Fiat

The Case Against Bitcoin’s Inflation Narrative

15/09/2021 by Idelto Editor

Despite inflation being most commonly cited as the reason for Bitcoin’s price appreciation, there are other factors at play.

What do Peter Schiff, gold bugs, the financial media and many bitcoiners have in common? It is the shared belief that “money printing” is to blame for many, if not all, of the increases in price that plague our economy. While it cannot be argued that prices are increasing in certain areas such as in housing, stocks, bonds and lumber (albeit temporarily), I believe the source of those price increases comes from a different place than what most people tend to assume.

Over the past few months, I have been collecting information related to the topic of inflation and would like to use this opportunity to share my findings with the Bitcoin audience in particular. We will use this missive to try and identify the types of things one would expect to see in both inflationary as well as disinflationary/deflationary environments. We will also try to uncover some of the culprits that are most responsible for the increase in asset and consumer prices post–Global Financial Crisis (GFC).

Within the Bitcoin space, there are two topics that are guaranteed to get you positive attention. One is to promote the inflation narrative and the other is to promote bullish price momentum. Many of the articles that cover the aforementioned topics can be boiled down to mere cheerleading and often tend to lack substance in my opinion. Even though this missive will be covering the topic of inflation, it will actually be providing support for an alternative view than that which is most popular. This article may seem a bit long to most readers but not to worry, it is just as chart heavy as it is word heavy and the charts and illustrations we will be using will be helpful for our analysis.

In order to begin, we first need to identify the attributes of both inflationary and deflationary environments in terms of the social and economic behaviors that one might expect to observe in each type of environment. To do this, we will be utilizing historic precedent more often than not. We will begin our analysis by first identifying the attributes of a truly inflationary environment.

What Does An Inflationary Environment Look Like?

In order to understand what to expect in an inflationary environment, we will be using history as our guide. We will be looking at the effects that inflationary periods have had on areas such as interest rates and consumer behavior. The inflationary episodes below are presented in chronological order and essentially cover the last century or so. We begin with Bolshevik Russia.

Soviet Russia

“World War I and the Revolution of 1917 led to a period of unprecedented inflation. By 1917, the ruble had lost 75% of its 1913 exchange value; by 1920, it had lost 99.9% of its 1913 foreign-exchange value. The commodity price index rose 5800% between 1913 and 1918 and rose 4.9 million% between 1913 and 1921.”— “A History of Interest Rates,” p. 598

One of the important hyperinflationary episodes that has been largely forgotten was the Soviet hyperinflation that directly followed the Bolshevik Revolution. The example provided above might remind people of more modern episodes such as the experiences of both Zimbabwe and Venezuela. So we know what was happening to the Soviet ruble during this time, but how did interest rates respond? According to”A History of Interest Rates,” deposit rates at the Gosbank were as high as 72% in 1923, but the text also indicates that these rates were not indicative of supply and demand, instead being determined by Soviet commissars, and thus would have likely been much higher. On the lending side, interest paid on loans exceeded 216% during the same year. Additionally, pawn shops could charge upto 120% for advances of credit. The aforementioned Soviet commissars controlled all aspects of banking during this period, so black market rates were likely to be much higher than those stated above.

Weimar Germany

“The only thing to do with cash by that time (February 1922) was to turn it into something else as quickly as possible. To save was folly. Undoubtedly, however, as in Austria, there were many farmers who behaved outrageously. Dr. Schacht’s account of the inflationary years recalled that farmers ‘used their paper marks to purchase as quickly as possible all kinds of useful machinery and furniture-and many useless things as well. That was the period in which grand and upright pianos were to be found in the most unmusical households.”— ”When Money Dies,” p. 109

From a behavioral point of view, one of the things you would expect to see during a period of high to extreme inflation is for consumers to try and get rid of their rapidly depreciating currency as quickly as possible. During the years immediately following WWI, this is exactly what you saw in Germany. Consumers would rush to purchase whatever they could the moment they were paid. In fact, the situation got so bad that producers and retailers couldn’t, and didn’t want to, part with their wares and responded by limiting the number of hours that their doors were open otherwise their inventory would be quickly cleaned out and the shopkeepers would have been stuck with the rapidly depreciating German mark. Additionally, loans in excess of 10,000% were recorded in Germany during this period but due to the chaos of the hyperinflation, the occupation by the French of the Ruhr, and political extremism, true black market rates could have been much higher.

Figure 1. Discount rate for the Bank of Brazil, 1948–1989 (Source).

The chart in Figure 1 is set to log scale due to the volatility in interest rates between 1948 and 1989. Following the military coup in 1964, the Brazilian government began the process of debasing the nation’s currency, the cruzeiro, in order to combat the various crises that occurred over this period such as the 1979 Oil Crisis. The currency itself went through three iterations in total before finally collapsing in 1993 due to hyperinflation. We can clearly see from Figure 1 that interest rates went parabolic just before the final implosion of the cruzeiro, therefore, there is a clear cause-and-effect relationship between the money printing taking place and the rate of interest. When money is printed, the rate of interest is shown to increase as a consequence. We see this type of behavior time and again.

Argentina

Argentina’s struggles with inflation are well known. The two main inflationary episodes of the last 20 years coincided with the Argentine Great Depression of 1998–2002 and the Argentine Monetary Crisis of 2018. During the peak of both crises, interest rates skyrocketed in response to the depreciating value of the peso. Figure 2 shows the rates of interest that banks have been paying their depositors over the last 25 years. At the time of writing, September 4, 2021, depositors are earning 34% interest on their deposits again, illustrating that periods of great inflation lead to large increases in the rate of interest.

The quotes and charts from the section above provide consistent evidence that high rates of inflation lead to higher and higher rates of interest. Furthermore, from a behavioral perspective, we saw that, during periods of extreme inflation, citizens would always try their very best to offload the currency for almost anything that couldn’t be conjured from thin air. While not shown in any charts provided, it also bears mention that wages also tend to increase significantly in an effort to keep pace with the ongoing inflation. We will conclude this section with a quote from Milton Friedman regarding the relationship between interest rates and monetary policy:

“As an empirical matter, low interest rates are a sign that monetary policy has been tight — in the sense that the quantity of money has grown slowly; high interest rates are a sign that monetary policy has been easy — in the sense that the quantity of money has grown rapidly. The broadest facts of experience run in precisely the opposite direction from that which the financial community and academic economists have all generally taken for granted.”

We will keep part of this quote in mind as we continue to the next section.

What Does A Disinflationary/Deflationary Environment Look Like?

Now that we have a thorough understanding of what an inflationary environment looks like, we can more easily identify the types of attributes that would define a disinflationary or deflationary environment. In this particular section, we will no longer be observing the past but more so the present state of affairs here in the United States. We will be observing the performance of bonds, commodities (such as lumber) and CPI prints (with particular focus on the most recent numbers). We will begin first by observing the behavior of a few key indexes.

