People are claiming Bitcoin is the new gold. It isn't. It is nothing like gold. But more than that we don't need to be on the gold standard ever again. It destroyed the world economy.
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Is Bitcoin the new gold? The fans of Bitcoin are saying it is. They are saying the moment for cryptocurrencies has arrived, and of course, they associate that with the elevation of Donald Trump to the post of US president for the second time. Are they right? I hope not. Why? Because gold was disastrous for the world economy.
Remember that once upon a time - and I use the term appropriately because this is almost like a fairy tale - once upon a time, the value of the world's currency was supposedly fixed to the value of gold, and you could supposedly swap your pound note, your dollar bill, or whatever else it might have been for gold in a fixed exchange rate.
As a consequence, it was hoped that the number of pounds, dollars, francs, marks, and whatever else were in existence at the time would be limited by the total supply of world gold, which would, therefore, prevent inflation from happening. This, it was said, was because there was this constraint on the creation of new money, and it was claimed that it was the creation of new money that was actually the cause of inflation.
The theory was wrong. It was wrong because it didn't take into account the fact that economies were growing and growing economies - growing either by way of population growth or by way of increase of income - do require more money. And they require more money because there's more income going around, and if there's more income going around, there will be more money needed to do the trades that we all wish to partake in.
Restrict the amount of money that is available and try and grow at the same time, and the only thing you get is deflation, which means that every pound has to be worth less to be spread more thinly across the economy to make sure that in practice there's enough currency to go around.
The trouble with deflation is when we face a deflationary situation, people stop spending because they believe that things will be cheaper in the future. As a consequence, you get an inevitable outcome, which is recession, leading to depression, and that's what we had in the 1930s. The attempt to fix the value of the US dollar to the value of gold led to the worst recession in US history and of course, that spilled over into the other major economies of the world, including ours, even though we had by then come off the gold standard at the beginning of that decade. But without sufficient leverage of our own because of our fixed exchange rate with the US dollar at that time we didn't have the flexibility to create the money that was required to make our economy work.
And this is the whole problem for the Bitcoin enthusiast. The Bitcoin enthusiasts are saying that because there are supposedly only ever going to be 21 million Bitcoins in total in the world there cannot be a Bitcoin inflation. That's because they say if the number of Bitcoins is fixed, the price can't change.
I do wonder about these Bitcoin enthusiasts and their relationship with reality. When they talk about Bitcoin and price stability, I wonder if they've ever noticed how rapidly the price of Bitcoin changes. In the space of a few months, its value can double sometimes or, of course, half. If that isn't an indication of instability and of something that is useless as a hedge against inflation, I am not sure what is. But they claim otherwise because they live in, as I said before, this fairytale world in which Bitcoin is the answer to all questions.
Bitcoin cannot be the equivalent of gold. The reason why, of course, is that Bitcoin isn't the only cryptocurrency in the world. If Bitcoin runs out, then there will be other currencies to be used instead. There is no limit, in fact, to the amount of crypto that we can have, and therefore, far from being a stable source of currency, it is a source of currency instability.
It's even worse than that, though, because at least gold had some uses beyond being the backup to currency. There is nothing to Bitcoin. It is just an entry in a ledger, a ledger which we can supposedly see but which we can't actually understand because it's encrypted. It is literally meaningless, worthless, empty, hollow. You keep finding the words, they all apply.
Bitcoin is a myth. It doesn't exist. It is just, apparently, the answer to an arithmetic algorithm solved by a supercomputer. But it isn't actually creating value, and nor does it impart value. And if you want to understand that it has no value, just put it in relation to the real world, where it can't be used as a currency because almost nobody really accepts it as a means of payment, and when they do, they instantly translate the value of the Bitcoin that you might offer into today's value in dollars or pounds or whatever, and then accept the equivalent sum.
So, Bitcoin isn't money, it doesn't represent value, it isn't limited in supply, it is economically unstable, it is exceedingly price volatile.
And it is claimed that the US must begin to build up Bitcoin reserves. These would be the equivalent of Federal reserves.
Why do the Bitcoin enthusiasts want the US to have Bitcoin reserves? Because that creates new demand for that limited supply of Bitcoin. And what happens when you have new demand for something that is supposedly in limited supply? The price goes up. So all those who currently own Bitcoin will think themselves better off.
And when, as they claim, other countries will then have to follow the US and create Bitcoin reserves, the price will go up again.
And this is what they're trying to create. A giant Ponzi scheme with government funding being used to increase their private wealth.
I've seen dangerous ideas in economics in my time. Ponzi schemes are usually the most exploitative, the most abusive and the worst, and Bitcoin frankly looks exactly like that.
And the marketing for this idea of the US having a Bitcoin reserve so that Bitcoin might become the reserve currency of that country and the world is probably the most dangerous thing I've ever come across. It is literally about destroying the value of the money which is necessary for the world to operate.
If you want to destroy the world economy, believe in Bitcoin.
If you want to believe that we actually need government-controlled and guaranteed money, which will be of value, come what may, stick with fiat currency.
