Bitcoin Ends Financial Privilege
Don't eat the rich, just stop subsidising them.
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
― Henry Ford (popular, debatably accurate)
At this point, it seems unlikely that we will see any widespread revolt against the monetary and banking system based upon a conscious and deliberate understanding of it by the populace. My confidence in this stems from my growing realisation that a great number of economists and bankers don’t even appear to understand it. To allay any fears of exaggeration, the Bank of England itself addressed the topic of money creation in 2014 and alluded to a similar conclusion:
“This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.”
So what if most people have been led to believe that they give their money to a bank for safekeeping, with the bank then carefully managing (and owning) the risk of lending that money to others? Surely it is relatively inconsequential that what actually happens is that a group of politically and legally privileged institutions costlessly create most money in existence from nothing, lend this money that came from nowhere to people for an interest rate to make private profit, debase the money held by the rest of society in the process, and then receive bailouts from the same taxpayers who have already been debased when the privileged lenders overextend themselves, socialising the losses to society? Minor difference in the detail.
“And note this isn’t an old man yells at cloud rant against money creation in general in which we insist all economic activity must be conducted with gold. The money created by credit extension can be perfectly legitimate if the risk of the maturity transformation is priced freely by interest, borne by the equity holders of the lending institution, mitigated with collateral they understand, and accepted in exchange by willing economic actors. But it is not if the risk is priced by political expediency, borne by nobody, collateralized by everybody, and forced into continual use and reuse by the threat of state violence.”
Bitcoin is Venice
This ‘system’ is simply normalised as environmental, akin to an immutable physical law. Entire treatises are written about wealth inequality without even questioning whether the very foundational way in which money - the thing used to claim scarce goods and services - comes into existence in the first place is problematic. As a society we debate ad nauseum about whether the answers lie with the political left or the right, and whether and to what extent we should redistribute wealth, while rarely questioning the potentially more fundamental question of whether the way in which money itself enters circulation is structurally fair from the outset.
“The rich will own more liquid wealth than the poor, but their liquid wealth is a small fraction of their wealth, a fraction that declines as wealth increases. By having much of their wealth concentrated in the little liquid fiat they can own, the poor are constantly paying a heavy price for inflation. A lot of ink is spilled over the evils of inequality, but very few will point to this very obvious and devastatingly cruel form of economic punishment inflicted on the world’s poor. Central governments are constantly devaluing and degrading what little hope the poorest among us have for achieving a better life.”
The Fiat Standard
The Guide to Printing Money Fairly
The answer is that it of course isn’t. Those who have the privilege of receiving and spending new money into the economy first (or even early relative to others) obtain a benefit from their proximity to the source of money creation. This is known as the Cantillon Effect, named after the 18th Century Irish economist Richard Cantillon. I once had someone ask me to prove that the Cantillon Effect exists. As a thought experiment, let’s flip it and try to imagine and explain how new money (especially of the legally mandated and state-controlled kind) could ever enter circulation in an equitable manner. It is actually a rather difficult mental exercise to undertake.
Dividing the new money evenly between a population in a given jurisdiction seems a little unfair on those who have worked hard and made sacrifices to build wealth, as it disproportionately debases them.
Allocating the new money proportional to existing holdings of money would excessively reward currency holders and debase asset holders; though of course the asset holders would subsequently benefit from rising asset prices, unless it was expected that the exercise would be repeated and then people might just hold the currency - quite a mess to untangle, and unlikely to be fair.
A final attempt might just be to (somehow) work out everyone’s net wealth (including all assets, not just the currency, though of course denominated in the currency) and distribute the new money proportional to this. We don’t even need to worry about this being impractical, because when we start to think through the absurdity of it, we realise that it would only (potentially) be fair because it changes everybody’s percentage claim of the overall purchasing power by precisely the same amount, which is to say not at all, given that the amount of goods/services/stuff in the economy doesn’t change.