Commodity Indexes

This tweet speaks for itself. Despite immense amounts of “money printing” and Fed intervention, the commodity indexes remain below their 2008 levels … which occurred well before any of the money printing began. After 13 years of intense expansion of the Fed’s balance sheet, why on Earth are these indexes still lower than they were in 2008?

Lumber

Inflation of the money supply leads to a “sustained, broad-based increase in consumer prices,” as Jeffrey Snider likes to say, but that is not what we see here. In fact, despite numerous quantitative easing (QE) operations, the lumber price managed to fall between 2013 and 2016. Figure 3 is more indicative of two short-term booms, the first in 2018 and another following the start of the COVID-19 recession, followed by subsequent busts. Lumber orders soared due to the effect COVID-19 had on workers being forced to stay home. Formerly unplanned projects were undertaken to pass the time, effectively taking demand from the future and positioning it in the present and the price of lumber increased drastically as a consequence. Likewise, when things started to re-open again, and normal life returned, demand relented and the price came tumbling back to Earth.

U.S. Dollar Index (DXY)

With four, technically five, QEs following the aftermath of the GFC, one would think that the value of the DXY (dollar index) would have decreased significantly but what we see is the exact opposite. Even the powerful QE unleashed in response to COVID-19 has been unable to push the DXY below its pre-2014 levels. Please also note that the DXY was below 75 in 2008, before QE had even begun. This low reading makes sense since it occurred just off the heels of a period of stellar commercial bank lending (true credit expansion) and within the context of a eurodollar system which had been free from hiccups. With such large amounts of “money printing” since 2008, we would expect the index to be even lower than it was then but we see the opposite.

Consumer Price Index (CPI)

When viewing these charts, it is important to remember that the current CPI prints are a function of the historically low prices brought on by the global lockdowns during the spring of 2020. For example, the price of oil went negative in April 2020 but had since rebounded to over $60 per barrel by April 2021. Oil is a large component of the CPI basket, so it should come as no surprise that our first big CPI print was the 4.2% registered in April 2021 which utilized April 2020 as its base. Additionally, the U.S. is a net importer of oil so the current congestion in shipping, as well as the record cost of container space globally, is putting further upward pressure on the oil price, which in turn affects the CPI. This process is merely a function of supply and demand, not money printing. Furthermore, these CPI prints will decrease in short order as the base they are compared to increases.

I would also like to point out that many people use spikes in the CPI print to justify the inflation narrative but then turn around and suggest that it is rigged when the inflation narrative is no longer supported by the same CPI figures. If you are going to use the CPI at all, it would be wise to be consistent — either choose to use it or choose not to.

Figure 4. U.S. interest rates, 1920–1989 (Source).

One of the best ways to help the reader visualize the relationship between periods of inflation/deflation and interest rates is to plot historic interest rates on a chart. Figure 4 depicts both short- and long-term interest rates in the U.S. from 1920 to 1989. We can use this chart to illustrate how interest rates respond to periods of both high and low inflation by using historic precedence in our analysis.

Between 1929 and 1933, more than 9,000 banks failed in the United States, forcing an enormous contraction of credit, which then set off a vicious deflationary spiral. In order to try and curb the dramatic fall in prices, the Roosevelt administration even went so far as to buy and then slaughter livestock in an effort to increase the price of meat by reducing its supply (in a Depression no less). Likewise, farmers were paid to keep other types of farm products off the market, an action which artificially reduced the supply of these products, in an effort to raise their price.

So how did interest rates react during a period which featured deflation, credit contraction and tight lending conditions? As shown in Figure 4, the interest rates back then behaved in the same way as they do currently, that is, decreasing and remaining low, as institutions and individuals flooded into the safest financial instruments to try and avoid any additional losses. It is counterintuitive based on what we are told but, when credit becomes scarce, interest rates will decrease and remain low until that condition changes.

The period of the 1930s lies in stark contrast with that of the 1960s and 1970s. The 1960s and 1970s existed within the context of a time where bank credit was expanding rapidly, not just in the United States but worldwide. This expansion of credit occurred in tandem with the growth of the eurodollar system, an international dollar system which is still with us today. So how do we know that credit conditions were loose during this period? Some history from that time should shed some light on the subject.

After the Bretton Woods agreement of 1944, the U.S. dollar became the world reserve currency, ostensibly pegged to gold at $35 per ounce, and the U.S. itself became the world’s depository for the gold of other nations. The privilege afforded by this arrangement was all too tempting for the Johnson and Nixon administrations. From the Great Society at home to the Vietnam War abroad, both programs required significant financing. These two costly blunders led to an increase in the number of dollars in circulation, without a subsequent increase in the amount of gold, which raised the eyebrows of some of the United States’ key depositors. WWII General and then-President Charles de Gaulle was the first to suspect that the U.S. lacked solvency and repatriated the French gold in 1965. Additional countries began to do likewise and the Bretton Woods agreement was permanently reneged upon in 1971 and, as a consequence, the dollar now floated freely. Politicians now had essentially a blank check for the first time in the history of the country, outside of war time.

The 1970s were essentially a continuation of the 1960s and credit continued to expand until, by the early 1980s, interest rates climbed so high that credit was forced to contract. When we examine Figure 4, we notice another counterintuitive trend. As credit was expanding during the 1960s and 1970s so, too, were interest rates rising. This was not limited to the U.S. but was a worldwide phenomenon that included most of Europe among other places.

At this point, you might say “that is all well and good, but how has the post-GFC world not been inflationary with the trillions of dollars being created by the Federal Reserve?” In order to answer this question, we will first need to explain what the difference is between a bank reserve and a banknote.

On The Efficacy Of Bank Reserves

What are bank reserves?

QE operations involve an asset swap. However, the asset that the Fed is conjuring from thin air in order to participate in the exchange is not a banknote but instead something called a bank reserve. The Fed creates these bank reserves, which pay a tiny amount of interest, and exchange them for assets on the balance sheets of commercial banks, assets such as mortgage-backed securities or treasuries. When the program was first unveiled more than a decade ago, the Fed famously used QE to absorb distressed assets from the books of commercial banks, specifically the mortgage-backed securities just mentioned.

The point at which commercial banks receive the bank reserves in exchange for their distressed assets is where things get interesting. Common wisdom, along with support from the financial media and the Fed itself, would have you believe that those bank reserves are the same as the banknotes in your wallet, but they are not. Bank reserves are an asset that cannot leave the banking system nor can these bank reserves function as banknotes since the two are non-fungible. Without going into too much detail regarding the reserve requirements of commercial banks, what bank reserves essentially are is a credit that synthetically increases the amount of reserves a bank has with the idea being that increasing the amount of reserves on a bank’s balance sheet will give the bank the confidence it needs to lend against those additional reserves during times of illiquidity and keep the economy afloat.