Those are the choices. They're binary. And only one of them works. And it's not Bitcoin.
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I think that you have presented some very elegant arguments here this morning which I agree with and see nothing wrong in.
Being more direct, I’d say that the enthusiasm(?) in encouraging the Fed to have Bitcoin reserves is only based on the fact that the Ponzi scheme operators know that they will be bailed out in Bitcoin if the shite hits the fan. Too cynical perhaps?
A big selling point is that Bitcoin has the promise of offering more resources to a world convinced that sovereign money is a finite resource – just as privatisation was sold on the basis of bringing in more money (it actually helped to extract money, not inject it).
The other attraction with shitcoin……er….sorry Bitcoin is that its origination sovereignty lies outside of government so it is aligned with hardcore anti-statist Neo-liberalism which is simply a negation of history in my view, which itself is a very Soviet view ( I find this really amusing but the authoritarianism of Neo-liberalism has always been sugar coated/a sleight of hand).
“That’s because they say if the number of Bitcoins is fixed, the price can’t change.”
Who ever has said that? Apart from you making it up? of course the price can change just like the price of gold changed at the time of the gold standard.
All those who claim Bitcoin is an inflation hedge say that
Thus is life but my late father seemed to have experienced many of the more interesting monetary events in history.
he was in Brussels not long after liberation/the end of WW2 when the currency was – cigarettes. The bottom line being I suppose that if the worst came to the worst you could always smoke them.
A scenario that might be familiar to anyone who saw Private Schultz
https://en.wikipedia.org/wiki/Private_Schulz
Interestingly he reported meeting a former NAFFI driver. After pinching a few boxes of Cigarettes a day he decided ‘…. this for a laugh’ and ran off with an entire lorry load. he was living well in Brussels with a nice flat and girlfriend but nobody would sell him whet he wanted, a leave pass that would get him onto a boat back to the UK.
A Cautionary tale
There was deflation and depression in the US in the 1890s Falling prices increased the real burden of debt.
William Jennings Bryan saw the damage of the gold standard and said “you shall not press down on the brow of labor this crown of thorns. You shall not crucify mankind on a cross of gold.”
it is an interesting period. Our ability to learn from the past is quite limited it seems.
Embracing a crypto-currency or currencies in the United States on a large scale as financial/money instruments will sooner or later lead to a financial crash re-run of the 2007/2008 Great Financial Crash because as the economist Gary Gorton tells us a big factor in the acceptance of a national currency is it being “information insensitive.” By this he means there is not constant background reporting in the media of instability (big jumps in value) and this volatility can only be minimised by having a democratically elected regulator in the form of a central bank.
https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?params=/context/uclrev/article/6342/&path_info=03_Zhang___Gorton_ART_Final…_Taming_Wildcat_Stablecoins.pdf
Apologies I meant to include the following paper which explains that a key requirement for a stable currency is that no one can obtain an information advantage about the common currency medium in circulation. Essentially Trump is hell bent on returning the United States to the 19th century where there was no common currency and citizens had to rely on the issue of bank notes by private banks which regularly collapsed. Much effort therefore had to be expended to check how stable the private banks were issuing their own individual currencies. Of course, Trump, is a libertarian anarchist blind to the subtleties of how money needs to work for a country’s well-being.
https://economics.mit.edu/sites/default/files/2022-09/w26074.pdf
“ thing you get is deflation, which means that every pound has to be worth less”
Shouldn’t that be “worth more”?
Yes
CNN has this article today – https://www.ccn.com/analysis/btc-market-value-realized-price-short-term-holders/
The irony of Donald Trump is that his mindless support of crypto-currencies is likely going to create another Great Financial Crash like that of 2007/2008 where ironically the American economy at the very least will get “slapped in the face by the Invisible Hand” as Gary Gorton has pithily explained:-
https://web.archive.org/web/20140620164026/http://www.frbatlanta.org/news/CONFEREN/09fmc/gorton.pdf
In a nutshell the libertarian crypto-currency fanatics don’t get it that such currencies are subject to Keynes’s “animal spirits” and as such always require the back-up rescue of central government creation of money to even out fluctuations in those “spirits.”
See page 6 of the following paper:-
“The panic starting in August 2007 involved firms “withdrawing” from other firms by increasing repo haircuts. So, a “banking panic” occurs when “informationally-insensitive” debt becomes “informationally-sensitive” due to a shock, in this case the shock to subprime mortgage values due to house prices falling.”
https://web.archive.org/web/20140620164026/http://www.frbatlanta.org/news/CONFEREN/09fmc/gorton.pdf
My uber driver the other week informed me that bitcoin “is the future”. If nothing else it seems to me that the bitcoin message is cutting through to people for good or ill.
Well, the Uber driver may be the modern equivalent of the shoeshine boy in the apocryphal story about Joe Kennedy: he sat down for a shoeshine and was bombarded with stock tips by the boy doing the work. That led him to conclude the market was close to a peak. He returned to his office and sold up (and maybe shorted some stocks) – not long before the 1929 crash. It was Minsky’s third stage of the market cycle: speculation-driven asset bubbles.
Agreed