Many people around the world are choosing to turn their backs on the traditional monetary systems taught in schools. Here’s why (Source: Getty)
How and why fiat money (money by decree) works today is a necessary part of understanding Bitcoin.
Most of us are taught Keynesian and Monetarist ideas in school or university, but is this really the appropriate framework in which to look at the economy?
Bitcoin is a rejection of the fiat economy and instead represents a non-governmental, non-corporate-controlled form of money. This view is more in line with an Austrian economist’s view of money.
What are Keynesian and Monetarist Ideas?
Keynesian and monetarist ideas are presented as if they are “the way things are done here”.
Few question these ideas which require or justify the continued inflation of the currency people use. The Keynesian and Monetarist focus on aggregates does a great disservice to those looking to conduct economic analysis.
The problem with this is that looking at general aggregates gives a misleading impression of what is going on at the level of each exchange.
The Keynesian idea that hoarding money is bad for the economy is wrong because there is indeed a natural level at which people should “hoard” money. Money is held because it reduces future uncertainty by allowing the owner to buy what is needed.
If we knew exactly what we would need in the future, we could instead buy long-term instruments that mature exactly when we need them. But the reality is we have to pay an emergency medical bill right away, so it is wise to keep a cash on hand.
Keynesians and monetarists make various arguments in defense of inflation, but they ultimately provide intellectual cover for government monetary intervention.
The failure of initial interventions is then used as a justification for even more interventions. This can be for “liquidity management” or to regulate the capital held on the balance sheet or to create a state lender of last resort.
The story goes on
What if the money supply didn’t have to grow? What if the monetary token could simply increase in value to keep pace with purchasing power growth over time? This view is in line with an Austrian understanding of monetary theory.
However, Bitcoin is still inflationary until it hits its final total of just under 21 million coins around the year 2140. Around 18.75 million coins had been issued by July 2021. So Bitcoin is actually disinflationary (increasing at a decreasing rate).
We live in a world where technological advances should reduce costs. But instead, prices are still rising depending on the industry! How could that be?
Government intervention affects some industries more than others, and therefore the effects are not felt equally. For example, the cost of Netflix subscriptions remains low, but the cost of luxury real estate or private schools increases dramatically.
Austrian economists realize that it’s not so much a question of how much money actually exists, in theory any amount could work, even a fixed amount of money.
Austrian economists also recognize that money is not neutral and that it depends on who gets the new money first. In the fiat money fractional reserve banking system (the one we live under today), new money is created when loans are made, and money is effectively destroyed when those loans are paid back.
The concept of Bitcoin actually corresponds more to the Austrian economic view (source: Getty)
But if you are an early recipient of that new money, you have the privilege of spending it before the money’s purchasing power devalues. Later money recipients lose.
Consequently, there is an incentive to go into debt to buy things like housing, which explains the trend over the past few decades. The leverage on buying a home has worked well in the past as you hold the real asset (the house) while your loan is in fiat money that goes down over time.
This has worked in the past, but it’s also why it’s for the typical Millennials or Zoomers versus boomers and older Gen-X folks who got on before cheap fiat loans puffed up a ridiculous real estate and stock bubble , has become so difficult to afford living space.
Why is Bitcoin the answer?
Bitcoin brings this whole equation back to justice by creating hard money that cannot be inflated past the 21 million mark. Without cheap and readily available fiat loans, we won’t see such ridiculous real estate, stock or bond bubbles around the world. By giving the world back to hard money, we would eliminate the aberration from fiat money that has existed all of our lives.
Looking back at the 19th century, there was a classic gold standard. And while it wasn’t perfect, it showed what we can expect in these conditions.
People actually experienced falling prices over time, and many great innovations were created during this era. That is not to say that we should all go back and live the way people did in the 19th century, but that we are specifically looking at the implications of the type of money that was being used at that time.
In a way, Bitcoin is making the old new again. It takes the best that gold offers us while offering the best that the digital, internet-enabled world has to offer. Bitcoin is like gold, but 1,000 times better.
Bitcoin represents a currency revolution and the loss of the power of politicians and bureaucrats to affect the economy on such a large scale. Instead, power is transferred for the benefit of the individual and the community.
Stephan Livera moderates the Stephan Livera Podcast, a broadcast about Bitcoin.
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