In summation, bank reserves are essentially an accounting credit issued by the Fed that cannot leave the banking system. These reserves only tell us what the Fed is doing NOT what commercial banks are doing. In contrast, banknotes are created by the commercial banking system and can exist both inside and outside of it. Banknotes are what we use for regular transactions and are the tool by which inflation is created. The key to remember is that bank reserves and banknotes are not fungible. For a better understanding of this confusing subject, a subject I am continuing to educate myself on as well, please refer to this article by Jeff Snider.

The Failure Of Bank Reserves

Figure 5 shows the trend in real GDP growth going back to the 1980s while Figure 6 shows the same trend going back to 2000. Also included in the Figure 5 are the level of bank reserves, shaded green, in the system both before and after the GFC. Figure 6 zooms in a bit more to magnify the COVID-19 recession a bit more clearly. In both figures, the black dotted line shows the trendline for GDP growth using the rate of growth between 1984 and 2007, while the blue line represents real GDP from 1984 to present.

Figure 5. Real GDP growth, 1980–2021 (Source).

Figure 6. Real GDP growth, 2000–2021 (Source).

Prior to the GFC, there were no bank reserves in the system. Bank reserves did not really exist prior to the QE era but have since exploded in quantity since 2008. What is interesting to observe is that, despite there being virtually no bank reserves in the system prior to the GFC, the real GDP growth rate was, in fact, higher. Despite loads of bank reserves coming online post-crisis, the real GDP growth rate has indeed declined, draining $6.3 trillion of output from the economy. Due to the enormous amount of reserves being created by the Fed, we would have expected a sharp recovery right back to the trendline but that is not what we see. Instead, what we see is significant disinflation as evidenced by Figure 7 and 8.

Figure 7. Total credit in the U.S. financial accounts (Source).

Figure 8. Compounded rate from 1982–2021 (Source).

The reduction in loan growth was so great following the GFC that its compounded rate, going back to 1982, was reduced from 9.1% to 7.8%; a reduction so large that it erased what would have been roughly $6.3 trillion from the economy. Anyone who thinks QE is inflationary should look at all four of the charts above. It is very evident, despite enormous amounts of QE, that the post-GFC period has been less inflationary than the period preceding it. In other words, the policy of QE and bank reserves has been a dismal failure at stoking inflation.

What is interesting, however, is that, despite being less inflationary, the number and size of asset bubbles seemed to increase after the GFC although the dot-com and housing bubbles were very large in relative terms as well. The reason for this is important and worth exploring because it is not a consequence of inflation.

So Who Or What Is Responsible For The Rise In Asset Prices?

We have learned that bank reserves are not as inflationary as they are made out to be. So, the next question we need to ask ourselves is who or what has been responsible for the various asset bubbles that have made themselves clearly evident over the past 13 years? We will answer that question by providing two examples below.

Figure 9. Stock Buybacks and Passive Indexing (Source).

Since 2009, stock buybacks have exploded in popularity among companies. Something that is often missed, however, is that stock buybacks actually create a zero-sum environment. When companies prefer to direct their revenue streams into financial assets, the real economy is neglected in the process. What I mean is that, for every dollar spent on share repurchases, that is a dollar being removed from elsewhere. This curtailment eliminates resources from productive endeavors, such as the expansion of operations or research and development, and this ultimately translates to fewer and lower paying jobs in the economy. We know this to be true because the labor force participation rate is at its lowest level in the last half century, levels not seen since women began entering the workforce in the 1970s. The financial media’s weak attempts to cheerlead job growth are meaningless because the trifling amounts of job growth they are cheerleading essentially consists of low-wage jobs in the retail sector. In sum, companies are preferring to enrich their shareholders at the expense of the public and the economy.

Stock buybacks, however, are not the only catalyst for the increase in stock prices. A lesser known but possibly more powerful force is the rise of passive indexing. Passive indexing occurs when an investment management firm more or less blindly allocates their client’s 401K contributions to a specific basket of stocks, usually those stocks that are most recognizable in the financial industry such as Amazon or Apple. Companies like BlackRock and Vanguard have more than $7 trillion in assets under management and can single-handedly move the market by aggregating and then deploying their client’s funds into stocks.

When companies do not trust the state of the economy, due to their perception that the economy is fragile, they deploy their resources into whichever areas they think will provide a safe return. Deploying capital toward the expansion of operations is a risky proposition, especially if you do not believe that there is enough demand within the economy to defray the costs of capital being deployed.

In truth, share buybacks and passive indexing waste trillions of dollars worth of capital to merely increase the price of assets, but this is a zero-sum game with no real economic benefit that causes the real economy to suffer as a result. In short, the growth in the stock market can

best be explained by stock buybacks and passive indexing.

Shipping Container Rates

People are all too familiar with the spike in the prices of food and other commodities over the last year; but are those prices really a function of an increase in the supply of money or is there a better answer? Figure 10 shows the enormous increases in the cost of shipping containers, and thus the cost of importation, since the beginning of the COVID-19 recession. You would be forgiven if, at first glance, you thought this was a bitcoin chart during the height of a bull market.

Figure 10. Container shipping rates, 2011–2021 (Source).

So what is the connection between the cost of shipping containers and the inflation narrative? The U.S. notoriously runs large trade deficits and its balance of trade with other countries is always negative, meaning that more goods are being imported than exported. According to the Bureau of Economic Analysis, $408.6 billion of goods were exported in the first quarter of 2021 and yet $677.0 billion were imported, which means that more than $250 billion worth of goods were being imported than exported in the first quarter alone. When you have an economy that is heavily dependent on imports, large increases in the cost of shipping are felt more acutely.

The Broken Window Fallacy … Well, Sort Of

What happens frequently is that observers become enamored with the inflation narrative based on the rapid increase in a particular asset or commodity, such as we saw in stocks and lumber. Meanwhile, no attention is paid to the proliferation of shuttered businesses nor the ubiquitous “for rent” signs that accompany all manner of commercial real estate across the country. This is the zero-sum game I was referring to earlier.

While bubbles form in things like stocks and housing, they do so at the expense of the real economy. One of the most important points from Frédéric Bastiat’s “broken window fallacy” was the principle of what is seen versus what is unseen. In his allegory, a shopkeeper’s window was broken by some unruly youth. Those who observed the breaking of the window, and subsequent repair work, only focused on all the economic activity that surrounded the process of repairing the window. They proclaimed how great it was that the broken window created more work for the glazer, while neglecting the fact that the shopkeeper had fewer resources with which to purchase a suit that would have been a negative outcome for the tailor. In sum, while the breaking of the window was a boon for the glazer it was also a loss for the shopkeeper, and the tailor by extension. Likewise, the stock market is indeed pumping but at the expense of all those empty storefronts.

What This Means For Bitcoin

Bitcoin has been rising in a disinflationary, and sometimes even deflationary, environment which means that organic interest, speculation and industry growth are the primary drivers of the price. The only area where credit expansion could at least partially explain increases in the price of bitcoin would be with the recent stimulus payments, assuming said payments were financed by debt issuance and not taxes. However, the treasury market is enormous and has many participants which include foreign governments. The last auction data I saw indicated that the thirst for government debt is much larger than the amount of debt available, so we should not be so quick to assume that an inflation of the money supply is being used to acquire this type of debt.

