End of the Road: How Money Became Worthless | Gold | Financial Crisis | ENDEVR Documentary
Technobabble, Libertarian Derp and Bitcoin
A number of readers have asked me to weigh in on Bitcoin and other cryptocurrencies, whose fluctuations have dominated a lot of market news. Would I please comment on what it’s all about, and what’s going on?
Well, I can tell you what it’s about. What’s going on is harder to explain.
The story so far: Bitcoin, the first and biggest cryptocurrency, was introduced in 2009. It uses an encryption key, similar to those used in hard-to-break codes — hence the “crypto” — to establish chains of ownership in tokens that entitle their current holders to … well, ownership of those tokens. And nowadays we use Bitcoin to buy houses and cars, pay our bills, make business investments, and more.
Oh, wait. We don’t do any of those things. Twelve years on, cryptocurrencies play almost no role in normal economic activity. Almost the only time we hear about them being used as a means of payment — as opposed to speculative trading — is in association with illegal activity, like money laundering or the Bitcoin ransom Colonial Pipeline paid to hackers who shut it down.
Twelve years is an eon in information technology time. Venmo, which I can use to share restaurant bills, buy fresh fruit at sidewalk kiosks, and much more, was also introduced in 2009. Apple unveiled its first-generation iPad in 2010. Zoom came into use in 2012. By the time a technology gets as old as cryptocurrency, we expect it either to have become part of the fabric of everyday life or to have been given up as a nonstarter.
If normal, law-abiding people don’t use cryptocurrency, it’s not for lack of effort on the part of crypto boosters. Many highly paid person-hours have been spent trying to find the killer app, the thing that will finally get the masses using Bitcoin, Ethereum or some other brand daily.
But I’ve been in numerous meetings with enthusiasts for cryptocurrency and/or blockchain, the concept that underlies it. In such meetings I and others always ask, as politely as we can: “What problem does this technology solve? What does it do that other, much cheaper and easier-to-use technologies can’t do just as well or better?” I still haven’t heard a clear answer.
Yet investors continue to pay huge sums for digital tokens. The values of major cryptocurrencies fluctuate wildly — Bitcoin fell 30 percent Wednesday morning, then made up most of the losses that afternoon. Their collective value has, however, at times exceeded $2 trillion, more than half the value of all the intellectual property owned by U.S. business.
Why are people willing to pay large sums for assets that don’t seem to do anything? The answer, obviously, is that the prices of these assets keep going up, so that early investors made a lot of money, and their success keeps drawing in new investors.
This may sound to you like a speculative bubble, or maybe a Ponzi scheme — and speculative bubbles are, in effect, natural Ponzi schemes. But could a Ponzi scheme really go on for this long? Actually, yes: Bernie Madoff ran his scam for almost two decades, and might have gone even longer if the financial crisis hadn’t intervened.
Now, a long-running Ponzi scheme requires a narrative — and the narrative is where crypto really excels.
First, crypto boosters are very good at technobabble — using arcane terminology to convince themselves and others that they’re offering a revolutionary new technology, even though blockchain is actually pretty elderly by infotech standards and has yet to find any compelling uses.
Second, there’s a strong element of libertarian derp — assertions that fiat currencies, government-issued money without any tangible backing, will collapse any day now. True, Britain, whose currency was still standing last time I looked, went off the gold standard 90 years ago. But who’s counting?
Given all this, are cryptocurrencies headed for a crash sometime soon? Not necessarily. One fact that gives even crypto skeptics like me pause is the durability of gold as a highly valued asset. Gold, after all, suffers from pretty much the same problems as Bitcoin. People may think of it as money, but it lacks any attributes of a useful currency: You can’t actually use it to make transactions — try buying a new car with gold ingots — and its purchasing power has been extremely unstable.
So when John Maynard Keynes called the gold standard a “barbarous relic” way back in 1924, he wasn’t wrong. But the metal’s mystique, and its valuation, live on. It’s conceivable that one or two cryptocurrencies will somehow achieve similar longevity.
Or maybe not. For one thing, governments are well aware that cryptocurrencies are being used by bad actors, and may well crack down in a way they never did on gold trading. Also, the proliferation of cryptocurrencies may prevent any one of them from achieving the semi-sacred status gold holds in some people’s minds.
