Slaying the Beast – How Bitcoin Can Defeat Inflation and Change the World
- High rates of inflation are spreading across the world. This may last longer and create more damage than officially forecast.
- Systemic inflation, created by monetary expansion, can lead to catastrophic consequences.
- Central banks have put themselves in a corner, as a result of their hubris.
- Bitcoin can fix this.
Consumers of luxury goods, such as food, shelter and fuel, will have noticed that they have been spending more than usual this year. To name just a few, the price of coffee beans rose 43%, while oats went up nearly 55%, sugar, almost 25%, and orange juice, over 30%.
Inflation is reaching concerning levels. As of August, the consumer price index, in the US, rose by 5.3%, year-over-year. This is its highest growth rate in 13 years. In the UK, inflation grew at its highest rate on record. Meanwhile, the eurozone’s inflation rate jumped to a 10-year high of 3%.
In choral unison, central bank officials have assured us that this is all transitory and certainly not their fault. Whereas supply-chain disruptions, due to the pandemic, may be a contributing factor, there is a multi-trillion-dollar elephant in the room. Exorbitant amounts of quantitative easing, coupled with artificially low interest rates, have led us to a series of very predictable consequences that central bankers refuse to acknowledge.
Let them eat (smaller and smaller) cake!
The causal link between monetary expansion and inflation is widely accepted and logically sound. The more money is created by government fiat, the likelier it is that the supply of money, in active circulation, will proportionally outgrow economic output. Simply put, the more units of money there are, per units of output, the more prices will rise.
Hatred of monetary inflation is one of those rare sentiments shared by Lenin, Keynes and Friedman. In 1917, Lenin argued that “the issuing of paper money… most of all affects… the poorest section of the population, and that it is the chief evil engendered by financial disorder.” Keynes agreed, and added that there was “no subtler, no surer means of overturning the existing basis of society than to debauch the currency.” Milton Friedman, for his part, argued that inflation was a “disease… sometimes a fatal disease for a society.”
The vast majority of politicians also agree on inflation, but their agreement is based on their shared love for it. The proverbial printing press allows them to finance ever-increasing amounts of public expenditure without having to increase explicit taxes. As it erodes the value of money, inflation also makes the real value of debt decrease over time. This means governments can accumulate astronomical levels of debt and spend even more. Inflation also acts as an indirect tax. As wages begin to rise, an increasing number of citizens enter higher tax brackets. When tax rates stay fixed, or even increase, larger amounts of income thus enter government coffers.
By increasing prices indiscriminately, inflation also acts as a highly regressive hidden tax, which hits poor people the hardest, and exacerbates economic inequality. Inflation thus squeezes purchasing power out of the hands of the general population and into those of governments and corporations.
Inflation does also benefit a considerable proportion of the population, however. The dividing line is usually age and wealth. The older you are, the more likely you are to have enjoyed decades of, near-constant, increasing asset prices. This is especially true with regards to real estate and the stock market. It explains why older generations were able to buy dirt-cheap housing, while young people are increasingly locked out of the property market. Officials at the Federal Reserve should understand this dynamic by now, as they recently realised that holding shares might, maybe, somehow, be considered a conflict of interest. There is nothing to worry about, however, as they conveniently sold their holdings at all-time market highs.
One of the problems engendered by systemic inflation is that it forces governments to adopt quick-fix solutions, such as price caps and buying schemes. These so-called solutions, however, usually lead to other problems. One very recent example includes the UK government’s cap on energy prices, which is leading many firms to collapse. Rising fuel prices have also made the UK government consider mobilising the military and has made them suspend competition laws.
The other major problem with inflation, from a government’s perspective, is that it can get out of control and, trying to rein it back in, can destabilise other parts of the economy. Central banks have two principal monetary tools. One is the supply of money, discussed above, and the other is setting base interest rates. Interest rates regulate the price of money. The higher the interest rate, the more likely someone is to save and the less likely they are to take out a loan, and vice versa. When interest rates have been at rock-bottom for a sustained period of time, increasing them risks engendering an economic shock, due to the vast amount of cheap debt incurred by governments, corporations and individuals.