Gold bugs have been screaming about inflation for well over a decade and yet the price of the yellow metal, long considered to be the inflation hedge, is below its 2011 high. In a similar fashion, bitcoin is considered to be an inflation hedge to the point where the space has also become an echo chamber when it comes to promoting the inflation narrative. However, the topic of inflation in and of itself is uniquely complicated and involves a lot of nuance. Additionally, a firm understanding of the financial system’s plumbing is necessary in order to make sense of this topic, because one needs to be able to clearly identify the transmission mechanism by which credit is created and then given to those nearest the spigot in true Cantillionaire fashion.

It is my belief that the dogmatic view on inflation that permeates throughout the Bitcoin space and elsewhere needs to be challenged because it is leading its adherents toward a false conclusion, namely that bitcoin is going up in price because of inflation while the evidence seems to support other reasons. If inflation ever does truly arrive in the U.S., which I think it eventually will, my guess would be that the price of bitcoin would increase to levels only understood by the citizens of Argentina or perhaps Turkey.

Final Thoughts

Price rises can occur from more than just inflation of the money supply. It is equally important to consider additional factors such as supply and demand. I am sure despite all the evidence people will still try to claim that “corporations are using printed money to buy stock.” If that is indeed so then please provide me with the smoking gun and indicate the transmission mechanism whereby this printed money finds its way to these large corporations. If someone was able to clearly illustrate this process then I would happily change my opinion.

However, if a person is unable to do so, then it might be best for them to reconsider their position on the issue, pursue further knowledge on the topic and keep an open mind. Once you have a better understanding of how the plumbing of the monetary system works, as well as an understanding of how limited the transmission mechanisms available to the Fed to expand credit truly are, then you will see that there are currently no avenues whereby the Fed itself can just print money.

Additionally, programs involving stimulus payments are merely “transitory” as the Fed likes to say and may provide a short-term lift. Once the stimulus has been exhausted, prices will begin to revert such as what we saw with lumber. In summation, when it comes to the topic of inflation the well-known idiom “the devil is in the details” is most applicable in my eyes. The plumbing within the financial system is a bit more nuanced and complicated than otherwise thought.

This is a guest post by Kent Polkinghorne. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.

Bitcoin Fixes The Modern Fiat Ponzi Scheme

14/09/2021 by Idelto Editor

The modern financial system is a debt-based pyramid scheme and an investment-based Ponzi Scheme with extra steps.

Meme Image from Rick and Morty(8/30/2015) Season 2, Episode 6; The Ricks Must Be Crazy

After a couple of years of studying Bitcoin and the U.S. dollar that I was raised to trust like it was some faceless god, I eventually started valuing everything in Bitcoin’s satoshis instead of the U.S. dollar.

The biggest reason wasn’t because of Bitcoin either. It was the U.S. dollar’s system that did it to me. Once I learned what the system was and how it functioned, I could no longer value anything in dollars after realizing how fast they were exponentially losing value.

A Dollar’s Worth (Source: Visual Capitalist)

The U.S. dollar is a system that is burning up its own value with every new dollar that is digitally issued and shoved into the bank accounts of the top 1% of the world. It is shoved into their accounts whenever they need to get a new bank bailout loan or corporate bond loan. They then take that new money and freeze it into their own portfolio’s asset holdings. Jumping ship from the dollar while the loan/money printing process that got them those dollars melts away the buying power of everyone else’s U.S. dollar savings.

This process leaves almost none of that newly printed money liquidity to trickle down to those at the bottom that are relying on the dollar. Dollars that are perpetually being devalued thanks to the digital printing of trillions of new dollars; trillions of new dollars that are issued through loans acquired by the top 1% for their asset-hoarding greed. And we wonder why the wealth inequality is getting so bad with all this loan welfare. Loan welfare for the top 1% where they get a majority of the newly printed cash to then play musical chairs within their asset market of choice.

“Corporate Welfare” by RJ Matson (Source: Distributed to subscribers for publication by Cagle Cartoons, Inc.)

They possess most of the now 35% of all U.S. dollars in existence that were digitally printed out of thin air last year, as stated by Jack Choros in a blog post going over the increases in M1 money supply during the pandemic. They always get a majority of the new digitally printed cash every year through loans to hoard in their assets, all while giving employees the bare minimum. Not even the bare minimum to survive anymore, but the bare minimum they can get away with since minimum wage isn’t even enough to afford the new rising costs of rent. NPR covers this in their article: “Rents Are Out Of Reach For Most Americans Earning Minimum Wage.”

That happens because our cash is created with every new loan that gets issued in our current monetary system, as stated by Forbes in “How Bank Lending Really Creates Money, And Why The Magic Money Tree Is Not Cost Free.”

The top 1% can afford to get the largest loans out of all of us. Some of them can even force the government to give them large loans or even buy up their stock, which in turn forces new money to be digitally printed. Devaluing the rest of the dollars in circulation in the process. We saw this during the pandemic. It was covered by The New York Times in their article titled: “1 Percent of P.P.P. Borrowers Got Over One-Quarter of the Loan Money.” According to the article, the 1% of businesses that got the lion’s share of the P.P.P loan money consisted of “powerful law firms like Boies Schiller Flexner, restaurants like the steakhouse chain started by Ted Turner, as well as the operator of New York’s biggest horse tracks.”

*U.S. dollar inflation visualized at the top versus bitcoin’s deflation at the bottom* (Source: Lark Davis @TheCryptoLark).

The government is often forced to give out these massive corporate loans that cause the printing of new money which devalues everyone’s U.S. dollar savings. There are situations like this that we see every couple of years where banks need to get bailed out because their corrupt systems go bust and start falling apart, further increasing the debt imbalance on the U.S. dollar’s balance sheet.

To see examples of these forced loans and forced stock buying programs for the largest banks and corporations of the world, all we have to do is look back to the same 2008 bailouts that caused Satoshi to invent Bitcoin in the first place. Wikipedia has a page detailing the events well, listing all the beneficiaries of the bailout in their page named the “Troubled Asset Relief Program.” A program that was created because banks and corporations marketed themselves as “Too Big To Fail.” In other words, using unproven theories about how their own failures caused by their own mistakes would somehow cause the whole financial system to crash, all to scare the general public and their lobbied politicians into bailing them out with programs that print new dollars just for them. These bailouts charge anyone saving in dollars an invisible tax via the inflation those bailouts cause. Wikipedia also has a page covering this that explains it in the following words: “Inflation tax It is a hidden regressive tax. Financial repression A range of measures which governments can employ to reduce their debt, which are often accompanied by inflation.”

Another part of this money printing picture for the top 1% is “Corporate welfare programs.” Programs in which governments hand out money grants, tax breaks and other special favorable treatment to corporations in the top 1% of the financial world.

