What does living under an unsound money regime looks like? Just look around.
You open the book to learn about Bitcoin, and you end up understanding how the whole world works. Such is the magic of “The Bitcoin Standard” by Saifedean Ammous. In our last Book Club meeting, we learned about the summarizing properties of “price” and how inflation and central planning distorts it and renders it useless. This time around, we’re going to explore the consequences of living under an unsound money regime. The fiat regime. The one most of us have lived our whole life under.
But first…
About The Coolest Book Club On Earth
The Bitcoinist Book Club has two different use cases:
1.- For the superstar-executive-investor on the run, we’ll summarize the must-read books for cryptocurrency enthusiasts. One by one. Chapter by chapter. We read them so you don’t have to, and give you just the meaty bits.
2.- For the meditative bookworm who’s here for the research, we’ll provide liner notes to accompany your reading. After our book club finishes with the book, you can always come back to refresh the concepts and find crucial quotes.
Everybody wins.
So far, we’ve covered:
- Prologue and Chapter 1
- Primitive Moneys (Chapter 2)
- Why Gold? (Chapter 3, Part 1)
- History (Chapter 3, Part 2)
- Gold Standard (Chapter 4, Part 1)
- Government Money (Chapter 4, Part 2)
- Money and Hyperinflation (Chapter 4, Part 3)
- Time Preference (Chapter 5, Part 1)
- Capital Accumulation (Chapter 5, Part 2)
- Price (Chapter 6, Part 1)
And now, “Chapter 6, Part 2: Business Cycles And Financial Crises”
Price controls send a false signal that distorts the market. It’s already bad enough if we’re talking about goods and services. “In the capital markets, something similar happens, but the effects are far more devastating as they affect every sector of the economy, because capital is involved in the production of every economic good.” To understand this properly, we need to establish a few fundamental concepts:
“Scarcity is the fundamental starting point of all economics, and its most important implication is the notion that everything has an opportunity cost. In the capital market, the opportunity cost of capital is forgone consumption, and the opportunity cost of consumption is forgone capital investment. The interest rate is the price that regulates this relationship.”
Our current governments have the privilege of printing money whenever they need it. For them, capital has no opportunity cost. And when they introduce that unsound money to the market, it sends a false signal that manipulates the interest rate. And that, “destroys the incentive for capital accumulation.”
“In an economy with sound money, such manipulation of the price of capital would be impossible: as soon as the interest rate is set artificially low, the shortage in savings at banks is reflected in reduced capital available for borrowers, leading to a rise in the interest rate, which reduces demand for loans and raises the supply of savings until the two match.”
In short, interest rate manipulation causes recessions.
Unsound Money Makes It Easy For Central Banks To Manipulate The Money Supply
Once inflation starts, only “the inevitable recession” can stop it:
“If the central bank stops the inflation, interest rates rise, and a recession follows as many of the projects that were started are exposed as unprofitable and have to be abandoned, exposing the misallocation of resources and capital that took place.”
They wouldn’t want that, so they keep the “inflationary process indefinitely.” Until the bubble bursts and recession arrives. The fact of the matter is that “central bank planning of the money supply is neither desirable nor possible.” As we learned in the previous meeting of our Book Club, the government’s intervention and control doesn’t “allow for the emergence of accurate price signals.” On the other hand:
“The relative stability of sound money, for which it is selected by the market, allows for the operation of a free market through price discovery and individual decision making.”
Inflation is the cause of recessions, but our current system sees it as “a normal part of market economies.” This is “the boom-and-bust cycle” that Austrian economists describe.
“Only when a central bank manipulates the money supply and interest rate does it become possible for large-scale failures across entire sectors of the economy to happen at the same time, causing waves of mass layoffs in entire industries, leaving a large number of workers jobless at the same time, with skills that are not easily transferrable to other fields.”
That’s right, massive unemployment is exclusive to our current economic system.
International Trading Under Unsound Money
If the people were allowed to choose their own money, they would instinctively go for “the least volatile good on the market ”
“This currency would oscillate the least with changes in demand and supply, and it would become a globally sought medium of exchange, allowing all economic calculation to be carried out with it, becoming a common unit of measure across time and space.”
Under centrally planned unsound money, on the other hand, “all economic activity is measured and planned” by the government using three tools. “Monetary, fiscal, and trade policy—and most unpredictably, through the reactions of individuals to these policy tools.” As you might suspect, the system is riddled with inefficiencies. Among nations, those inefficiencies are magnified. Daily international trade needs the foreign exchange market. How big of a business is it?
“Perhaps one of the most astonishing facts about the modern world economy is the size of the foreign exchange market compared to productive economic activity. The Bank of International Settlements estimates the size of the foreign exchange market to be $5.1 trillion per day for April 2016, which would come out to around $1,860 trillion per year. The World Bank estimates the GDP of all the world’s countries combined at around $75 trillion for the year 2016.”
These incredible amounts give the people in charge of the current system a clear incentive to keep their charade going.
BTC price chart for 08/20/2021 on Bistamp | Source: BTC/USD on TradingView.com
Currency Wars And The Solution
The system also incentivizes every country to devalue its currency. To make their exports cheaper and more attractive in the international market, they effectively impoverish its citizens.
“The combination of floating exchange rates and Keynesian ideology has given our world the entirely modern phenomenon of currency wars: because Keynesian analysis says that increasing exports leads to an increase in GDP, and GDP is the holy grail of economic well-being, it thus follows, in the mind of Keynesians, that anything that boosts exports is good. Because a devalued currency makes exports cheaper, any country facing an economic slowdown can boost its GDP and employment by devaluing its currency and increasing its exports.”
Bitcoin fixes this. The solution is “a sound global monetary system that serves as a global unit of account and measure of value, allowing producers and consumers worldwide to have an accurate assessment of their costs and revenues, separating economic profitability from government policy.” Simple.
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