Fiat Money: the Real Virus Behind the Upcoming Economic Crisis
By Maciej Cepnik over 1 year
Bitcoiners have for a long time talked about the eventual fall of our societies as we know them right now. These predictions haven’t come to light by a wish of the annihilation of our way of life, but through a deep understanding and analysis of all the broken components that managed to somehow hold everything together, until now.
Money is being vilified constantly in our societies as it’s being portrayed as the main tool of malevolent and corrupt people. This is right, money is certainly a tool used by crooks to increase their power, but so is everyone else, leveraging money to better their way of life rightfully.
The problem isn’t in the money itself, as it is a universal technology that practically every human being uses in their everyday life. Also, no society has managed to eliminate criminals all together as every human being makes their own decisions, and some wish to follow criminal paths. A perfect world isn't possible.
Why exactly do people feel like our system is broken and that they’re being led by people who don’t necessarily have their best interests at heart? It is because it’s real, and that game is called the fiat system. Our assumed money is inherently evil, broken and amplifying the negative effects of the biggest public crisis humanity has had to face since World War 2.
Don’t get me wrong, if most people will gobble whatever is being thrown at them in the news, it would be too much to ask of them to question what makes the pieces of paper in their wallet valuable. In an ideal world, they wouldn’t have to, as the value of their dollars, yuans and euros, would only go down in a slow and controlled manner because the central banks that print them are honest, smart and somehow have a crystal ball that lets them price in every possible catastrophic event outside of their control.
See where am I going with this? I’m cynical about the Central Banks ability to implement effective monetary policies that wouldn’t drive our societies into oblivion in the long term. In fact, most Bitcoiners in general strongly question and reject the assumed monopoly that our governments have over the production and management of money.
Unfortunately, I believe now more than ever, that people will be drawn to Bitcoin because they will need to, not because they took years to study how Bitcoin works and how it achieves scarcity, censorship resistance, and decentralization.
In times of crisis, the quickest and boldest of us will react to find a lifeboat for their loved ones and themselves, but others will still hold onto the hope that the hand that leads them to their demise will continue to feed them. You decide which one you will be.
COVID-19 is an incredible Black Swan event that wasn’t integrated into our models and certainly poses a major threat to yesterday’s world relative stability and prosperity. Most governments have adopted an authoritarian approach which was to cease by force any social and economic activity in order to stop the spread of the disease. These rules are now enforced under the threat of heavy fines and even jail time in some countries.
Politicians have acted but have they done so in a rational way? After all, they remain human beings, like all of us, and are currently under tremendous emotional pressure. This impacts heavily their decisions and they will often sacrifice tomorrow's prosperity for today’s stability. Every decision has trade offs and it seems that right now, only one side’s positive effects are being considered, and not the long term implications.
For example, politicians will proudly pat themselves on the back when they just created a certain financial subsidy using taxed dollars for a certain company or industry resulting in the artificial creation or maintenance of “X” number of jobs. These easily quantifiable results are understood by most and buy your vote for the next election. However, it’s the data that isn’t quantified and presented to the public that despite being more difficult to grasp, is also of great importance and consequence. What is the opportunity cost of the alternative economic outcomes that might’ve happened if the money financing the subsidies would have been spent or invested through a free market? Perhaps that if that money stayed in the pockets of the citizens, it would have yielded more stable and natural jobs than what has been done by the government.
This concept will raise questions now more than ever since there is a lot at stake.
Will the economic results and the loss of our individual liberties caused by the draconian and authoritarian measures taken by governments be worse than the virus itself if left untouched?
We will never have a clear response to that question as we are already on the path of concentrating most of our efforts to slow the spread of the virus while not focusing on the damages that these responses are causing to the economy.
“We don’t care about the economy”. Yeah well, you will care about it when there is no longer food on your table or a roof over your head.
One problem at a time, right? Well, the first results of these responses are already felt through multiple financial markets. Nonetheless, most of them were already doomed to crash at some point as we were riding the longest Bull market of all time. Everything was going up, everybody was happy, everybody was taking additional loans and leveraging their way up to glory. Wake up, this isn’t 2019 anymore. The virus acted as a catalyst to the whole situation, but ultimately isn’t the cause of the crash.
Us Bitcoiners have the advantage of early prophesying, at least theoretically, this doomsday scenario of the crash of the highly nonsensical and steroidal monetary and financial scenes. We already know the cure, and now more than ever we must push the narrative that made sense to us all these years. Not because we want to be right, but because we believe it is right.
The GOAL of this article is to provide an understandable guide to be sent to all nocoiners, those who haven’t understood this yet, that are dear to your heart in these times filled with uncertainty and hardship.
For those of them seeking to act independently from what is done by our governments to mitigate the crash, they will have a hard time understanding rapidly all the concepts that we Bitcoiners have studied for so long.
