It has become now a worn-out cliche to point out that central bankers are destroying the world economy. All their stimulus and ‘quantitative easing’ is nothing more than naked money-printing. There is no substantive difference between counterfeiting to spend for one’s self, and what governments do, save some academic window-dressing. To think that money can be invented without consequences is folly. To think that bureaucrats can counter-cyclically intervene in the economy better than private actors, is in total defiance of history. Most absurd of all is the presumption that one dollar spent by government could amount to more than a dollar’s worth of economic activity. This tenet, if true, would legitimate a state-controlled economy. That self-professed capitalists can countenance such government interventions is deeply contradictory.
The exuberance of governments to spend beyond their means is the root cause of the economic malaise. The lack of fundamental, physical limits on money itself made it possible to defy gravity. Whereas in an earlier time, gold’s intrinsic scarcity limited the scope of central banks’ distortions, now there are no such limits. It is truly a wonder that investors were willing to abandon gold in the first place, in the ’70s.
It is strange indeed, that we measure value with a ruler which itself changes over time. This is a fact lost on many people. We are fixated, perhaps by some psychological bias, on dollars earned in nominal terms. We find it very difficult to account for changes in the unit of measurement as we value things. To deconvolute value from such changes is abstract and challenging, but totally essential. The difficulty of performing this task, of perceiving the fluctuations of our measuring stick, is what has allowed the subtle theft known as inflation to take place.
Simply put, this time central banks have gone too far. In pursuit of Keynesian theories, which presume far too much about bureaucrats’ ability to manage the economy, money-printing has run amok. It is the solution to every problem. And it will go further still. The economic consequences must be felt, as surely as the law of gravity must tell. The monetary supply cannot be quintupled without consequences. Interest rates cannot remain negative in a climate of monetary looseness (or any climate really). A bitter reckoning must be reaped. It is not a feeling. It is mathematically foreordained.
As the situation worsens, the emptiness of current policies will become only more apparent. The money-printing will accelerate. As a one-joke comedian repeats the same punch-line, central bankers know little else besides still-more monetary easing. A crisis of confidence will erupt. The way a brittle stone suddenly cracks, a panic will ensue, in which a deluge of fear grows virally. Confidence in fiat money must necessarily plummet as debts are monetized without end. Volatility will reign. Vast, interconnected and over-leveraged debts will turn bad. And when debts turn sour, bad things happen.
It is a historical pattern that the widespread failure of debts generally does not end well. Society has particular trouble deleveraging. Throughout many times in the past, nations could theoretically have suffered deflationary austerity and deleveraging to solve their problems. But it seems to be a particularly difficult thing to accomplish. Instead, such debts are invariably defaulted upon, amplifying the damage. Just consult the combatant countries of WW1; Germany is the obvious case. But rather, see the example of Britain, which is perhaps more illuminating (after trying to do the right thing, they devalued in the end).
In the pain to come, people will seek alternatives to fiat money. In a currency crisis, the money itself comes under threat. The price of gold, the traditional anti-fiat hedge, will rise dramatically. In a world of unstable currencies, nations and investors alike will scramble to acquire gold. As a commodity that cannot be printed by governments, it is exceptionally inflation-resistant.
Amid such tumult, Bitcoin will truly shine. Bitcoin shares the same anti-inflationary tendencies as gold. It is beyond the grasp of governments; the stability of its supply betrays the lie of ever-growing fiat money. As investors seek havens against money-printing, gold will be utterly swamped with demand. But to a lesser extent, investors will find Bitcoin as well. However because Bitcoin is starting from such a low-level of capitalization relative to that of gold, the price increase will be far more dramatic.
Bitcoin may actually be better suited than gold to the confiscatory environment we may expect in a severe currency crisis. Capital controls are the norm at such times, when governments become utterly desperate. While such controls may seem remote, US citizens were not even legally permitted to own gold until fairly recently. Outright confiscation of savings deposits, even in nominal terms, has already been seen in Europe. It is completely plausible that we may witness draconian impositions on individuals’ savings and possessions.
In such an environment, Bitcoin will be a particularly useful investment. If officials decide to trim bank accounts by 1–2%, your bitcoins will be beyond their grasp. The government hates cash money for that reason; it cannot be forced to suffer negative interest rates (yes that is actually happening in Europe). But government will hate Bitcoin even more, because it cannot be confiscated, but also because it cannot be inflated away. Governments will despise Bitcoin because it illuminates their misdeeds. For this reason, investors will flock to it in a crisis.
Were central bankers more responsible, were the monetary supply in Dollars, Euros, or Yen actually stable, I would not be nearly so bullish on Bitcoin. It would be a technological novelty instead: interesting but not urgent. Instead, we live on an sinking island of loose money and bad debts. The islands that are not sinking, such as Bitcoin, which is structurally incapable of suffering from such problems, will become havens for the nimble.
The failure of fiat money will be totally self-imposed. It will be the product of pure hubris. But it will dramatically hasten adoption of Bitcoin. Bitcoin’s killer app isn’t some clever tipping or multisig feature. It’s killer app is merely the stability of the monetary supply. That doesn’t sound very sexy. But in today’s world, in which paper money has failed so badly in the most basic function of currency, that’s saying a lot.