Money — the magical power it has over people is almost universal. But whether we earn it, spend it or save it, we hardly ever think about the following questions: What is money? Why does it exist? What will money look like in the future? And why should we think too much about it? Our money works. Day in, day out, we use it without much effort. So what’s the problem?
As August Friedrich von Hayek pointed out, we humans constantly use things we don’t know anything about. For example, you don’t need to know anything about internal combustion engines in order to drive a car. It’s no different with money. We don’t have to think deeply about money in order to use it successfully. This very fact is what makes us such a successful species and indicates how well our market and knowledge society functions.
Given recent developments, more and more people have started pondering the state of today’s money. this is often indicative of the very fact that strange things are happening within the realm of cash.
What the overall public is being told immediately is that cash is often created endlessly. With the coronavirus popping the so-called “Everything Bubble,” central banks are interfering heavily by providing vast amounts of cash — altogether the various flavors that cash or money-like substitutes exist in today’s financial world. On top of that, governments have found out stimulus packages within the trillions of dollars, exceeding anything the planet has ever seen far and away.
In the wake of the big money tsunami unleashed onto economies and societies, people have begun (rightfully) to start out asking the question: What has become of The money? Is money even worth anything any longer?
A Battle of Devaluation
Others, among them many bitcoiners, are asking the question: How has money gotten to the present point? so as to answer this question one has got to return to 1971, when the dollar, because the last national currency, was stopped from gold. Perhaps surprisingly, government currencies didn't crash to zero at that time; rather they moved to a system of free exchange rates.
Whereas the yellow valuable had previously served as an anchor useful and price, henceforth a battle of national currencies was unleashed. This battle clothed to be quite costly. the various exchange rates of individual currency pairs led to a rise in currency risks. The latter increased transaction costs for international trade, which still weigh heavily on global trade to the present day, representing a globally inefficient barter system on a national currency level.
Merchants, companies and politicians reacted to the present situation. Within the political arena, the U.S. dollar developed into the worldwide unit of account for oil and other commodities thanks to U.S. hegemony being the strongest economic power around the globe. to the present day, the U.S. dollar continues to function as a world reserve currency. during this way, the greenback facilitates global trade, but thanks to its importance it also let the U.S. exploit what's called its “privilège exorbitant.” The sheer dominance of the dollar and therefore the advantages for U.S. markets are impressive.
Financialization of the planet
The entrepreneurial response has been to financialize the planet and makes derivatives and more and more hedge funds. the previous are financial products whose primary objective is that the contractual hedging of risks over time and space. The latter, hedge funds, are entities that trade these financial products within the sort of actively managed investment. It is, therefore, hardly surprising today that hedging transactions to attenuate the rate of exchange risks account for a substantial proportion of total financial transactions.
Government currencies beget ever-greater financialization. It’s the entrepreneurs’ reaction to them. therefore the ever-increasing number of derivatives used today is ultimately a consequence of the costly effects of this diversity of national currencies. Anyone wishing to send money across national borders today pays hefty fees. The reason: the truth of various currency areas requires the involvement of banking and financial institutions. Countless banks, partner banks and financial service providers from different countries are involved and need their “fair” share. So, ultimately, our current international monetary order resembles a worldwide barter trade supported numerous fiat monies. Legacy systems and regulatory requirements make their efficient and rapid transfer difficult.
The various fintech companies of today are therefore also actors within the entrepreneurial reaction to the present state of affairs. the foremost popular and successful among them are those that want to get rid of artificial barriers in international payment transactions resulting from this global barter. Upstart companies like TransferWise or Revolut are making possible those things that banks have barely managed to try to to . Sending and receiving national currencies isn't only becoming faster but also cheaper.
Bitcoin: the last word Reaction
The entrepreneurial reaction within the sort of financializing the planet has its drawbacks though. it'd help investors, entrepreneurs and corporations to affect the effort of state currencies, but the system at large is being inflated and becomes ever more fragile. Ironically, this is often also the rationale why we see central banks floating the markets now. they're reacting toward something that has itself been a reaction to financial institution national currencies within the first place. the matter may be a closed-loop system that makes an ever greater problem.
In 2009, a replacement player entered the stage: bitcoin. during a sense, the crypto asset is that the final reaction that aims to interrupt this closed-loop system of national currencies and financialization. Born at the peak of the financial crisis, Bitcoin represents the antithesis to the prevailing financial order. it's an effort to wrest money as a force influencing the economy, politics and society from the hands of centrally planned God players.
Money again should be scarce and decentralized so as to tame the endless appetite of politicians, functionaries and economic giants. within the eyes of its supporters, Bitcoin may be a counter-reaction to the shameful misuse of paper money . Whether paper money is supported by the state and issued by private banks or maybe corporations, the matter remains the same: It remains in centralized hands and users cannot keep self-sovereign control of it.
Digital payment solutions that promise to show current money into “fiat money 2.0” are merely putting “lipstick on a pig,” consistent with the argument of Bitcoin aficionados. this is able to not solve the elemental problem of monetary socialism that's ailing our current medium of exchange . Money remains tied to intermediaries and each payment made is recorded during a central database controlled by a 3rd party. Transactions are often censored at any time.
