The 2020s is a decade of many strange things in the realm of finance from million dollar auctions of links-to-pics (NFTs) to magic boxes and meme stock trading. Arguably, some (a lot) of this market lunacy was caused by money printing, which has by the same, but opposite causality, also accelerated growth of bitcoin and its endorsement by celebrity investors and institutions.
With each new crisis, the flaws of the global monetary system become more evident and understood by the public. Standing in contrast to this perceived bad system, bitcoin is rapidly growing in significance as a global macro asset, and entering higher levels of intellectual debate.
It is helpful to recognize that there is a very deep and long history of academic bickering on the subject of better alternatives to nationally managed currencies. To pick the most obvious examples, Hayek proposed Ducat, while Keynes had his supranational currency, Bancor.
The overarching thesis present in most of the currency theories that is also seeping into the bitcoin debate is that the managed money is always at risk of being manipulated, inflating away the wealth of people.
The expectation in bitcoin community is that as the fiat currency system centered around dollar is reaching its limits, it will be replaced by an outright bitcoin standard or a marketplace system in which bitcoin plays a significant role as a reserve asset.
Most of the debate on the feasibility of bitcoin adopting this global role is centered around its volatility, technical sufficiency (or lack thereof) and environmental impact. There is to a greater or lesser extent satisfying answer to all of these issues.
The volatility will subside with bitcoin’s growth to some extent naturally due to law of large numbers, although it will never disappear completely since bitcoin is, after all an unmanaged asset subject to market forces.
The risk that bitcoin will not be able to run transactions of the entire world simply from a technical / mechanical point of view (limited number, high transaction costs after all bitcoins are mined) can be disregarded on the basis that bitcoin is more akin to a base layer on top which payment (Lightning network) and other value transfer networks (securities) can be built. The case for bitcoin as a base layer asset also diminishes the risk related to volatility.
On the environmental side, there has been a lot of discussion and good analysis on this subject recently, so we should not go into too much detail here. Work by Lyn Alden and Nic Carter is especially impactful here.
In short, bitcoin’s energy usage is a rounding error on the global energy consumption estimates. This should be viewed all the more favorably considering the (of course) vastly more wasteful traditional financial industry comprised of middlemen and thousands of networks powered by old code on mainframes.
Even more importantly, there is the argument that the ability of the mining industry to go on/off as required is beneficial for the growth of renewable energy, which generates energy according to elements, not demand, of course.
More detail please.
Given that bitcoin supporters are primarily concerned with defending against these criticism and promoting the practical advantages of bitcoin, it is quite understandable that they offer a relatively limited discussion of how the bitcoin standard could actually work in real world.
To the extent that bitcoin rejects managed inflationary currencies and aims to resemble gold as a store of value, it implicitly favors a return to a gold standard-like mechanism.
It can be said that bitcoin rejects the Keynesians and Monetarists (put simply, countries should support economic activity during downturns via monetary easing or fiscally, which eventually requires monetary easing) in favor of the Austrian school, which believes that it is the government control of money that causes cyclicality and thus recessions.
Although all of these theories are just that - theories - arguably, the Keynesian/Monetarist economics are the ones that have been put in practice; all economies of the modern world are managed and supported by their governments, fiscally and monetarily.
Rejecting this, the theoreticians of bitcoin do not offer practical alternatives. We should be concern that a gold standard-like system is unlikely to work in the context of the modern world.
The basic rule of the gold standard is that each country’s currency is convertible to a fixed quantity of gold. Countries could not inflate their currencies. If they did, investors would exchange currency for gold leading to an outflow of gold from country, leading to a downward spiral of less trust in currency, leading to a further outflow of gold.
In this system, countries had to subject the wellbeing of their domestic economies to the fixed rate (see Milton Friedman, 1953, p.172). In other words, they could not artificially create debt in their economies to support economic activity in times of downturn, or they would risk the above.
In contrast, this is the basic mechanism of the fractional reserve banking system that bitcoin so rejects. (This is done by: 1. FED changing the federal funds rate, which is a rate at which banks borrow from each other. When it is low, it is cheap for banks to borrow from each other, hence they are motivated to lend to households and companies. 2. FED buying treasuries and other securities off of banks books with made up money to increase their required reserves, reflate them with fresh capital and allow them to lend more.)
Without this debt-push mechanism, economies would be left to market forces and natural self-healing, arguably leading to a much slower economic growth and protracted uncorrected periods of subdued economic activity.
The theoreticians of bitcoin reject the artificial debt creation and perceive the debt cycle as something evil (e.g. see Saifdean Ammous, 2018, p. 156). They do not offer alternatives tested in the context of the modern world.
At best, they point to history as evidence why a fixed-rate hard money system should work: “For Keynesian and Marxist economists, and other proponents of the state theory of money, money is whatever the state says is money, […], which is going to inevitably mean printing it to spend on achieving state objec- tives. […]. But the fact that gold has been used as money for thousands of years, from before nation states were ever invented, is itself enough refutation of this theory.” - Saifdean Ammous, 2018.
As inspired by the original Austrian school authors: “A world of constant money supply would be one similar to that of much of the eighteenth and nineteenth centuries, marked by the suc- cessful flowering of the Industrial Revolution with increased capital investment increasing the supply of goods and with falling prices for those goods as well as falling costs of production.” - Murray Rothbard, 1976.
This would not be accurate. As noted by Friedman (1962), even gold standard was a highly managed system, meaning flows of capital between countries were controlled and influenced by an arguably small group of central (and other) bankers, so as to promote desired outcomes, subjecting the wealth of people to the greater good.
To the extent that the theoreticians of bitcoin reject money supply control as a mechanism to support economy, at best they propose that left to the free market, everything will go along nicely and there won’t be periods of demand destruction and downturns as if they ignored the possibility of exogenous events. It is certainly true that money supply control leads to a destruction of wealth of population, but it may be necessary.
Bitcoin’s attack on Keynesianism/Monetarism is based on moral grounds, not economic reality: “By constantly expanding the money supply, central banks’ monetary policy makes saving and investment less attractive and thus it encourages people to save and invest less while consuming more. The real impact of this is the widespread culture of conspicuous consumption, where people live their lives to buy ever-larger quantities of crap they do not need.” - Saifdean Ammous, 2018.
But isn’t the creation of crap what keeps the economies going? When people invented the infinite light bulb, they had to begin creating departments dedicated to making sure the products would go dead at some point. Otherwise the factory would only sell its product to the world once.
They don’t recognize this as a limiting factor in bitcoin adoption, and instead focus most of their attention on explaining bitcoin’s practical advantages as hard money, which are at this point, thanks undoubtedly also to their work, becoming well accepted.
This brief text made a full circle; it started with the recognition of the flaws of managed money, which gave birth to bitcoin, and concluded that managing money may indeed be a necessity that bitcoin cannot replace.
The absurdity is deliberate in order to emphasize that bitcoin theoreticians may be overly content in their narratives of bitcoin as an antithesis to managed money theories, while at the same time failing to provide satisfyingly detailed alternative.