Let’s focus. If we do, we can finish our analysis of Saifedean Ammous’ “The Bitcoin Standard” this century. The rest of this chapter is all about inflation, the buzzword of the last few months. As the whole world is feeling the effects of something that’s day-to-day life for small economies, people in privileged countries are curious about why their purchasing power decreases every month.
SPOILER ALERT: It’s because of unsound money and the government’s constant money printing.
Let’s explore that idea and everything fiat money permits and generates as a byproduct. 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)
- Unsound Money (Chapter 6, Part 2)
- Economic Thought (Chapter 7, Part 1)
And now, let’s go back to, The Bitcoin Standard:
“Chapter 7: Perpetual War, Inflation, And Taxation”
Inflation is a hidden tax. Bitcoin fixes this. However, the world doesn’t live under the Bitcoin standard… yet. We could summarize this whole section with this quote:
“With sound money, the government’s war effort was limited by the taxes it could collect. With unsound money, it is restrained by how much money it can create before the currency is destroyed, making it able to appropriate wealth far more easily.”
Only through this technology called money can trade exist at a massive scale. And, as we explored here, price is a mechanism that summarizes all the intricacies of different economies into a simple number. However, if the signals are corrupter by unsound money, price is no longer useful. “Prices need to be denominated in a sound form of money across the community that trades with it,” however, in our world they’re not.
“When communities use different kinds of unsound money, trade becomes more complicated, as prices vary along with the variation in the value of the currencies, making the terms of trade unpredictable, and making it often counterproductive to plan economic activity across borders.”
In the world we live in, perpetual war is our day to day
Do you remember a time when there was not an active war somewhere? Not to mention the unwinnable wars that the U.S. likes to engage with. Like the war on drugs. Or the war on terror. “As it stands, a large number of firms in all advanced economies specialize in warfare as a business, and are thus reliant on perpetuating war to continue being in business.” Well, these types of operations are only possible in a fiat money world.
“In nineteenth-century Europe, kings who wanted to fight each other had to tax their populations in order to finance their militaries. In the long run, such a strategy could only be profitable for kings who would employ their military defensively, not offensively.”
As you might suspect, the hidden tax that is inflation doesn’t only finance wars. Unbeknownst to the common people, It finances everything, including the government’s incompetence.
“As long as government had to tax its people to finance its operations, it had to restrict its operations to what its subjects deemed tolerable. Governments had to keep a balanced budget by always keeping consumption within the limits of earnings from taxation. In a society of sound money, government is reliant on the consent of its population to finance its operations.”
Inflation Is Easier Than Taxation
It would be much harder to fund the government’s every whim if they had to outright tax the population. Not only that, inflation “allows governments to buy allegiance and popularity by spending on achieving popular objectives without having to present the bill to their people.” No wonder the ones on top wanted to get out of the gold standard and rewarded those economists that gave them the intellectual justification to do so.
“Unsound money makes government power potentially unlimited, with large consequences to every individual, forcing politics to the center stage of their life and redirecting much of society’s energy and resources to the zero-sum game of who gets to rule and how. Sound money, on the other hand, makes the form of government a question with limited consequences.”
As we said before, the constant printing of new money distorts the price signal beyond recognition, but there’s more. “Credit creation by central banks causes unsustainable booms by allowing the financing of unprofitable projects and allowing them to continue consuming resources on unproductive activities.” Businesses with access to direct government payments and low-interest‐rate credit have an enormous advantage over those who don’t. And who gets those contracts? Those already connected and big companies. The bigger the better.
“In a society with sound money, the more a person saves, the more he is able to accumulate capital and the more he can invest, meaning that capital owners tend to be those with lower time preference. But when capital comes from government credit creation, the allocators of capital are no longer the future-oriented, but members of various bureaucratic agencies.”
BTC price chart for 10/16/2021 on Bitstamp | Source: BTC/USD on TradingView.com
Banking In A Sound Society
The banking profession gets a bad rep. Yet, more and more students are drawn to it each and every year. The reason is that it’s an extremely profitable industry, sure. However, the fact that those institutions are considered “too big to fail” and can take enormous risks without fear of consequences also plays a big role.
“In a society with sound money, banking is a very important and productive job, where bankers perform two highly pivotal functions for economic prosperity: the safekeeping of assets as deposits, and the matching of maturity and risk tolerance between investors and investment opportunities. Bankers make their money by taking a cut from the profits if they succeed in their job, but make no profit if they fail. Only the successful bankers and banks stay in their job, as those that fail are weeded out.”
About the relationship between these untouchable “too big to fail” institutions and inflation, Saifedean says:
“In a society with sound money, a central bank would have to tax everyone not involved in the bank in order to bail out the bank. In a society with unsound money, the central bank is simply able to create new money supply and use it to support the bank’s liquidity.”
Would the U.S. population have backed the bailout if they had to directly pay for it from their own pockets?
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