The U.S. dollar’s system in which new dollars are generated through loans is basically a loan-based, asset-hoarding pyramid scheme with extra steps. One that is falling apart at increasingly faster rates with every uptick in inflation, and no uptick in wages thanks to the wage stagnation caused by corporate greed. Corporate greed likes to test how little they can get away with paying people while avoiding an uprising.

It falls apart further with every new digitally printed dollar that forces them to print even more dollars to pay off old debts, which in turn creates larger debts in the process. Repeating this bleeding debt, money creation cycle that is causing the inflationary purchasing power loss of the U.S. dollar to grow exponentially faster over time.

All this so 1% of the population can hoard enough assets to live like financial gods. With enough money to fly their rockets to the heavens and still have more money left over than they can ever possibly spend in their lifetimes. But sure, some of them are promising to give it all away when they die, so they tell us that it’s okay for them to do it.

“Madoff and Pyramid Schemes” (Source: Studio Bendib, Wednesday, January 28, 2009)

“ICEBERG” (Source: Rob Rogers, December 5, 2010)

Their corrupt schemes get more fun, too, on the other end of this debt/money creation equation: the investor’s end.

On the investor’s end, the government pays off debts to old national bond investors with the money they receive from new national bond investors that are investing into the government’s bond market system.

That means that the U.S. pays off old investors of the nation with the money they receive from new investors into the nation’s bond system. Sound familiar? In the dictionary, this is called a Ponzi scheme. I call it “a Ponzi scheme with extra steps.”

These government bond investors are supposed to be the ones funding the new government bond loans. But there are not enough investors to do that, since most people today are wage slaves. So, the investors that are able to invest can only afford to fund a small percentage of the massive corporate-government loans that get approved every year. Meaning the rest is new money printed out of thin air with each loan that exceeds the national bond investment cash inflow.

They print the new money that devalues the purchasing power of everyone else’s U.S. dollar savings, while at the same time freezing the new money supply in corporate assets that prevents it from trickling down and circulating throughout the economy: This system is how a wage slave working class is created.

A working class with wages so low that they can never save any substantial amount of money before the dollars in their savings are devalued beyond any meaningful utility. Usually forcing them to have no other option but to take on unpayable debts just to get by and get anything they need in life like a house, a car, food, or rent, or even to pay emergency medical bills.

Helpful Wage Slave by u/freakDWN (Source: Reddit, October 2020).

The national bond investor end of this equation is what allows the government the front they need to be able to print the massive amounts of money that they do. Money that they then loan to Wall Street every year who then freezes it into their asset bags.

You know, like how a money-laundering operation works. Except, instead of the money coming in from cartels or nefarious businesses with offshore bank accounts to then be washed through their fake businesses and stored in legal assets, it’s just being printed out of thin air by the Federal Reserve. Adding more dollars to the overall circulating dollar supply, while reducing the value of everyone else’s savings who save in U.S. dollars and/or fiat currencies like it that rely on the dollar.

Have you felt that something was off with our financial system in this country? That might be because you subconsciously noticed that the system unfairly flows the stream of new money to the top 1%. While at the same time leaving those at the bottom with less money and only higher debts every year that perpetually grows and forces them to work all their lives.

In layman’s terms, the system is a debt-based pyramid scheme with extra steps, fronted on the other end by an investing-based Ponzi scheme with extra steps.

George Carlin said it best: “It’s a big club, and you ain’t invited.”

Everyone else might as well be a WestWorld robot-like wage slave whose time can be rented and traded with a paycheck like a deck of trading cards.

It’s two sides of the same rotten apple, and it is starting to rot down to the core. Two corrupt practices that the government takes other companies and individuals down for when they’re caught doing it. Maybe they just don’t like the competition. Maybe it’s Maybelline. (Sorry, I couldn’t help myself!)

When Bernie Madoff gave his first interview from jail after being caught running a Ponzi scheme, he told the press: “Why are you even talking to me; the federal government is running the biggest Ponzi scheme in the world!”(Paraphrased from NBS News: “Madoff: ‘Whole government is a Ponzi scheme’”)

If there was one thing Maddoff was an expert in, it was Ponzi schemes. Game recognizes game.

All this is inching the U.S. dollar closer to a cliff of hyperinflation. A financial cliff drop in the dollar’s purchasing power that most of us now have a high probability of seeing in our lifetimes.

When we compare where our debt-to-balance ratio is today to other countries in history who have been where we are now. Each of those countries historically fell into hyperinflation within 30 years from when they were at the point we’re at now. Unsustainable increases in inflation rates, which caused a loaf of bread to cost their citizens upward of a million dollars in their currencies.

Where Venezuela is today. Where Argentina, Zimbabwe, and so many more countries are today. All countries who are already experiencing this ahead of us 30 years ago were, 30 years ago, where we are today in our rates of inflation and national debt balance sheets.

“Zimbabwe reintroduces the Zim Dollar” (Source: ThisIsAfrica.me, June 26, 2019

It happened to Germany before they got desperate and fell into wars from the pains of those economic collapses. Wars that were started as last-ditch efforts to save their country. Well, more so to save the wallets of the country’s political leaders and its war profiteering military industrial complex.

The fall of these countries’ currencies always started off with a slow ramp-up in speed like what the U.S. had in 2008, when Satoshi first noticed it during the second bank bailouts. That’s right, the first bank bailouts were done in the late 1990s, and almost nobody paid attention. Next follows a moderate-to-fast increase in speed like we are in now. All finally resulting in one giant uncontrollable drop in the values of their currencies within 30 years. A value-loss rate of inflation that never ended once they fell into hyperinflation.

And with the U.S. dollar being the reserve currency of most countries today, then its collapse will drag the whole world down with it if they all don’t hedge themselves properly to protect themselves against the dollar’s approaching collapse.

El Salvador is a great example of that kind of hedging against the dollar that other countries appear to be taking notes on. If you don’t know, El Salvador made bitcoin a legal currency and treasury reserve asset in their country to protect themselves against the dollar’s increasing rate of inflation.

The signs of the dollar’s collapse and that it’s exponentially picking up speed is obvious when you look at all countries that are experiencing hyperinflation today. Countries that relied on the dollar until its increasing rates of inflation failed them and their currencies. This is further explained in Robert Kiyosaki’s video, “Shocking Prediction: The Price of Bitcoin by 2031.”

Because of all that, I’m more afraid to save dollars long term than I am afraid to save bitcoin. Especially after reading the charts on https://wtfhappenedin1971.com/.

It really paints a good picture of how we started heading down this increasing rate of inflation rabbit hole after Nixon ended the gold standard. Something that even Nixon said was supposed to be temporary. Well, it’s been 50 years since then and the dollar has only lost what? Over 99% or more of its value when compared to things like houses, cars, food or rent. But sure, it’s temporary.

