Enquires@newsofbitcoin.com
This is an opinion editorial by Dan, cohost of the Blue Collar Bitcoin Podcast.
A preliminary note to the reader: This was originally written as one essay that has since been divided into three parts for publication. Each section covers distinctive concepts, but the overarching thesis relies on the three sections in totality. Much of this piece assumes the reader possesses a basic understanding of Bitcoin and macroeconomics. For those who don’t, items are linked to corresponding definitions/resources. An attempt is made throughout to bring ideas back to the surface; if a section isn’t clicking, keep reading to arrive at summative statements. Lastly, the focus is on the U.S. economic predicament; however, many of the themes included here still apply internationally.
Series Contents
Part 1: Fiat Plumbing
Introduction
Busted Pipes
The Reserve Currency Complication
The Cantillon Conundrum
Part 2: The Purchasing Power Preserver
Part 3: Monetary Decomplexification
The Financial Simplifier
The Debt Disincentivizer
A “Crypto” Caution
Conclusion
Part 1: Fiat Plumbing
Introduction
When Bitcoin is brought up at the firehouse, it’s often met with cursory laughs, looks of confusion or blank stares of disinterest. Despite tremendous volatility, bitcoin is the best-performing asset of the last decade, yet most of society still considers it trivial and transient. These inclinations are insidiously ironic, particularly for members of the middle class. In my view, bitcoin is the very tool average wage earners need most to stay afloat amidst an economic environment that is particularly inhospitable to their demographic.
In today’s world of fiat money, massive debt and prevalent currency debasement, the hamster wheel is speeding up for the average individual. Salaries rise year over year, yet the typical wage earner often stands there dumbfounded, wondering why it feels harder to get ahead or even make ends meet. Most people, including the less financially literate, sense something is dysfunctional in the 21st century economy — stimulus money that magically appears in your checking account; talk of trillion dollar coins; stock portfolios reaching all-time highs amidst a backdrop of global economic shutdown; housing prices up by double-digit percentages in a single year; meme stocks going parabolic; useless cryptocurrency tokens that balloon into the stratosphere and then implode; violent crashes and meteoric recoveries. Even if most can’t put a finger on exactly what the issue is, something doesn’t feel quite right.
The global economy is structurally broken, driven by a methodology that has resulted in dysfunctional debt levels and an unprecedented degree of systemic fragility. Something is going to snap, and there will be winners and losers. It’s my contention that the economic realities that confront us today, as well as those that may befall us in the future, are disproportionately harmful to the middle and lower classes. The world is in desperate need of sound money, and as unlikely as it may seem, a batch of concise, open-source code released to members of an obscure mailing list in 2009 has the potential to repair today’s increasingly wayward and inequitable economic mechanics. It’s my intention in this essay to explain why bitcoin is one of the primary tools the middle class can wield to avoid current and forthcoming economic disrepair.
Busted Pipes
Our current monetary system is fundamentally flawed. This is not the fault of any particular person; rather, it’s the result of a decades-long series of defective incentives leading to a brittle system, stretched to its limits. In 1971 following the Nixon Shock and the suspension of dollar convertibility into gold, mankind embarked on a novel pseudo-capitalist experiment: centrally-controlled fiat currencies with no sound peg or reliable reference point. A thorough exploration of monetary history is beyond the scope of this piece, but the important takeaway, and the opinion of the author, is that this transition has been a net negative to the working class.
Without a sound base layer metric of value, our global monetary system has become inherently and increasingly fragile. Fragility mandates intervention, and intervention has repeatedly demonstrated a propensity to exacerbate economic imbalance in the long run. Those who sit behind the levers of monetary power are frequently demonized — memes of Jerome Powell cranking a money printer and Janet Yellen with a clown nose are commonplace on social media. As amusing as such memes may be, they are oversimplifications that often indicate misunderstandings regarding how the plumbing of an economic machine built disproportionately on credit1 actually functions. I’m not saying these policymakers are saints, but it’s also unlikely they are malevolent morons. They are plausibly doing what they deem “best” for humanity given the unstable scaffolding they are perched on.