So long as the existing money is sufficiently divisible, this final conceptual option proves itself to be moot and a complete waste of time and energy. Now that we have that mental exercise out of the way, let us be crystal clear - there is no fair way to print money. Even if there was, it is certainly not achieved through digitally creating it to buy particular classes of assets held by particular classes of people. Introducing new claims on goods and services to an economy can only ever serve to redistribute existing purchasing power.
Recapitalising teetering banks benefits those who will subsequently receive poorly risk-assessed loans. Central banks buying government debt to keep interest rates low benefits profligate politicians and those who have best lobbied them (rarely poor Joe Soap). When newly minted money is instead used to buy mortgage backed securities, it directly benefits property owners and financial institutions. Almost all of these things are to the detriment of holders of the currency and savers. They virtually always benefit those who have the means and wherewithal to invest, in addition to those who understand that it is better to hold debt than money.
At least in the short term, the supply of money should be considered a zero sum game. While inflation apologists will make all sorts of arguments about trickle down effects, you will forgive me for not setting out to mathematically prove that getting the first choice of a cut of steak is a bonus. When you hear jargon such as quantitative easing, or anything with words approximating ‘liquidity programme’, it is helpful to remember that there is no free lunch and the victims of the new money are out there somewhere, usually unaware of the opaque schemes by which they are contributing to the ‘greater good’ of their politically-connected betters.
The Evolution of a Revolution
As I have deepened my understanding of the monetary system, I have gone through various iterations of sentiment. As the unfair effects of it first become clear, a certain indignation bordering on anger is often unleashed. How can anybody stand over this? Why isn’t everyone talking about it? Digging a little deeper into how the system has evolved then leads one to ask how else things might have turned out? After significant consideration, the answer is likely to be: no differently. Lyn Alden’s book Broken Money makes this case in diligent detail.
We have never had good money as a species. The best thing we possessed for most of our civilisational history was a shiny yellow metal which was difficult to transport and verify; of course more convenient systems of credit were going to be built on top. Once you sprinkle in the natural incentives playing upon bankers and states themselves, it starts to become at the very least explicable that leverage would tend to expand with time. When would-be risk-takers can quite correctly claim that to allow the chips fall where they may would result in a deflationary spiral and hurt the innocent saver, who’s equity is composed of the debts of others, then the temptation to increase moral hazard and avoid truly difficult short-term political decisions isn’t beyond comprehension. How many people would vote for politicians saying “we are going to let the entire financial system cataclysmically collapse because it is the right thing to do”? Next thing you know, we have central banks full of PhD economists who are earnestly convinced that a 2% inflation target is scientifically-quantifiable public good.
As hopeless as this may all sound, my most recent sentiment has been a calm surrender borne of a conviction that our collective exit from this mess is almost as inevitable as our way into it was. Since 2009, almost every incentive that has been pushing us towards inequality and disaster has been inverted. The optionality of good money, in the form of Bitcoin, effectively uses the excesses and unfairness of the existing financial system against itself, like a reflexive judo move.
If you’re not cheating, you’re not trying
For the last number of decades, in particular since the world has adopted an entirely fiat-based, free floating monetary system, people have been effectively able to cheat within the rules to get ahead. The code has been to take out an intelligent level of debt, buy scarce assets, leverage them as much as possible to buy more, and repeat. Of course, get the timing wrong or overextend and you get liquidated; but the way to build wealth has been to effectively lean as far forward on your financial skis as possible without falling over. Importantly, this has only been available to some, and could continue almost indefinitely, rubbing up only against the fuzzy bounds of social cohesion as people that are not net beneficiaries have a growing sense that the system is rigged against them.
There has been a spectrum of winners and losers of this system, with many people falling in a somewhat grey zone, or a foot in each camp. If you are a middle-class blue or white collar worker who could afford a mortgage, this may describe you. The bonds in your managed pension fund are probably being debased in real terms, but your house, bought with a 90% not-saved-for mortgage, will be generally increasing in price, at least nominally. If you are a renter who is just about staying on the income/expense hamster wheel, you are subsidising both your landlord’s mortgage (directly through rent payments) and your neighbour’s (indirectly through debasement of your purchasing power courtesy of their out-of-thin-air loan). You are likely not benefiting on balance from a system of costless money creation, as you wonder why your weekly shopping bill always seems to rise faster than your wages.