A Real Alternative
For this reason, a distinction must be made between digital currencies and cryptocurrencies. The latter are often exclusively controlled by individuals using cryptographic methods. So-called cryptographic values can thus be held and used directly by their owners and without intermediaries, almost like bearer instruments or material objects. rather than being managed by an intermediary, cryptographic values are supported a blockchain. this is often a distributed database that no-one has sole control over. A blockchain is ultimately a computer protocol, supported programming code. From a technical point of view, this turns the crypto assets into pure information and arithmetic .
Consequently, Bitcoin stands for an alternate way of brooding about financial systems. Today, our economic system may be a conglomerate of abstract constructs like contracts, promises and balance sheets. This bears witness to the very fact that our economy has been becoming ever more abstract. Money is not any exception. the good philosopher and sociologist Georg Simmel already noted this tendency toward ever greater abstraction in his work “The Philosophy of cash .”
There exists a hierarchy of cash in today’s financial system: money within the narrower sense, which is additionally referred to as base money; and money during a broader, more abstract sense within the sort of bank deposits, shadow banking IOUs, credit cards or mobile payment options. This development toward more abstract sorts of money is driven by the financialization of the past decades, which has led to a stronger fusion of the economic and financial worlds.
This amalgamate requires a financial alchemy that's now supported three basic building blocks: institutions (technology), incentives and human participation. within the existing economic system , the human element predominates. Contracts and promises are framed by institutions, but they're executed and enforced by human hands.
An uneducated observer might regard Bitcoin as only the newest iteration during this constant evolution toward more abstraction. And although bitcoin truly is an abstract sort of money, it's not a mere extension of this hierarchy of cash during a seemingly endless game of financialization. it's a replacement sort of base money for a replacement sort of network or institution powered by what's today generally called an open, neutral, borderless, censorship-resistant public blockchain.
As a replacement sort of base money, bitcoin will see financialization occur and with it, ever greater abstraction happening on top of the bitcoin base money. curiously enough though, on its most fundamental layer, the Bitcoin protocol reduces the human element to an unprecedented extent and provides technology and incentives more weight.
Incentives to stay the human element in restraint and technology are getting more important thanks to mathematics, cryptography and computing . A financial alchemy as we all know it today, but one supported Bitcoin, is probably going to depend less on the human element and more on computers, formulas and code so as to regulate , execute and enforce it. It’s the hope of bitcoiners that this type of monetary alchemy are going to be better in an objective sense than what we've today.
The Endgame Is Upon Us
So let’s come to the question asked within the beginning. What has become of the money? Quo vadis, economic system? It seems obvious that our current financial system can only go down this one path: Ever extra money is required to stay it alive. Helicopter money is imminent within the U.S., another chapter within the tragic but inevitable trajectory of cash.
Further reading: Zero Interest, Limitless Repo And QE4: The Federal Reserve’s Market Operations Explained The ultimate chapter will finally be the adoption of what's mentioned today as “modern monetary theory” or MMT. This theory, which ironically isn't “modern” in the least , holds that the state doesn't need creditors because it can create funds in its own currency at will. As a monetary sovereign, the state is, therefore, not hooked in to borrowing on the market within the sort of government bonds. it might much rather create the cash itself via the financial institution incorporated into it.
MMT has been growing in popularity, probably because more and more people seem to intuitively feel the inevitable endgame. Other reasons also are more pragmatic: MMT may be a blank check for all types of political projects like “jobs,” “education” or “climate protection.” Fewer and fewer people are ready to resist financial resources for political “necessities” — in any case , the last word aim is to complement society.
Another argument at the guts of MMT is that of justice. Today, bankers and other financial actors seek to complement themselves within the process of financing of the state, therefore the argument goes. a couple of people get richer and richer at the expense of the masses. the very fact that MMT wants to finish the entire financial circus around interest rates and government bonds by depriving commercial banks of the chance to make money is thus met approvingly , especially from the political left. The entrepreneurial reaction of financialization won't be made possible anymore; the state will take over all on its own.
Debating whether MMT are going to be more just than today’s system really doesn’t make any sense, within the end. Once money has lost all its meaning, there’s no point in debating any justice because there won’t be any left. Money will truly be worthless; people will only use it under a state of coercion.
In the wake of this coronavirus crisis, the good triumvirate of our day and age — governments, central banks and banks — has began to realize the following: “Fiat iustitia et pereat mundus” or “Let justice be done, though the planet perish.” the matter , however, is that in paper money , there's really no iustitia left. Without justice, there's only pereat mundus…
So, as an antithesis to endless growth and therefore the meaningless of cash , Bitcoin stands firm: Its network is restricted to 21 million bitcoin units only. there'll never be more bitcoin. that's the message of it all, and during a world during which “relatively scarce” money within the sort of state fiat currencies will soon only be suitable for lame jokes, such a message is more important than ever.
So if Bitcoin didn’t exist, it might need to be invented: As a psychological elixir of life, so to talk , it'll give comfort and confidence to several more people within the light of the crazy money interventions of our times. What would we do without Bitcoin?
This is an op ed contribution by Pascal Hügli. Views expressed are his own and do not necessarily reflect those of Bitcoin Magazine or BTC Inc.
SOURCES: bitcoinmagazine.com/
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