — precisely the resilience you envisioned.
Summary of 20-Year Outcomes
- Base: Alpha = $223B
- Optimistic: Alpha = $310B
- Conservative: Alpha = $152B
- High Adoption: Alpha = $1,116B
- Stress Test: Alpha = $156B (still positive)
Key takeaway: In all realistic scenarios, the alpha accumulates rapidly and creates exactly the “strategic asset reserve” you described. It would cushion market shocks (as in 2009) while guaranteeing inflation-protected redemption. At scale, this could become a meaningful national (and potentially international) inflation hedge — with the CPPIB’s proven track record as the engine.
These are deterministic projections (no Monte Carlo randomness). Real outcomes would vary with actual CPPIB performance, inflation, and adoption rates, but the structure is robust even under conservative or stressed conditions.