As well as only being available to some, the other important perpetuating factor within this system has been the inability of the losers to effectively protest or opt out. They have had no realistic option but to hold and use the currency which has been subsidising the beneficiaries. Given that housing has been the most prominent focal point to get ahead with debt, if you couldn’t reach the relatively arbitrary threshold of a deposit and a mortgage, you simply couldn’t reach financial escape velocity to accrue hard assets, and you were probably destined to navigate the monopoly board without any hope of ‘letting your money work for you’ (what a hideously fiat phrase).
Let’s all cheat
The most obvious way Bitcoin levels the playing field is that it is the first method of protecting purchasing power that can be bought practically anywhere in the world in any quantity. No matter how small your savings, there is now a vehicle you can use to escape fiat debasement, and you don’t need leverage to do so. There is no such thing as getting on the housing ladder by buying a few bricks. You either escape the gravitational pull of unprotected debasement with a mortgage which can eventually become your retirement nest egg, or you don’t.
Similarly, relatively small parts of the global population have access to reliable government debt or strong capital markets. Even for those who do, real yields on fixed income such as bonds is unlikely to be positive with current public debt levels, and access to the stock market introduces fee-absorbing middle-men, minimum purchase requirements, and a variety of risks that those with little to invest should not be forced to take in order to save. I have covered all of this in a previous article.
A question I often get is how a poor beleaguered worker bee will benefit from a Bitcoinised world if they can’t even afford to buy any. It is a very valid question, and the answer contains some nuance. Bitcoin is theoretically a much better store of value than real estate, for many reasons. Comprehensively making this case is a job for another article; however, suffice it to say that I suspect that this will someday be viewed as obvious. It is fungible, liquid, divisible, portable, and importantly, absolutely scarce, in that no matter how much the price rises, nobody can make more. Because anyone can buy it, it also has a greater addressable market. It has no jurisdictional risk, and can flow to places where it is best treated. If this is correct, then you would expect that as Bitcoin grows in value and gains mainstream acceptance, it is likely that financial institutions will offer the ability to borrow while using it as collateral. This is precisely what we are starting to see.
Everyone can see the rabit in the hat
Before Bitcoin, there was a very clear distinction between the currency we all use, and the collateralised, leveraged assets that could be used by some segments of society to build wealth. There was never a realistic prospect that people could start denominating payments and wages in houses, Nvidia stock, Rolex watches, fine wines, art, or even Gold. It is not just that there wasn’t a realistic way to opt out, but rather that, no matter how egregious monetary expansion became, the vehicles of wealth creation priced in the currency could rise almost indefinitely in nominal terms. It is for this reason we are now used to using numbers that had almost no relevance to life decades ago. No human can conceptualise a thousand thousand million, but we do indeed hear about trillions in today’s monetary world.
This very practical distinction between the money and the available methods of escaping its debasement has become blurred. Bitcoin is the great absorber of liquidity. The greater the degree of monetary expansion, the more obvious the alarm signal which is the Bitcoin price. Not only does this lead people to question the mechanics of money creation, but as more and more people realise that the winning strategy is to borrow the bad money, and buy the good, a time logically comes where people start to measure the value of their time and possessions in the better money.
The idea of a speculative attack has been around long before Bitcoin, but even since Bitcoin’s early days it has been understood that Bitcoin is itself an inevitable speculative attack on fiat currencies. The network effects of existing currencies isn’t easily displaced when it comes to the unit of account and medium of exchange functions of money, but if Bitcoin continues to act as a superior store of value, then Theirs’ Law will logically assert itself, and the good money will drive out the bad.
This is why Bitcoin is good even for those who can’t afford to buy it - perhaps it is especially good for them in the longer term given that it removes egregious structural disadvantage. It may be cold comfort for those looking for an immediate fix, but without a decentralised, sound money such as Bitcoin, those with less are destined to subsidise those with more into perpetuity.