On January 1, 2000, the world was supposed to end. As the date changed and the next millennium began, computer systems designed in the 1960s and 1970s were expected to crash. Storage space was very expensive at the time. As a result, programmers often save space by recording years with only two digits instead of four, omitting the century. When the century turned, logic would be lost, and systems would malfunction.
Large IT projects were established to fix the problem and prevent future disasters, such as explosions at nuclear power plants. Alongside the booming tech industry, a booming survival industry emerged. Guide books were published on how to survive the impending disaster – hide under the table – while there was a healthy trade in overpriced bunkers and survival packs.
In the first move, the US Federal Reserve loosened monetary policy. The booming Internet and its early success brought technology to the masses. Along with the loose financial conditions and growing public enthusiasm at the turn of the millennium, this led to a unique boom in the stock market, especially technology and Internet stocks.
The world did not end. Instead, people are starting to wonder what will happen to companies that have no chance of making a profit and that depend on the continuous injection of investor funding. Skepticism began to spread, prices began to fall, and in mid-2000, the dot-com bubble burst.
The final nail in the coffin of the bubble of 2000 came on September 11, 2001. The terrorist attack on the World Trade Center in New York made it seem like the world was really coming to an end. Air travel was banned, war broke out, and economic recession followed. Stock markets fell, and kept falling.
Once again, the US Federal Reserve stepped in to save the economy and financial markets. Interest rates were lowered, credit became cheaper, and with this, the recession slowed. From the beginning of 2003, the stock markets began to recover. Slowly at first, then quickly. Ultra-low interest rates have stimulated economic activity, although not as much as intended. The bursting tech bubble was quickly replaced by a huge housing bubble, especially in the United States.
It’s a movie The Big Short begins with a quote from Mark Twain:
“It’s not what you can’t get you in trouble for. It’s what you know for sure isn’t.”
History provides us with many examples that show how people, entire societies, cling to false beliefs with force and for how long. A good example is the geocentric worldview that many had in the Middle Ages: they believed that the universe revolved around the Earth. Galileo Galilei held a dissenting belief and was threatened with death and excommunicated for it. The image of the Church itself and the interests it serves forbid such a disturbing reality. But as is the case with truth, the point comes when it can no longer be denied.
The same was true of the financial crisis of 2007–2009. Behind many of the financial products offered were mortgage-based securities with little or no value. This fact, too, was ultimately undeniable. Markets for these securities and the financial products they were built on collapsed, along with many of the banks and financial institutions that owned them. Finally, the entire financial system went into effect. Big, well-known banks went bankrupt, financial markets dried up, and even healthy companies were put at risk of failure.
The scary yet interesting part was the reaction of governments and big banks – through bailouts. Except for Lehman Brothers and a few others, almost every major institution was saved. At the time, Chancellor Angela Merkel assured the German public that the money deposited in the bank was safe – a promise she might not have kept had it been issued.
The main feature of the bailout was and still is the printing of money. Governments have liberally bailed out key banks, and companies associated with the system by injecting new money. Central banks funded and continue to fund this by buying government bonds, reducing interest rates, and providing favorable financial conditions to banks.
This point is very important. When the central bank buys outstanding government bonds, that means it is expanding money or printing money. In the movie EconomicsPeter Praet, then the ECB’s chief economist, said this clearly: “It is not physical money, but electronic.”
Printing money means increasing the amount of money in circulation. And that leads to all our money going down the drain. Ultimately, this makes it less expensive as there is more money but the same amount of goods.
When new money is created – that is, when money is raised and spent, regardless of what it is used for – prices will eventually rise, and the money held by everyone becomes very little. Put another way, when new money is created, everyone who already owns money is deprived of it.
Only those who receive new money first benefit, which are usually banks, shareholders, and companies and borrowers as well as governments. Other beneficiaries are those who own assets or assets that were first purchased with the newly created currency. This includes real estate, stocks, and general tangible assets.
Such inflation must be separated from each price increase. If the demand for downtown areas suddenly increases because people are moving from the country to the city, property prices in the cities will rise, while they fall in the countryside. With inflation, prices rise almost everywhere. Increases in prices caused by increases in demand or decreases in demand, such as after a bad harvest, are limited and offset by decreases in prices in other areas.