I’m no economist myself so I didn’t delve deeply, as other Bitcoiners have already, in all the concepts that will be presented there. Consider this as a rescue resource to quickly guide people to Bitcoin, it might be the only lighthouse in this gigantic storm.
- What is money?
- Keynesian VS Austrian Economics
- Fiat Crap
- Helicopter Money and Infinite money
- The BRRR meme
- Bitcoin fixes this
What is money?
It is hard to construct a good description of money without being boring.
Money is an universal technology that has been present in one form or another since the beginning of Human civilization. It serves as a tool to communicate value,store one’s wealth, act as a medium of exchange for goods and services and as a unit of account when valuing those goods and services.
Wealth is described as the accumulated purchasing power that one might have gathered through business ventures, paid work or theft. This encompasses money but may include other types of assets of value that could be sold for money.
When a certain group of people agrees upon a certain form of money, one can assume it will be accepted universally by this same group of people as long as it respects the initial characteristics that made it acceptable as money in the first place.
All types of money are either created or discovered. They are created when they are forced upon a certain group of people through a centralized authority. They are discovered when their valuation and brought upon proprieties of money emerge organically through unsupervised and natural human interaction.
For example, the US dollar was created and declared legal tender by the US government and forced to be used as the main money within its jurisdictional authority. The control and therefore guarantee of the value associated with the US dollar depends strongly on the existence of its creator and maintainer.
On the other side, gold could be considered as a discovered money since its existence and characteristics don’t depend on a central authority. It emerged naturally as money in geographically distinct early human settlements. The properties intrinsic to gold made it valuable as all humans were attracted to that stupid shiny yellow rock. The countless interactions and economic exchanges that were built around this medium constructed the history and trust that humans hold towards gold even today. This was possible since gold has properties that make it naturally rare and easily preservable for future uses.
Therefore, we can summarize that money can take up various forms with some of them playing that role better than others.
Keynesian VS Austrian Economics
This one is complicated as it can take years to fully understand the differences between Keynesian and Austrian economics. I found a good summary through an infographic that mentions all the main points of divergence, you can find it right below.
Take the time to go through it. However, here are a few key points that I find valuable to retain :
Keynesian economists believe that the government should play an active role and stir the economy by having central control on key components of the economy such as interest rates, inflation and money production. An emphasis is put on the importance of spending and the whole system depends on a constant consumption spree.
Austrian economists believe that the market and the economy don’t need much input from central authorities as its independent actors will naturally come to rational conclusions through their interactions and undisturbed price discovery. This model focuses on saving rather than spending.
Currently, we live under a Keynesian system and it's widely unquestioned in our universities, our daily life, and the economic scene. Some are theorizing whenever this is a rightful and just system on which our societies are built. However Austrian economists are a minority and generally flooded by their opponents’ power and influence. The theorized crash of the Keynesian system might be the only thing that will bring it to a halt.
For those who want to delve further into the differences and why the Keynesian system is inherently bad, you should read the Bitcoin Standard by Saifedan Ammous.
In order to serve the deeds of a Keynesian economy that dictates governments should intervene in the economy in order to rescue it, politicians need to have full control over the production and management of money.
That is why in 1971, the previously agreed upon Bretton Woods monetary system was terminated. This system was established in July of 1944 in the wake of the Allied invasion of Northern France, or D-Day,between the Allied nations. Its creation established the US dollar as the reserve currency of the world, but specified that it had to be pegged to gold. Therefore, the US dollar was mainly a representation of the gold reserves that the United States of America was holding, which accounted for close to two-thirds of the global gold reserves at the time.
The Bretton Woods agreement is a really complex global financial framework that favored the USA and the Allied nations in the aftermath of their victory in the second World War. The years that followed the Bretton Woods agreement, the member nations enjoyed a relatively steady and continuous economic growth. No major bank crisis happened between 1944 and 1971.
However, following complaints and rising dissatisfaction from nations regarding the lack of flexibility permitted by that system, but mostly following high inflation and high unemployment in the United States, President Nixon issued measures known as the Nixon Shock which halted the convertibility of the US dollar into Gold in 1971. This effectively terminated one of the main engagements of the United States in the Bretton Woods Agreement. This was presented to the international community as a temporary measure and talks followed, but by 1973, the US dollar effectively became a free floating currency. All countries followed suit and the Bretton Woods agreement was officially brought to an end in 1976 through the Jamaica Accords.
After that period, virtually all countries adopted a free floating currency system, also known as a fiat system, which basically has no rules. Money isn’t pegged to gold anymore or the United States dollar, so no more reserves are needed to be held by countries in order to guarantee the value of their money. Countries adopting a fiat currency basically allow the Government to peg their currency to another fiat currency, a basket of other currencies or to nothing.