If you want to know why I’m bullish on bitcoin, and why I started using it as my primary savings ever since learning about its system instead of the U.S. dollar then check out my article, “My Best Attempt To Simplify The Math Of A $50 Million Dollar Bitcoin.”

This is a guest post by Fausto Liro. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.

Bitcoin Has No Competition

12/09/2021 by Idelto Editor

A Weekly Series Of Essays About The Language Of Bitcoin by Alex McShane.

Lingua Contra Imperium

The Language of Bitcoin: 5

TL;DR – A myriad of monetary ruses are revealed to the general public through the scrutiny Bitcoin incites. From the onset, most of us couldn’t see the woods for the trees. For many, the simple technology of Bitcoin helped explain the extremely convoluted machinations of fiat, which were so pervasive as to keep generations of humans effectively viewing the monetary landscape at close quarters. Bitcoin is another lens, a constant measure, through which to view the world. Meanwhile, many are deceived about the state of things due to the all-consuming influence of inflationary credit expansion, which has a telescoping effect on the financial world.

Function

Through its proof-of-work mining the digital world of Bitcoin’s infinite scarcity is grafted on to the physical world. Such a tether between these two realms hadn’t been achieved before with a distributed system. Bitcoin has the additional magical property that it can be transported through any communications channel, for a nearly inconsequential fee that transparently serves only to protect its value, and incentivize cooperation among its network participants.

There is an insidious misconception, or a popular misassumption, that many competing objects in this world are scarce.

There is only Bitcoin, and it is geographically independent, politically deaf, and cannot be captured by any single entity. Moreover its perceived value, which derives from its terminal infinite scarcity, can be transferred from and to anyone, anywhere on the planet, at any time.

This is in part what separates Bitcoin from every other cryptocurrency. It is not difficult to invent circumstances, or to imagine what might be the case. Altcoins are just an exercise in this, they belong to the realm of ideas. Ideas alone will not bring about change. Altcoins, NFTs, de-fi, all of that noise exists merely in the realm of ideas. In the real world, Bitcoin is the simpler, more practical technology that is subsuming and eclipsing the centralized proof of stake technologies, all of which look more or less the same from the perspective of a decentralized technology.

Alt coins are nothing but iterations of fiat, bringing to the market nothing aside from niche special technical languages that are effectively technobabble gibberish, which serves only to entertain. Altcoins are emergent from Bitcoin. They are merely direct copies or permutations of it, all failing at various speeds. Altcoins are also dependent upon Bitcoin to enjoy any longevity at all.

Bitcoin solved the daunting problem of associating events with points in time in distributed systems. It is worth pointing out that Satoshi didn’t manage to make information uncopyable. If you have access to information, you can also copy it perfectly. Centralized systems try to obfuscate and police knowledge by avoiding and actively discouraging people from learning how to do this.

All information, including that associated with your Bitcoin private keys can be copied. This understanding is at the heart of learning to use Bitcoin, and protecting your privacy. Duplication is an inexorable trait of information.

This is a blessing and a curse. This law is what makes both good and bad ideas heedless and intractable. It’s also what makes patents and copyright law a perpetual losing battle, one that only persists through force.

It must be stressed that the impossibility of associating events with points of time in distributed systems was an unsolved problem before Bitcoin. Solutions such as Bitcoin may be singular, but can’t be made single, because all information is copyable, alternative cryptocurrencies will always exist.

It is highly improbably that the set of conditions that led to the launch and successful bootstrapping of the Bitcoin economy will repeat in our lifetime with a currency that can do everything that Bitcoin does, and more.

Bitcoin as a solution cannot be put back in the bottle, and it cannot stay niche. Alternative cryptocurrencies will persist, but will pale in comparison to Bitcoin’s success, because they are and will remain centralized and subject ultimately to the whims of one person, or a small group, or even a large group of people.

Apolitical

Bitcoin is apolitical money. This is one trait that separates it from every other asset.

You might argue we will not find a solution to all political problems in cryptography, however, as Satoshi Nakamoto pointed out, “we can win a major battle in the arms race and gain a new territory of freedom for several years.” And we have and will likely continue to enjoy the opportunity to have freedom and property that Satoshi provided.

Many believe this freedom emerges out of a competition between various cryptocurrencies. This is a mistake. For what it does, Bitcoin has no competition. It is peerless.

In the expansive history of monetary mandate, censorship, and oppression, everyone alive had ideas. Bitcoin delivered a simple, actionable solution. Unforgeable, unstoppable, unconfiscatable transactions ordered and stored on a distributed network.

As long as honest nodes control the most hashing power on the network, they can generate the longest chain and outpace any attackers, and we can store and transmit property, value, and therefore uncensorable free speech across space and time.

The only requirement is that the good guys collectively have more hashing power than any single attacker. For over a decade that has been the case.

Bitcoin gives you the freedom to acquire and control property. This is a singular form of ownership. Bitcoin is freedom. It is unique in this regard. You can actually take ownership of freedom through Bitcoin. This is what it means to be running Bitcoin.

The problem with fiat is that its rules are forever incompletely explained. There is a degree of randomness brought to bear on all forms of alternative cryptocurrencies and fiat, because they’ve introduced a great amount of human governance and dictate into the system.

Humans are not maximally effective at policing themselves, because they are subject to the fallacy of infinite regress. Who watches the watchers? and so on.

This admits of a question: How is governance defined? In Bitcoin one has the option to run older versions of Bitcoin, and the freedom do whatever one chooses with one’s Bitcoin, without being cast out from the network. Our updates are agreed upon by a majority and adopted individually at will. Bitcoin is backwards compatible. And the burden of choice with whom or for what to transact rests solely on the owner of the transactions unspent.

There is no limitation imposed by the rules of the fiat game. They are not playing with a definite supply of numerals but instead with a system for constructing numerals indefinitely.

The fiat game was constructed on the premise that the highest number, positive or negative, takes the trick. The problem is the rules of that game have been abused to the point where it has become generally unclear to the population at large how the game works. In fiat, what is, and what is not money?

In fiat you are playing three-card monte with the fed, who provide the illusion of security, entertainment, and instant gratification (if you play nice), in exchange for the perpetual debasement of your wealth.

Instead of making this false promise, Bitcoin simply provides you with certainty as to how much property you have in this moment and in the next. Bitcoin is property ownership in a rented world.

So we are just quietly accumulating Bitcoin. Bitcoiners understand that only a terminally closed supply will maintain value long term, and increase value when priced against all other non-scarce assets.

In fiat you are constantly paying a permissionless convenience tax by way of monetary debasement on top of the outright taxes paid to fund wars and institutions that enforce the fiat network. Bitcoiners understand that any amount of money will forsake value ad infinitum when its supply is unlimited.

As a society we have grown accustomed to not a definite supply of monetary numerals but instead a system for constructing money indefinitely.

Every other monetary system is allowing people to decide at each moment at what rate to continue printing money, and when to tighten up, but it will never stop, there’s no incentive to. History has shown that governments can’t resist the temptation to debase society’s currency in order to enrich themselves.

