Yes, I said necessity.
In a recent issue of the Gold Goats ‘n Guns Newsletter I described Bitcoin as “The Mutation That Saved Money.” In that piece I argued that Bitcoin was born out of the extreme fraud of the financial system under Greenspan and Bernanke.
Leverage ratcheted up post-Y2K to levels which could only be supported through legislative fiat. It walled off capital from fleeing the system.
And the response was a group of folks applied the teachings of Austrian Economics and Ludwig von Mises’ Regression Theorem to create a digital asset which became less resistant to fraud the more it was adopted.
The result was Bitcoin.
Bitcoin was a catastrophic mutation. A thing born out of necessity to free human beings from a central issuing authority of new monetary units. That relationship needs to be broken if we are going to free ourselves from the cycle of tyranny of the few at the expense of the many.
This isn’t to say that Bitcoin itself is the end of the story. No, in fact, it’s simply the beginning of the next story in human development. But it shows us where we are headed.
What Goes Around …
The ebb and flow of the human generational cycle and its relationship to natural cycles is at the heart of the economic cycle with its booms and busts. They create the interplay of how the rate of wealth generation proceeds.
It’s not possible to end the business cycle, like the Utopian Marxists and their economic brethren the Keynesians believe.
The business cycle is tied to forces far beyond the control of any one person.
The central control of money is an accelerant of both sides of the economic cycle, the boom and the bust.
Excess credit creation, an inevitability during boom times, without underlying assets pull forward production from the future. It does this by cheating the slower formation of capital through industry and savings.
The risk associated with that credit is almost certain to be under-priced via the loan’s interest rate because the lender didn’t earn the money it is lending.
The result is a high probability that the loan will not be repaid as the project was unsupported by the pool of real savings within the economy. Gene Callahan’s excellent book, “Economics for Real People” covers this brilliantly in the first few chapters.
Excess credit creation thanks to the imperfect knowledge of all economic actors accelerates the boom and exacerbates the subsequent bust as the credit money is destroyed and the assets it was supporting fall in price.
Misaligned Incentives
Centralized money issuers have a vested interest in selling more monetary units. Because they make their wealth on the arbitrage between the price of what they buy now versus the higher price later.
They institutionalize the underpricing of capital risk by issuing money at lower interest rates than the economy can support. The result is a shift of the demand for money farther out in time because the most interest rate sensitive projects are the most capital intensive with the longest time horizons to completion.
This not only subsidizes uneconomic capital spending building roads to ghost cities but also crowds out investment in the projects the society actually needed because that capital was bid away from those projects.
Once the pool of real savings is exhausted because borrowers can’t generate enough revenue to cover the cost of the loans the whole system starts to collapse. Borrowers miss payments, the banks get caught short of cash and liquidations and bankruptcies rise.
The banks are leveraged up, having lent up to ten times the amount of money they have in their ‘vaults.’ Once the borrowers stop paying, the savers have to be paid their part of the interest on the loan and the bank runs out of cash.
Welcome to a bank run.
The Lobster Trap
Inflation is the result of more money chasing the same number of goods. And prices are a reflection of the knowledge of the two participants in the transaction. There is a mismatch between the two if there is a central issuer of new currency.
For example, say I’m a central banker who whips up $1000 for my weekly lunch tab. I know that $1000 will inflate prices later. New money gets spent at today’s prices because the restaurant owner doesn’t know where the money came from.
He just knows business is good and that I buy the most expensive lunches he offers. This gives him the false signal to up the price of that dish, say lobster. He knows he can then outbid his competition for lobsters, driving up the price.
I’ll always pay the new, higher market price for the lobster.
Because why the heck not? I’m printing money out of ‘thin air’ and sticking taxpayers with the bill.
This form of income, unearned through honest labor, is called rent.
And so on. With each transaction the new money raises prices along the way. The closer you are to the issuer of the new currency, the more of the total arbitrage between the original price and the final higher price you receive.