The value of a fiat currency relies solely on the trust people have towards the government’s entity that issues that money.
The problem with fiat money is that its supply is managed by politicians, and like human beings, they can’t be trusted for such an immense responsibility, particularly since their incentives are to sacrifice tomorrow's value for today’s election results. The monetary and financial policies they implement can badly hurt the value of the fiat money as they can go on a printing frenzy and therefore end up diluting the amount of fiat units that were already in circulation. When that happens, this phenomenon is called money inflation and it can rapidly cause complete chaos within the economy if it’s exaggerated, as in hyperinflation situations. It has happened a countless time throughout history for many nations and it will certainly happen with all fiat systems, over the long term.
The complexity of the fiat system is an effective way to keep the truth away from regular folks who work hard for their money, but are nonetheless obscured by the sheer forces of inflation and are completely left without resources when episodic hyperinflation occurs.
To better illustrate how bad fiat money is, what’s better than to see how much money is needed to buy a single roll of toilet paper in a country that was destroyed recently by hyperinflation, Venezuela.
Ridiculous, right? People shouldn’t rush to the stores to buy toilet paper. Ironically, they could simply hold on to their fiat money and use it for the same purpose and have a better use of their fiat.
Jokes aside, don’t do this, buy Bitcoin before your fiat money becomes a worthless stash of paper.
Helicopter Money and Infinite Money
The economic collapse provoked by a complete halt of our economies means that millions of people will lose their jobs and therefore will not be able to pay their respective debts nor will they have money to spend on services and goods, pay their taxes, etc. This isn’t hypothetical anymore and it’s happening in real time : around 10 million people have lost their jobs in the United States in the last two weeks alone. This breaks the record set in 1982 where 690 000 jobs were lost in a single week. We’re reaching unprecedented levels, by significant scales of difference.
This doesn’t stop here, as people lose their jobs and spending is reduced in the economy, more businesses collapse after that first shock, triggering another round of job losses, reduced spending and no debt repayments. This vicious cycle has virtually no bottom as it is uncertain when the forced quarantine will be over.
The governments realize that they cannot simply stop everything without any compensation to their citizens and businesses that have faithfully paid their taxes for so long. The problem is that governments can’t do much, as usual.
Sure, they have their fancy financial and monetary tools in order to attempt to stimulate the economy by injecting the money they just created or by indebting our countries even more and increasing our deficits
One of the most powerful tools of central banks is the manipulation of the interest rate. That interest is being applied to the newly created money they input into the economy through commercial banks.
The interest rate is a key component of the creation of new money, one of its contemporary forms is called quantitative easing (QE). A fancy term describing the issuance of debt or pure cash being created by central banks. Depending on the sets of economic circumstances and projected predictions, central banks will vary the interest rate to encourage or discourage commercial banks to commit to new loans that are subsequently distributed to regular business and people with a premium.
Normally, as explained in our glorified financial manuals, when the interest rate is brought down, indebtedness & spending are encouraged because commercial banks are incentivized to push additional loans in the economy. Central Banks oversee this fragile and uncertain equilibrium.
The humongous and yuuuge problem right now is that interest rates throughout the Western World (USA, EU, CANADA, UK, etc) were all brought down to ZERO or almost zero during the last few weeks. Even worse, some countries are venturing into the negative interest rates experiment, which is even more incomprehensible.
That means there is no more stimulus juice than can be injected into the economy through that medium. Even with these 0% rate loans, it seems like commercial banks don’t want to take the risk of contracting additional debt nor do businesses and consumers.
What are the options left for governments to use and try to revive this pathetic thing that is the economy right now? Forget the cumbersome route of commercial banks, governments need to inject money FASTER in the economy so people can feed themselves and pay whatever obligations they have.
That’s where we transition to a “Helicopter money” phase. It may sound like a joke, but it is a real term coined by Milton Friedman in 1969. It references a situation where governments are stuck to deal with a recession and they already brought the interest to zero. This is known as a Liquidity Trap. Instead of passing through the traditional QE process to inject new liquidity into the economy, central banks print the money and pass it on directly to their citizens or business for free or through interest-free loans. Therefore, you have this visual representation of a helicopter throwing a bunch of cash while flying and people on the ground excitedly raising their hands to catch as much of it as they can. Unfortunately, this was supposed to stay a theoretical term and not become a reality.
The real consequences of this policy are completely unknown, and some may quickly infer that it may lead to a higher inflation rate and devaluation of the money, at least for the weakest currencies out there. The US dollar will probably be the last to fall if ever, but still isn’t invincible from that threat.
“But don’t worry!” says the Federal Reserve of the United States trying to reassure us, we have INFINITE money! Check out this video if you don’t believe me.
If they really had infinite money capabilities since the beginning, remind me again why are we paying taxes again?