To zero in on one key example, let’s look at the Global Financial Crisis (GFC) of 2007-2009. The U.S Department of the Treasury and the Federal Reserve Board are often maligned for bailing out banks and acquiring unprecedented amounts of assets during the GFC, via programs like Troubled Asset Relief and monetary policies like quantitative easing (QE), but let’s put ourselves in their shoes for a moment. Few grasp what the short and midterm implications would have been had the credit crunch cascaded further downhill. The powers in place did initially spectate the collapse of Bear Stearns and the bankruptcy of Lehman Brothers, two massive and integrally involved financial players. Lehman, for example, was the fourth-largest investment bank in the U.S. with 25,000 employees and close to $700 billion in assets. But what if the collapse had continued, contagion had spread further, and dominoes the likes of Wells Fargo, CitiBank, Goldman Sachs or J.P. Morgan had subsequently imploded? “They would have learned their lesson,” some say, and that’s true. But that “lesson” may have been accompanied by a huge percentage of citizens’ savings, investments and retirement nest eggs wiped out; credit cards out of service; empty grocery stores; and I don’t feel it extreme to suggest potentially widespread societal breakdown and disorder.
Please don’t misunderstand me here. I am not a proponent of inordinate monetary and fiscal interventions — quite the contrary. In my view, the policies initiated during the Global Financial Crisis, as well as those carried out in the decade and a half to follow, have contributed significantly to the fragile and volatile economic conditions of today. When we contrast the events of 2007-2009 with the eventual economic fallouts of the future, hindsight may show us that biting the bullet during the GFC would have indeed been the best course of action. A strong case can be made that short-term pain would have led to long-term gain.
I highlight the example above to demonstrate why interventions occur, and why they will continue to occur within a debt-based fiat monetary system run by elected and appointed officials inextricably bound to short-term needs and incentives. Money is a base layer of human language — it is arguably mankind’s most important tool of cooperation. The monetary tools of the 21st century have worn down; they malfunction and require ceaseless maintenance. Central banks and treasuries bailing out financial institutions, managing interest rates, monetizing debt and inserting liquidity when prudent are attempts to keep the world from potential devastation. Centrally-controlled money tempts policymakers to paper over short-term problems and kick the can down the road. But as a result, economic systems are inhibited from self-correcting, and in turn, debt levels are encouraged to remain elevated and/or expand. With this in mind, it’s no wonder that indebtedness — both public and private — is at or near a species-level high and today’s financial system is as reliant on credit as any point in modern history. When debt levels are engorged, credit risk has the potential to cascade and severe deleveraging events (depressions) loom large. As credit cascades and contagion enters overly-indebted markets unabated, history shows us the world can get ugly. This is what policymakers are attempting to avoid. A manipulatable fiat structure enables money, credit and liquidity creation as a tactic to try and avoid uncomfortable economic unwinds — a capability that I will seek to demonstrate is a net negative over time.
When a pipe bursts in a deteriorating home, does the owner have time to gut every wall and replace the whole system? Hell no. They call an emergency plumbing service to repair that section, stop the leak, and keep the water flowing. The plumbing of today’s increasingly fragile financial system mandates constant maintenance and repair. Why? Because it’s poorly constructed. A fiat monetary system built primarily on debt, with both the supply and price2 of money heavily influenced by elected and appointed officials, is a recipe for eventual disarray. This is what we are experiencing today, and it’s my assertion that this setup has grown increasingly inequitable. By way of analogy, if we characterize today’s economy as a “home” for market participants, this house is not equally hospitable to all residents. Some reside in newly-remodeled master bedrooms on the third floor, while others are left in the basement crawl space, vulnerable to ongoing leakage as a result of inadequate financial plumbing — this is where many members of the middle and lower classes reside. The current system places this demographic at a perpetual disadvantage, and these basement dwellers are taking on more and more water with each passing decade. To substantiate this claim, we’ll begin with the “what” and work our way to the “why.”
Consider the widening wealth gap in the United States. As the charts below help to enumerate, it seems evident that since our move toward a purely fiat system, the rich have gotten richer and the rest have stayed stagnant.
Chart Source: WTFHappenedIn1971.com
Chart Source: “Does QE Cause Wealth Inequality” by Lyn Alden
The factors contributing to the wealth inequality are undeniably multifaceted and complex, but it’s my suggestion that the architecture of our fiat monetary system, as well as the increasingly rampant monetary and fiscal policies it enables, have contributed to broad financial instability and inequality. Let’s look at a couple examples of imbalances resulting from centrally-controlled government money, ones that are particularly applicable to the middle and lower classes.
The Reserve Currency Complication
The U.S. dollar sits at the base of the 21st century fiat monetary system as the global reserve currency. The march toward dollar hegemony as we know it today has taken place incrementally over the last century, with key developments along the way…
Read More: Fixing Broken Fiat Plumbing — Sharing A House Separated By Cantillon Privilege
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