The good news is that none of this matters very much. Because Bitcoin and its relatives haven’t managed to achieve any meaningful economic role, what happens to their value is basically irrelevant to those of us not playing the crypto game.
The 5 stage life cycle of a fiat currency
Gold and paper currencies have been at war for more than three thousand years. When currencies were pegged to gold, they appeared to coexist peacefully. Nevertheless, when the peg ceased internationally, they became each other’s nemesis and thus began the battle for monetary supremacy. A study on the history of money, and its relationship with inflation, is essential to appreciate the role of gold as money.
For paper currency, there is always a boom-bust cycle. It often begins with the healing of a country’s economic woes and promises of prosperity for all. To better illustrate how the boom-bust cycle works, one can draw reference to the recent economic history of United States. In the late nineties, US technology stocks formed a huge bubble mainly because of over leveraging of debt through low interest rates. Start-up technology companies with mediocre or even negative earnings were valued in the millions. After the crash, which coincided with the terrorist attack on New York, interest rates were lowered again to spur economic growth, forming another bubble in housing. When the housing bubble burst, it almost took down the whole world’s banking system with credit facilities drying up, thus triggering the global financial crisis in 2008. With interest rates kept near zero, special measures in the form of money printing were needed to boost the economy and create jobs.
These cycles have been repeating for centuries. According to Nick Barisheff’s $10,000 Gold, it seems that countries that broke peg with gold standard and introduced fiat currencies go through a five-stage cycle.
Stage 1 is fuelled by optimism and euphoria as politicians promise growth stimulus with the least amount of pain and discipline. In the beginning, there will be promise of fiscal responsibility to print only what the country needs and live within the budget means. However, such period is usually short-lived as politicians and central bankers will soon give in to temptation to print more money so as to stimulate growth.
In Stage 2, restrictions would be slowly removed from the currency-creation process. The idea of paying off debt is no longer important as compared to growth. As a result, growth becomes the single most important driver of the fiat system. As currencies gradually lose value, due to declining purchasing power, people have to work longer hours to maintain their standard of living.
Stage 3 is the gambling stage where excessive liquidity makes its way into the stock market and real estate market. Growth will start to slow down and therefore, more money needs to be created to stimulate growth. This means that interest rates must be maintained at artificially low levels. With interest rates kept low at the same time there’s significant money printing, people will have to take risks on the stock market or real estate market just to keep up with inflation. In stage 3, people also start to borrow more because of the wealth effect with the bubbles causing them to feel like they have more money than they do in terms of purchasing power.
Stage 4 is the penultimate stage of the fiat cycle. Sluggish growth in western countries force financial institutes to try make money through other means than financing and brokerage fees. At this stage, corruption prevails, fundamentals are ignored and wealth is concentrated in the hands of a few. At this point, individuals must look out for themselves by not trusting the government or financial advisors. Those who failed to do so would suffer potential loss of wealth in the latter part of Stage 4 and Stage 5.
Stage 5 occurs when there is hyperinflation, which is the worst economic phase of the fiat cycle. In stage 5, the currency becomes worthless. At this stage precious metals are often reoccurring in the monetary system to be used as currency or be used to back up the currency. Keep in mind that hyperinflation has occurred at least 56 times during the last two centuries.
At each cycle, only the “movers and shakers” can influence lawmakers to implement laws that benefit the rich and elites, especially those with the highest concentration of wealth. The middle and low income groups lose out the most and tend to feel that “the rich get richer”. This is due to the rapid erosion of purchasing power caused by the inflation. During each stage of inflation, gold appears to rise in value as currencies continue to lose value. This is because as paper money loses value, the only alternative will be real money, represented by precious metals such as gold and silver. The increased demand means that they will appreciate in value not only against fiat currency, but also against other tangible assets.
There is strong possibility that the global monetary system may collapse in the near future due to a crisis of confidence in the paper money system. Individuals must realise that the current debt-based model for the monetary system is not sustainable and there will come a breaking point when the government debts become uncontrollable. When that happens, you want to keep your assets in the only real money – Gold and Silver!