This is why wealth inequality is accelerating in the Age of Central Banking at an exponential rate.
As the central banker pay off Congress, the banks, the lawyers, the media and everyone else with my new money first to ensure I can continue foisting the costs of my life off on the taxpayers.
The old system was simply debasing the coinage by cutting down the amount of gold or silver in the coins. The modern system is to issue new money units as debt against someone else’s labor, i.e. the taxpayers.
Bitcoin and the blockchain say nuts to all that. They say new money units should be divorced from human desires and their capacity for corruption. Let’s have math govern that and let the humans figure out how to earn wealth through the system itself.
Tying Risk Down
Sovereign consumers are always looking for ways to grind out arbitrage by bidding as little as possible for what they buy. Enforcers of control are always looking to earn rent by keeping prices higher than consumers want.
Bankers love inflation, consumers love deflation.
Bitcoin, alongside gold, is the ultimate weapon against the rent-seekers because its supply is not governed by humans. This small difference changes everything. There is certainty as to what the supply of money will be tomorrow or next week.
And as such demand for it can be more predictably forecast by market actors. There is no guess work as to what the central bankers are going to do at the next meeting. There are no gonzo gold deposits that could radically change the supply of it on the horizon.
While market forces guide the hands of the central bankers and the gold miners to some extent, nothing is changing how many Bitcoins will be available tomorrow. Yes, there is loss due to attrition and small, uneconomical balances lying around in wallets all over the world. But, there is a known maximum of coins, governed by math, that removes the human element from money creation.
And because of that eventually Bitcoin, or some other suitable cryptocurrency or basket thereof, will form the reserve asset pool against which all other assets are measured. Because that stability of supply and its growth will grind out opportunities to collect rent created by the uncertainty and unfairness of the current system.
It simply costs too much to regulate dollars, euros, etc. Those lowered costs will now be passed to consumers who retain ownership over the value of their money.
Bitcoin returns sovereignty back to the consumer, the rights-holder, which is exactly where it belongs. It distributes (in theory) the ownership of the transaction network and pays them to maintain it. Consumers are the ones who have money to convert into goods. They should be the sole arbiters of their money’s exchange rate, not a President, Board of Directors or Banker.
If the market needs more money in the short term it will create it. Banks can issue credit based on its Bitcoin balances. But, they will be constrained in how they do this because no Federal Reserve stands behind them ready to bail them out.
So, be good at risk assessment or be driven out of business.
Hard forks and other blockchains can create new cheaper currency units and keep the owners of the older network honest through competition and potentially better service, e.g. Bitcoin Cash, Zcash, Litecoin, etc.
And So it Begins…
And that’s why consumers will over time choose to do business in cryptocurrencies over debt-based ones. The value of their money is based on the operational excellence of the owners of the network not the needs of corrupt bankers and politicians.
The miners/witnesses/notaries update and improve it to meet consumers’ needs rather than sitting behind a wall of laws and dictating that inflation is too low and dumping a bunch of euros on the market, devaluing your wages and your savings.
The costs of paying the network operators will be regulated by the market far more efficiently than the current system. And those cost advantages will translate up and down the financial services industry to steal market share from traditional banks over time.
That arbitrage is what is fueling the growth of the cryptocurrency markets now. We’ll still see all the same things that happen today happen in a world governed by cryptocurrencies – bank runs, bad loans, too much or little credit, etc.
But all of those things will not be institutionalized and protected by laws. They will be isolated and far better contained as long as they are allowed to develop as companies free from government interference. The discipline of a crowded market will inspire innovation in risk management.
As we approach the moment in history when the confidence we have in central banks will be tested to the extreme, the timing of cryptocurrency adolescence couldn’t be better. When the monetary system seizes up and people look for new solutions the ‘cryptos’ will be there to keep things flowing.
Those that are have cryptos in their portfolio of assets now are holding them as savings, hedging against this very risk. And in the process they are becoming their own central bank holding reserves to protect their wealth unwittingly ushering in the inevitable.
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