The World is Ending and Only Bitcoin Can Save Us

@CharlieLongren

Banking in the Shadows: Part 5

The artists and writers responsible for creating Japanese comics and animation are the best storytellers in the world, and I don't think it's even close. It is not a coincidence that Japanese anime and manga have become one of the most popular forms of media in the world, as such, their style of world building has become intertwined with popular culture world wide. One of the features common to the Japanese style of storytelling is a well crafted magic system. The main character in many Japanese manga has a set of special abilities that they must utilize and improve upon in order to overcome challenges. The best manga have a magic system that includes some kind of cost for using special abilities and improving on them. The cost may be environmental, physical, or mental. In the best stories, that cost is always significant. Without significant costs to using special abilities, fantasy stories can become stale. This is the same reason that Batman is a far more compelling character than Superman. Batman plays with higher stakes. Though the beautifully crafted magic systems in Japanese stories are a small part of what makes the narratives great, the systems can make or break a great story.

There is a meme in crypto Twitter with the tagline “Bitcoin Fixes This.” It is as if the so-called Bitcoin Maximalists look out into the horizon and see the world on fire. They see all of the economic, social, and environmental issues that we face, and they believe that the magic of Bitcoin will fix everything. That is a false and boring narrative. The truth is far more compelling. The Bitcoin “magic system” can help us overcome many challenges that we will face in the future and it can help us improve our social, economic, and environmental success, but there will be costs.

After the US government broke the US dollar’s peg to gold, the Eurodollar system was created by banks in order to address their desire for liquidity. The Bretton Woods Agreement established the US dollar as the world hegemonic currency, which meant that the majority of the world would have to settle all international trades using US dollars. Later the US broke the dollar’s peg to gold. Without the dollar’s peg to gold, banks were able to “print” their own dollars and create their own liquidity. Global monetary supply was no longer in the hands of governments and central bankers. When the Eurodollar system imploded, the federal reserve and other central banks were catapulted back into the role of liquidity supplier, and they have since created over 25 trillion dollars of liquidity. Even so, central banks have not been able to match the level of money creation and balance sheet expansion that was provided by the “fully functional” Eurodollar system.

Furthermore, the broken Eurodollar system was never replaced. Central banks did not seek to understand and fix the flaws in the system, they instead kept feeding a broken system allowing it to survive through multiple recessions. But the fault does not completely belong to central bankers and government policy makers. In order to replace a global monetary system, we need a NEW global monetary system. Historically, monetary regimes have only been replaced after a period of violence and destruction. Before a slew of European wars including the French Revolution, the French held the world reserve currency with francs. Before the first World War the British pound sterling was the world reserve currency. And, arguably, it was various Cold War conflicts that pushed the US to break the dollar peg to gold, and transition into the Eurodollar system. Replacing a monetary regime without large scale conflict seems equivalent to trying to replace a house’s foundation without destroying the house. Regardless, it will become necessary to replace the Eurodollar system. It can only proliferate for so long without causing financial catastrophe on a global scale. We need to replace the foundation.

Eventually, Bitcoin can be that new foundation. Unfortunately, it is not a viable replacement yet. In order to take full advantage of the magic of Bitcoin, we still have to deal with the costs. Even when we have paid the price and made sacrifices for the sake of sound money, there are still financial and political issues that Bitcoin will likely never fix.

There is a limited supply of Bitcoin in existence, and a substantial amount of effort/energy is required to access the untapped supply. This means you can not just create or find new bitcoin. Bitcoin is hard money. It is in fact one of the hardest forms of money we have ever used in human history. In my paper, “What is Money?” I explained why hard money is important, but in summary, hard money allows people to store and save their labor and energy to fulfill future wants and needs. Hard money also gives participants in an economy the clearest information about price. Soft money is very poor at doing both of those things. When you store value in soft forms of money, your money’s value can be easily reduced and prices become extremely unclear and unreliable. Fiat currencies, such as the US dollar, are one of the softest forms of money in human history. The softness of fiat currencies is one of the reasons people save for the future by investing in securities instead of simply saving cash or saving money in a bank account. There are better philosophical arguments for Bitcoin as a world reserve currency, but in my opinion, this is the best financial argument.

With a Bitcoin standard (Bitcoin as a world reserve currency) it will be more difficult for banks to create dollars at the stroke of a pen. Everyone will have the option to store their labor in a money that cannot be created by bank employees or unelected government officials. The financiers and power brokers will not so easily be able to create profit for the few at the expense of the many. I feel many of those who are benefiting from the current financial system are diametrically opposed to Bitcoin because they subconsciously feel it will shift the dynamics of power. And, it will to an extent. The beauty of the network is that within it the rich still get richer, but the poor get richer as well. Everyone benefits from using a system of hard money. It’s like magic, but of course the best magic systems always have a cost.

Some of the costs of the Bitcoin network are built into the system. It requires a substantial amount of energy to maintain the network, and as the network grows so does the amount of energy needed. This is a feature not a bug. The amount of energy required to maintain the system is the reason why it is so secure and can be trusted. The energy cost of Bitcoin is being paid everyday by brilliant engineers, entrepreneurs, and hobbyists. The societal cost has yet to be paid. And, that totes a much higher price tag.

In order for Bitcoin to become the world reserve currency, the previous system has to be destroyed or replaced. Replacing the Eurodollar system requires intelligence and collaboration among world governments, both of which they have shown to be beyond their depth. That leaves destruction. As I stated earlier, history shows that global monetary systems are only replaced after a period of destruction and devastation on a global scale. This is because no one wants to deal with the short term consequences of abandoning the legacy system. In order to see change, short term benefits have to outweigh short term negative consequences by orders of magnitude. In general, people will not change unless they do not have a choice. After World War I half of Europe was in shambles. The world turned to the US for survival rather than for politics. If it had not been for that destruction, we would likely be in a Europound system rather than Eurodollar.

The Eurodollar system has broken and eventually it will fail. It is a matter of when not if. The social cost of transitioning to a Bitcoin standard will be in the form of the social, economic and physical destruction that occurs as a result of the Eurodollar system finally giving in. Liquidity will be scarce leading to failing corporations and small businesses, we will see the climax of populist sentiment and nationalism, and there may even be war. Amidst this panic the price of Bitcoin will move parabolically and eclipse all time highs. Of course, it is possible that central banks and world governments release their own digital currencies, but there will be costs in that transition as well. Furthermore, we will likely end up in a situation identical to the present if we keep monetary control in the hands of the current world governments.

No one can, with any amount of certainty, predict the future. Even so, as days pass the number of probable futures are decreasing. We are seeing that central banks are running out of rope. The cracks in the Eurodollar system are widening and becoming more apparent to the public. The financial world, as we know it, is coming to an end, and it is important that there be something to replace it. A more appropriate title would have been “the world is changing and Bitcoin can help us,” but that is far less catchy.

When I say it, it is only half in jest… The world is ending and only Bitcoin can save us…