This is why central banks are stuck. They cannot reduce the supply of money and they cannot even slow down the rate of quantitative easing without causing a financial crash. Much like a drug addict, the stock market would enter a state of shock akin to severe withdrawal symptoms. As for interest rates, on one hand, they need to keep them low to stimulate economic growth and, on the other, they need to raise them to tame inflation. In thinking they were all-powerful, they have come to this very predictable dilemma. They either set off a financial crisis, a debt crisis or both. This situation explains why they keep saying the situation is transitory in tantric unison. They hope it will go away without them having to take damaging and unpopular measures.
The consequences of uncontrollable inflation can be catastrophic, as history has shown us repeatedly. In Ancient Rome, by the middle of the third century, the silver content of a denarius had gone down to just 0.5%, from a high of 95%. Prices rose by 1000% and, as costs soared, the empire raised taxes to maintain its level of expenditure. Hyperinflation, high taxes and a debased currency chipped away at the financial stability of the empire. Trade reverted to bartering, as people lost confidence in fiat currency. This led to the disintegration of trade networks and centuries of decline. Many impoverished urban dwellers ended up destitute, having to enter rural serfdom to survive. You don’t need to go all the way back to ancient history to see these dynamics in action. The Weimar Republic is the most notorious 20th-century example of this, as well as contemporary Venezuela and Zimbabwe.
Its intrinsic attributes and the gradual pace of its adoption could make bitcoin revolutionise the global economic system. Its widespread use could represent a historic paradigm shift, away from the centralised control of money. This could bring an end to the self-destructive cycle of monetary addiction. The beauty of its perfectly mathematical and apolitical construct is that it provides predictability. Its supply will increase at a, more or less, predictable rate, until it reaches its hard cap of 21 million coins. By achieving a fixed supply, it could then gradually usher in a naturally deflationary system, as units of output would outgrow units of money.
Many economists are terrorised by the idea of deflation because they fear it will lead to a slowdown of consumption and an increasing debt burden. The argument is that people will stop consuming because their money increases in value with time. As the value of money increases, debt will then become more burdensome in real terms. This has occurred in the past and may well be true, but bitcoin is unlikely to lead to such a shock when taking into consideration the element of time.
The gradual pace of its adoption, coupled with the predictable evolution of its supply, means that it would not engender a sudden deflationary shock. Unlike the current system, which is artificially inflationary, bitcoin would set off a natural and gradual process that would allow economies to adapt. One of the major effects of this could be that governments, corporations and individuals become disincentivised to take out and hold debt. They would thus start to deleverage. Due to the natural pace of this progress, it would take place at a manageable rate. In the long run, this process could lead to far more solid economic foundations and reduce the intensity of financial shocks. Deleveraged booms and busts would be far easier to absorb than those amplified by mountains of debt.
Bitcoin could thus inaugurate a new economic paradigm. It could gradually detoxify the inflationary system and lead to one of the greatest periods of human progress ever witnessed. One that could reduce inequalities and benefit the poorest among us.
This process would happen to the detriment of centralised power. And therein lies the rub. Governments do not willingly give up power. They fight very hard to maintain and expand it. This is why they have convinced society that inflation is good. It is also why there is a global effort to regulate cryptocurrencies and even ban them in some places. Governments cannot risk allowing rival currencies to flourish and giving people the right to choose. Progress may thus prove complicated and the end goal elusive. A strong belief in the benefits of widespread bitcoin adoption could, however, create enough conviction in the community to keep moving forward.
Nothing in this article constitutes professional and/or financial advice. The content is provided exclusively for informational and/or educational purposes. Nothing is to be construed as an offer or a recommendation to buy or sell any type of asset. Seek independent professional advice in regards to financial, tax, legal and other matters.