by Michael Roerade on 26 Sep 2023
Do you think the cycles of economic growth, followed by worldwide recession we witness roughly every 10 years, are normal and unavoidable phenomena? At least that is what a lot of so-called experts would have you believe. However, there is an explanation that makes perfect sense. An explanation that also points to the solution.
The Austrian Business Cycle Theory, as formulated by Ludwig von Mises, is based on the idea that artificially low interest rates cause malinvestment and market distortions. This leads to unsustainable economic booms and eventual busts. The theory applies to the current global financial and monetary system, which is based on fractional reserve banking and interest rate manipulation.
In fractional reserve banking, banks are allowed to lend out more money than they possess in deposits. This creates an increase in the money supply. Low interest rates lead businesses to borrow money and invest in long-term projects that they otherwise would not. This is the source of the boom-bust cycles most of us have come to accept as a normal phenomenon, or at least as some force of nature we can't control. In reality, there is nothing normal or natural about it, and the consequences for society as a whole are dire.
Electric vehicle cemetery in China. A clear example of 'cheap money'
The Austrian Business Cycle Theory suggests that the only way to prevent these boom and bust cycles is to limit the expansion of credit and money supply. This has to be done by limiting the ability of central banks to create money and by implementing sound monetary policies. Furthermore, the theory proposes that government spending should be kept in check and that the government should not intervene in the economy.
This would mean that without government bailouts, unsuccessful businesses go bankrupt all the time, and their assets, human, intellectual and financial capital flow to other players in the market that are better capital allocators. Due to the lack of centrally determined low interest rates and the resulting cheap/free money, there would be no zombie corporations as we currently see.
There would be no bubble that bursts at the end of the boom cycle. Instead, creative destruction causes a constant move towards more efficiency and lower prices by letting the free market correct itself, thus rewarding those companies who allow for the highest customer satisfaction (removal of uneasiness) at the lowest price.
Unfortunately, history shows that governments and central banks have strong incentives to do the exact opposite. Monetary expansion (money printing) and excessive government spending are necessary to make good on unrealistic, short-term election promises that are necessary to gain and retain political power. Few voters realize that this causes increased prices and devalues their savings.
Tragically, those who live paycheck to paycheck - and are hit the hardest by this inflation - don't demand to stop the monetary and fiscal policies that are causing it, but ask for more government handouts and will vote for those promising them. This happens because monetary policy is intentionally veiled in difficult terminology in order to make sure people don't figure out what is actually causing their problems.
"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." - Henry Ford
This causes a perpetual downward spiral that makes both people and governments addicted to money printing, with catastrophic consequences. Between 1700 and 2013, more than 250 fiat currencies collapsed due to excessive monetary expansion. If central authorities have the possibility to inflate the money supply, they will.
Adoption of bitcoin as the global monetary standard would drastically change the current state of the global financial and monetary system. Bitcoin is a decentralized, unconfiscatable and permissionless digital currency that is not issued or backed by any government or central bank, and is immune to their manipulation. Its monetary policy is set in stone. The use of bitcoin as a global monetary standard would therefore eliminate artificial credit expansion and the boom and bust cycles that come with it.
When governments cannot fund their policies through inflation, and people will only pay taxes from their unconfiscatable wealth voluntarily in return for real value they receive, it means the size and power of those governments would decrease significantly.
People who hold their wealth in bitcoin can take it with them wherever they go. That means that the more people do so, the more governments will need to compete amongst themselves based on how much real value they provide to such sovereign individuals at the lowest possible price (tax rate). Governments that are quick to adapt to this paradigm shift can attract more wealthy people that are prepared to go where they are treated best.
The 1974 Nobel Prize laureate Friedrich von Hayek was well aware of the fact that government controlled money is only good for governments and those who are close enough to their circles of power. For money to be good for the average person like you and me, it needs to be neutral and impervious to manipulation by central authorities.
By combining existing technologies, the person, or group known under the pseudonym Satoshi Nakamoto "in a sly and roundabout way" introduced the "something they can't stop", referred to by Hayek 24 years earlier, when the bitcoin white paper was published in 2008.
Game theory playing out at nation state level
El Salvador is one of the poorest countries in Latin America and had the guts to be the first to open itself up to this asymmetric opportunity. 1.5 years after making bitcoin legal tender, which at the time received fierce criticism from the IMF, the World Bank and the Federal Reserve, El Salvador's GDP was up 10.3% in 2021, tourism has increased by 95%, and the country started buying back its own bonds at market prices. At this stage, direct correlation with making bitcoin legal tender is obviously difficult to prove, but the numbers are surely impressive.
If this positive trend persists, it will mean more small poor countries, which have been at the receiving end of the bludgeon of the US dollar as global reserve currency, will follow El Salvador's lead and break free from the modern day monetary slavery that is perpetuated by the IMF and the World Bank. No one wants to be the first. No one wants to be the last.
What's it to you?
Understanding what increased adoption of bitcoin will mean for the power of governments and large financial institutions, puts dismissive remarks made about bitcoin by politicians and central bankers in a very different light. They have a lot to lose and have a vested interest in making sure the majority of the population remains unaware, as long as possible, of how bitcoin gives power back to the people with every person who opts out of the legacy system by building and holding their wealth in bitcoin.
It also makes clear why more than 100 countries are developing Central Bank Digital Currencies (CBDCs). They are the exact opposite of bitcoin, as they allow central authorities to maintain their control over people and make it possible to implement real-time monetary policies at the micro level. That is, right in your pocket. Programmable money means governments can determine where you can spend your money, on what and for how long. If implemented, CBDCs make creating a China-style social credit system childishly simple.
Educating yourself about how bitcoin can protect you from that panopticon, if/when it gets implemented, might prove to be the difference between being able to freely transact with others and take your wealth with you to greener pastures, and being stuck in a system that makes your ability to transact fully contingent on your compliance with whatever rules governments might come up with in the future. The 'dress rehearsal' of technologically controlled conditional freedoms that we've seen since March 2020 has been more than successful in a lot of countries.
If your personal knowledge about bitcoin is primarily based on what the media usually report regarding its price volatility and purported environmental impact, but have become curious to learn what it is, why it was created, how it works, and why you need it, I highly recommend the free e-book "Bitcoin - Everything in 21 Pages" that I wrote together with my colleague Andrew Howard. In a few hours, you will know more about the deeper implications of this disruptive freedom technology than 99% of people.