The BRRR MEME
This magnificent piece of art has erupted and spread organically within the Bitcoin community after the numerous announcements of the ever increasingly bold and ambitious economic stimulus plans presented by the federal government of the USA.
Following a sharp decline of the main indexes of the stock market, which by the way was faster than the 1929 Crash, the Trump administration wanted to be reassuring and maintain the stable and optimistic pace of the Bull market. The proud achievement of endless and nurtured economic growth must be maintained in order to keep the moral up of the American people. Therefore, a plan to boost up the economy was proposed that explored the possibility of six trillions dollars worth of stimulus money to be created in order to keep America afloat. Ending up agreeing on a 2.2 Trillion dollar plan on the 27th of March. This accounts to around 10% of the GDP of the United States. In comparison, the Marshall Plan, the reconstruction effort of Europe after World War Two, accounted for only 5% of the GDP of the USA.
Other countries followed quickly, each of them promising incredible sums of money to stimulate their own economy. These promises show how governments are desperate to control the whole situation, all the while balancing public health issues and the crumbling economy.
However, one must always ask themselves if the government actions are the right ones, especially when so much is at stake. Aren’t these unprecedented monetary stimulus jeopardizing the long term health of our money? Possibly and the consequences could be the end of the Western civilization as we know it.
That question explains the rise of the BRRR meme. It illustrates the absurdity of actions taken by our political leaders in response to this crisis. As if by printing more money, we will have any real beneficial effects on the life of regular citizens. It shows how broken our system is. The magical printing press will resolve all of our problems, right? There is a lack of money, we just need to create more of it out of thin air. Politicians can decide to completely rebalance and revamp the whole system and be the benevolent shepherds that take care of their lambs. Dare to question their practices and the wolves will be unleashed onto you.
Bitcoin fixes this.
Whatever your political beliefs, you must feel the growing social unrest and uncertainty for the future. The economy looks bleak as bad news continues to flow through all media platforms, old and new. It’s hard to believe in anything at the moment, as everything seems tainted by an unprecedented feeling of lies and hidden purposes. Nobody can tell what will happen, even tomorrow, and being stuck at home amplifies this feeling of the world about to hit a wall.
In a world like that, people will look for something they can count on and that won’t change its rules. They are looking for truth, and not a lot of things can provide them that at the moment.
That’s where Bitcoin comes into play. Bitcoin is the response that people will seek in a highly manipulated world where people at the top sacrifice their future for short term gains.
Bitcoin is there for people willing to learn and save themselves. Don’t wait to be fed by the same hand that struck you in the first place.
In times of crises, people go back to the source. The lucky people that have had the chance to hoard some gold through the previous financial crises have managed to survive during times of hardship. The problem right now is that gold bullions are already in a shortage in some countries as masses have flocked to buy as much as they can for its safe haven properties. Also, Gold production isn’t considered an essential business in many countries, which has driven the supply downwards and made it more difficult to find. You know who will get it first, Central Banks.
As people are running towards gold today, the same will happen to Bitcoin tomorrow, as it has all the properties that make Gold valuable but also, due to its digital nature, other functionalities that gives it an even bigger potential as a reserve asset.
Here are some properties that make Bitcoin a potential lifeboat for our times:
BITCOIN IS SCARCE
As governments continue to print money to try to save the economy, your own portion of that whole system gets constantly diluted over time and there is nothing you can do about it. On the other hand, there will only be 21 million bitcoins ever created, and no one can change that about it.
BITCOIN IS CENSORSHIP-RESISTANT
The numbers on your bank account balance are just numbers on a screen. As people feel threatened about their money, some may want to pick up their bank balances in cash, but they will quickly realize banks aren’t keeping full reserves of clients' money. Your money is held hostage in your bank. You should be in control. Bitcoin gives you that possibility because when you control your keys, you are completely independent from any third party
BITCOIN IS DECENTRALIZED
Central authorities, such as governements and central banks, will prove to be completely incompetent in what they are doing. The trust in them could be completely compromised after such a hard episode of economic and public health unrest. That means that any type of fiat money or any other governmental institutions could fall and leave people to themselves. Bitcoin doesn’t need any type of central supervision to function since it's decentralized through its wide network of voluntary participants.
BITCOIN IS TRUTH
Our politics and money is all tainted with lies and uncertainty. Bitcoin is pure truth as you have the ability to continuously validate its history and all of its protocol rules that make it Bitcoin. You don’t have to trust anymore, you can simply verify.
If you want to get into Bitcoin, I can help you. Send me a message today so I can show you the ropes, no matter where you live or how informed you are. How to buy Bitcoin and how to store it is our expertise at Veriphi. Don’t waste time, bitcoins are rare. If demand increases, their price can only go up, since their supply is fixed. Don’t wait until it’s too late and it’s worth much more, act now.