Inflation works like a tax, but it is not seen as such. The government can take a small amount of money from every business and citizen to pay for their consumption instead of creating new money by issuing government bonds. Actually, it would be the same thing, only it wouldn’t be easy, and many people would complain and might vote for those politicians in the next election.
Inflation is not clear, and in the public opinion it is not the government’s fault but that of others who create shortages and profit from rising prices. Political and social scapegoats for price hikes can always be found.
The ECB’s former chief economist, Peter Praet, clearly states that the functioning of today’s financial and economic system depends on the creation of more money – in other words, on continuous inflation. If the last financial crisis showed us anything, it’s the default response of governments: print money. And problems will always come for various reasons: ongoing climate crisis, epidemics, wars, migration, demographics, etc. Reasons and excuses for printing money can always be found.
What does this have to do with Bitcoin?
The biggest and most valid criticism of a sound monetary system, where money cannot be multiplied uncontrollably, is that it does not provide a means of quick intervention by increasing the money supply in difficult situations. Of course. You will need to save upfront, to set aside a reserve.
And if there’s one thing politicians can’t do, it’s save. There’s always a good reason to spend money, whether it’s doing good, solving problems, winning over voters before an election, or even supporting a friendly businessman in a personal space.
Another would be to raise taxes to cover these unexpected costs. That would be politically and economically ineffective. It can scare voters and take away their purchasing power.
The bottom line is this: without being able to print money at will, the boom that preceded the crisis would not have occurred in the first place, or at least it would have been much smaller. And the following problems will also be very less. This can be seen in the economic cycles of the 19th century, when there was a strong gold standard.
Yes, there were many problems at that time. But they were short and not very strong. And deflationary periods certainly did not end in catastrophic collapses.
The ability to print unlimited amounts of money leads to massive misallocation, which leads to corresponding massive adjustments, and as a result, disasters. These problems cause more money printing, and it continues.
The greater the misallocation before, the greater the correction afterwards. A healthy financial system leads to sound economic decisions, sustainable growth, and short recessions when misallocations are corrected.
Money that cannot multiply without reason limits misallocations during booms, and accordingly, limits corrections during downturns.
At the height of the financial crisis, on October 31, 2008, an unknown person or group published a Bitcoin white paper – six weeks after Lehman Brothers, one of the largest US banks, filed for bankruptcy.
On January 3, 2009, Satoshi Nakamoto launched the Bitcoin blockchain. The very first block was mined. This first block contains the following message:
“The Times 03/Jan/2009 Chancellor on brink of second bailout”
This was a clear indication of the subject in the The Times January 3, 2009 – repeated bailouts of the financial system are teetering on the brink of collapse.
Bitcoin was and still is the answer to a fragile financial system: to the uncontrolled printing of money, to the deliberate denial of reality, but also to the unjust and socially unjust expropriation of land that accompanies the creation of money.
The cap of 21 million bitcoin and the lack of central control make inflation policy impossible. A bitcoin holder cannot be deprived of the uncontrolled printing of more bitcoin.
And they won’t be dispossessed by banks that fail or deny access to bitcoin, as long as they hold their bitcoin in a private wallet and thus control their own access. No central authority can revoke that access.
The timing of Bitcoin’s launch was not coincidental. It was a reaction to a financial system that would have collapsed if money had not been printed out of control.
Bitcoin is sound money – the answer to a broken financial system. It is a program that can be ranked higher. Participation is voluntary and open to anyone. No one with a computer or smartphone and an internet connection can be excluded from it. For many, it is a lifeline from an unsustainably unsustainable fiat money system.
In contrast to an inflated and opaque system, Bitcoin is decentralized, transparent, and trustworthy.
Find out more at Bitcoin: Trusted Money!
This quote is just the beginning. Dive deeper into how inflation reduces the value of your money, your savings, and your access time Bitcoin: Trusted Money by Alex von Frankenberg, Ph.D. The paperback is available now.
Order your copy here!