Time

Bitcoin is a closed monetary enumeration that accounts for the asynchronous communication that is inherent in every decentralized system.

Synchronous events don’t exist. Everything happens in plenty of its own time. From the perspective of a centralized system however, with a single line of sight, this would not appear to be the case. There is a sobering parallax effect when viewing the monetary landscape through Bitcoin’s decentralized system.

But information, and even Bitcoin cannot represent the state of the world directly. And Bitcoin doesn’t pretend to do this. The state of things is not, nor has it ever been as any government tells you it is.

The Bitcoin blockchain is but one description of time within greater and smaller systems, orthogonal systems. All other cryptocurrencies have left out the essential decentralized feature of such a description of time and try to mask this with accessory features.

There is a wealth of monetary experiences revealed to us by the scrutiny Bitcoin incites, which were hidden or abstracted from view before. One of these is the understanding of our time as an asset we must constantly trade. Time is not money. But time, like Bitcoin, is scarce.

12 September 2021

Read The Language of Bitcoin: 4: “Bitcoin And Existential Risk”
Read The Language of Bitcoin: 3: “Bitcoin: The First and Final Rival Money”
Read The Language of Bitcoin: 2: “Bitcoin Alleviates Future Uncertainty”
Read The Language of Bitcoin: 1: “BTC Is The Best Explanation For The Way Money Is”

Bitcoin And Addiction: A Life In (Fiat) Recovery

09/09/2021 by Idelto Editor

What parallels can be drawn from the recovery of an addict and a society addicted to debt?

Instead of asking, why am I an alcoholic? I prefer to ask, how? As in, how did I become as hopeless as I once was and then how did I miraculously — slowly — progress to where I am today? What were the actions I took, the motivations for those actions, and the destructive patterns that arose and shaped the incentive structure for my reality? Most importantly, now that I am years into recovery and free of the bondage of active addiction, I constantly have to ask: What am I doing to continue to live freely in this new way? What will I do, what actions will I take, through service, self-care and human communion to continue on this more enlightened path?

I’ve stopped caring about why I became an alcoholic. The laundry list of causes looks the same for many of us. I started with family, genetics and some circumstances and all of that was just a roll of the dice. What’s important to me is how I reacted to all of that and how I continue to react to life today.

I was often motivated by fear before sobriety. Today, I have to be on alert for when a fearful story pops up in my head: “Some of the worst things in my life, never even happened.” — Mark Twain.

My alcoholism is clearer to me now, but what I’ve discovered more recently is that I didn’t know I had another addiction: fiat money.

I’m the “bitcoin guy” in my group of family and friends. Random conversations and text threads about current events regularly end up with me inserting a casual and sometimes not so casual, “Bitcoin fixes this,” or “Better buy some more bitcoin,” or “Good job on cutting out those costs … more bitcoin.”

When my brother sends me an article about how meat prices are skyrocketing and another about how lumber costs are going through the roof, I can’t help that, after some exchange, I inevitably conclude my assessment with: “It’s all a signal. Put your time and energy in something that can best store value across space and time — buy more bitcoin.”

We are operating in a debt-based global economy that acts very much like a chronic alcoholic/addict. We get increasingly into more debt, individually and collectively, and in order to service these debts, the powers that be would rather print money to service their aim, instead of allocating tax revenue effectively and practicing austerity. With the alcoholic/addict, abstinence is painful. If the world were to transition to a more sustainable monetary system, it would almost certainly come with pains too.

It is an unpopular decision in the nervous system when all of the sudden you deprive it of the substance it has relied on. If the populace is one big nervous system, then we have been living on debt and cheap money in an arguably unsustainable way. When an alcoholic/addict decides to get clean and sober and cut themselves off from the destructive behavior and substances they have been relying on, it can seem catastrophic for them. And in many cases, they need to be medically assisted in their detox or the process can be fatal. After the dust settles and their body is no longer dependent on the chemicals, the real work usually begins.

The incentive for the individual alcoholic/addict to get clean and sober is freedom from the disease. When they achieve this, they reap the benefits. Family and friends usually benefit enormously as well. Communities and society as a whole benefit from this.

Now let’s look at the incentives for the administrators of a monetary system, central bankers and governments. What are their incentives to administer a new, more fair monetary system? I’d argue that they have no incentive to level the playing field and bring up the disenfranchised — those most affected by modern inflationary monetary policy. Even if the mobs came for them, they have money and the means to get away. They have been living off the fat of the land. Why would they change the current structure? They privatize the gains and socialize the losses. Their decision-making is based on high time preference — short-term goals — and self-interested policy. In their world, rules change at their whim and they know how to act beforehand in order to come out on top.

Enter Bitcoin, a monetary network that is accessible to anyone in the world at any time, with no gatekeepers, intermediaries or central points of failure. The record of its transaction log is immutable and auditable by anyone. The supply of the asset is fixed. The issuance is awarded to those that expend their time and energy, the amount won commensurate with how much of their resources they expend. The disbursement of it is true trickle-down economics as those who have acquired it through provable work and energy expenditure, choose to sell it for other currencies, goods or services. This, in turn, enriches and compensates those that offer such goods and services, in exchange for their time and energy spent. Bitcoin is “engineered money.” It is a monetary network with rules but no rulers and is resistant to corruption by human fear and greed.

How did I get into Bitcoin? I was in the right place at the right time. I had experienced enough to be open to it. I had watched my parents get into debt, then bankruptcy, then divorce, then homelessness. I had experienced my own moral degradation and recovery. In 2016, a friend tossed me an old quarter and said it was made of silver. I had no idea. I quickly wanted to know about money. I soon found bitcoin.

Through this journey, I’ve come to understand money as an information tool. It can be thought of as an information tool that enables people to be accurately (or inaccurately) compensated for their time and energy. The fact that more units of the most pervasive information tool in the world, the U.S. dollar, can be arbitrarily produced at the whim of relatively few individuals, has never boded well for the majority. Money touches everything. Chaotic and shapeshifting money leaves everything it touches in an abyss of misinformation.

Most people go about their lives while never deeply questioning what their finite time on this planet is worth, let alone questioning the money they accept for their time and who controls it. When some entity can create money instead of work for it, they are stealing your time. This is inflation. It is a stealth tax on your wealth. When central bankers and governments decide to put more money into the system, it makes the pie bigger and makes your slice of the pie smaller. You thought the pie would stay the same size or at the most grow as humanity grew, that your work and sacrifice would let you climb the ladder and acquire more of the pie for yourself and your loved ones. Instead, you are subconsciously and often overtly incentivized to spend your money the moment you get it. You are ever in fear that the prices of the things you want will go up. In your lifetime, prices of desirable and scarce things have always gone up.

Unfortunately, disenfranchised and financially illiterate people are the ones who get left behind. They are usually unaware of the rules of this game and the fact that having wealth gives you access to borrow money at close to zero percentage interest, where you can, in turn, buy the scarce assets and reap the benefits of inflation. Most people never get out of the doldrums of lower and middle class, as they live paycheck to paycheck. In this pervasive case, it is common for people to live in debt. In debt to a system that holds an imaginary prize, the American dream, freedom, in front of them, just out of reach. America may be the best country in the world, but the pursuit of life, liberty and happiness gets increasingly harder the more you are beholden to debt.

Fear once ruled my life. Fear of taking chances. Fear of self-expression. Fear and inaction toward love to avoid being hurt. Fear and inaction toward success to avoid the pain of failure. I found a way out through recovery and accessed the fundamental behavioral change necessary. I also found bitcoin along the way. Recovery and bitcoin align well.

Self-sovereignty and taking responsibility for your actions are one in the same. Honest self-appraisal by taking a hard look at incentives and motivations helps me stay true to a more principled life based on honesty, open-mindedness and willingness. I also must be of service to those that desire positive change in their lives, in order for me to feel that I have some tangible purpose. Helping the next suffering alcoholic in the way that I have been helped gives me purpose. Helping the next sovereign individual grasp and develop an understanding of a brilliant alternative to government-backed money helps give me purpose too.

Bitcoin is an asset as well as a network that features a transparent monetary system, wherein provable work is rewarded with wealth creation, in a way that actually motivates innovation. I am abstinent from drugs and alcohol in the same way that I hope to one day be abstinent from participating in and, in consequence, perpetuating, a crooked economically structured world. Government-mandated, pay-your-taxes-in-it, crooked money that is excessively pervasive, leads to the degradation of the health and spirit of a society. Drugs and alcohol, done in excess, leads to the degradation of the health and spirit of the individual.

If we are to recover from the ills of wasteful consumerism, re-election seeking, bought-and-paid for government officials, and the unsustainable dependencies we as a society have on the cheapest goods and labor, we must adopt better money by which to use as the conduit for change. Bitcoin fixes this.

— — — — — —

Special thanks to the people, whose writings, thoughts and actions helped inspire this article:

Jeff Booth: thepriceoftomorrow.com/amazon/

Robert Breedlove: https://breedlove22.substack.com/

Parker Lewis: https://unchained-capital.com/blog/dollar-crisis-to-bitcoin/

And many more….

This is a guest post by OtterBTC. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

The Transition Between Fiat And Bitcoin

03/09/2021 by Idelto Editor

Bitcoin is going to overtake fiat — and bitcoiners can make choices to best facilitate this transition.

One World, Two Systems: Why Bitcoin And Fiat Must Learn To Live Together

Two competing economic systems eye each other warily across the ideological divide. One is based on complete state control and surveillance of its citizens; the other celebrates personal and financial freedom. The world holds its breath and hopes their mutual hostility does not turn into outright conflict.

No, this isn’t the Cold War: it’s the battle for supremacy between fiat and bitcoin. And as we know from the last century, no one gains from a war between two superpowers, whether the weapons are nuclear or monetary. Instead, the two worldviews must learn to live together.

The world’s separation into two parallel, competing economic systems has already begun. So rather than “pick a winner,” we need to understand what these two ideologies want to achieve, why each will dominate its own sphere of influence, and how we can navigate this time of transition. And we must ask whether, and how, we can secure cooperation and collaboration between these two so very different worlds.

Fiat 2.0

The rise of Central Bank Digital Currencies (CBDCs) promises to be no less transformative than bitcoin, though they serve a very different ideology: state control. From a fundamental perspective, CBDCs are as poor a store of value as banknotes, and even easier to “print.” But that’s only one reason why governments see a future in digital money. These CBDCs lay the foundation for a universal financial ecosystem where every transaction is monitored and everyone’s access to the economy is controlled.

If that sounds like dystopian fiction, it’s merely the logical progression of a process that’s already been well advanced today. Just look at Facebook Marketplace: a hyper-efficient online economy that counts its customers in the billions, with incredibly powerful analytics and, crucially, complete control over its users. Break the rules, and you’re out.

It’s easy to see why Fiat 2.0 is so attractive to governments, but less obvious is why these digital currencies will succeed when bitcoin is superior in so many ways.

Superpower Tensions

To understand why CBDCs are unstoppable, remember that they are designed to work with, and support, legacy financial infrastructure. Centralized digital currencies require no revolution in the world’s financial ecosystem; they can simply piggyback on existing fiat payment rails. That’s one key reason why their success is assured, but it also sets up tensions with the parallel Bitcoin ecosystem.

When CBDCs are the de facto standard for transactions, it creates a paradigm of control. With digital fiat creeping into more areas of the economy, even without the public being fully aware of it, governments will be even less tolerant of any rival system. They will naturally seek — as many are trying now — to apply the same legacy regulation to the Bitcoin ecosystem, demanding the same types of anti-money laundering, KYC controls, and transaction monitoring.

While it’s easy to regulate what you can control, Bitcoin’s value lies in decentralisation: it cannot be censored — unless you censor internet access as a whole — and it cannot be “printed.” And while this makes it the perfect means to transfer wealth through space and time, the risk is that governments and legislators will try to strongarm consumers into adopting Fiat 2.0 by adding as much friction as possible into buying, holding and transferring bitcoin. Tensions between the two monetary superpowers are only set to grow.

Learning To Live Together

Bitcoin might be unkillable, but we can expect a rocky road to inevitable regulatory acceptance. There are two ways you can prepare: first, become an expert in Bitcoin at the technical level to understand the workarounds to any obstacles placed in the path of consumer adoption. But this requires a huge expenditure of time and effort, and even then may be beyond most people.

More realistically, people can choose services that are truly aligned with Bitcoin’s vision. Steer clear of financial services firms that claim to “do bitcoin,” yet still have a significant stake in the legacy financial ecosystem. Companies like PayPal might have a strong brand and worldwide reach, but unwary users will quickly discover that they don’t give ownership of coins to the user and require rigid requirements for withdrawing bitcoin to personal wallets.

And what of the regulators? Well, we’d like to see them play a role in bitcoin’s development – or rather, in the services built on top of it. We’ve seen how cryptocurrencies can be used as the foundation for scams and illegitimate crowd-funding endeavors. Just look at what Joseph Lubin has to say in that regard. We’d like to see regulatory frameworks that can avoid the abuse of the Bitcoin ecosystem. For this to work, regulators need to roll their sleeves up, hire experts, and create bodies and discussion panels to examine the risks and propose workable solutions, rather than just slapping layers of legacy regulation on them.

We’re seeing the emergence of two monetary standards: one for everyday financial transactions, and the other for storing and transferring wealth. Though neither can “win” over the other, the legacy financial system can make life unnecessarily difficult for bitcoin and its adherents, yet with no hope of halting the revolution. Let’s not see history repeat itself as farce, and hope the two worlds can compete but, where possible, collaborate for the greater good of humanity.

This is a guest post by Nik Oraevskiy. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.