Bitcoin: Why you should question traditional ‘fiat’ money

Questioning how and why fiat money (money by decree) operates today is a necessary part of understanding Bitcoin.

For most of us, we’re taught Keynesian and Monetarist ideas in school or university, but are these actually the appropriate framework to view the economy?

Bitcoin is a rejection of fiat economics, instead representing a non-government, non-business controlled form of money. This view aligns more with an Austrian economist’s view of money.

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What are Keynesian and Monetarist ideas?

Keynesians and Monetarist ideas are presented as though they are ‘the way things are done around here’.

Few stop to challenge these ideas that require or justify the continual inflation in the currency used by the people. The Keynesian and Monetarist focus on aggregates does a grave disservice to those wanting to perform economic analysis.

The problem here is that looking at broad aggregates gives a misleading view of what’s going on at the individual exchange level.

The Keynesian notion that hoarding money is bad for the economy is erroneous as there is actually a natural level at which people should ‘hoard’ money. Money is held because it reduces future uncertainty by giving the holder the ability to purchase what’s needed.

If we knew exactly what we’d need in the future, we could instead purchase time duration instruments that mature at exactly the time we need them. But the reality is we could have an emergency medical bill to pay at a moment’s notice, thus maintaining a cash balance is prudent.

Keynesians and Monetarists make various arguments in defense of inflation but they effectively end up providing intellectual cover fire for governmental monetary intervention.

The failures of initial interventions are then used as justification for even more intervention. This may be to ‘manage liquidity’ or to regulate the amount of capital held on a balance sheet, or to create a state lender of last resort.

What if the money supply did not have to grow though? What if the monetary token could simply rise in value to accommodate the growth in purchasing power over time? This view is consistent with an Austrian understanding of monetary theory.

That said, Bitcoin is still inflationary until it hits its eventual total, just under 21 million coins around the year 2140. As of July 2021, about 18.75 million coins have been issued. So Bitcoin is actually disinflationary (increasing at a decreasing rate).

We’re living in a world where technological advancement should be bringing costs down. But instead, depending on the industry, the prices are still rising! How could this be?

Government interventions impact some industries more than others, and thus the effects are not felt evenly. For example, the cost of Netflix subscriptions remains cheap, but luxury property or private schooling costs are rising dramatically.

Austrian economists recognise that it’s not so much about how much money exists per se, any amount could theoretically work, even a fixed supply of money.

Austrian economists also recognise that money is not neutral, and it matters who gets the new money first. In the fiat money fractional reserve banking system (the one we live under today), new money is created when loans are issued, and money is effectively destroyed when those loans are paid back.

But if you’re an early recipient of that new money, you have the privilege of spending it before the purchasing power of money has been devalued. Later recipients of money lose out.

Consequently, there’s an incentive to go into debt to purchase things like housing, which helps explain the trend we’ve seen over the past few decades. Levering up to buy a house has historically worked out well because you hold the real asset (the house), while your loan is denominated in fiat money that is going down over time.

This has worked historically, but it is also why housing has become so difficult to afford for the typical millennial or Zoomer relative to Boomers and older Gen X individuals, who got in before cheap fiat credit inflated a ridiculous property and stocks bubble.

Why is Bitcoin the answer?

Bitcoin brings back justice to this whole equation by creating hard money that cannot be inflated beyond the 21 million limit. Without cheap and easily available fiat credit, we won’t be seeing such ridiculous property, stock or bond bubbles around the world. By returning the world to hard money, we would be removing the aberration of fiat money that has existed for all of our lives.

Looking back to the 1800’s, there was a classical gold standard. And while it was not perfect, it did show what we could anticipate under these conditions.

People actually experienced falling prices over time, and many great innovations were created in this era. This is not to say that we should all go back and live like humans did in the 1800s, but rather we’re looking specifically at the impact of the type of money in use at the time.

In a sense, Bitcoin is making the old new again. It is taking the best that gold offers us, while also offering the best that the digital, internet enabled world offers. Bitcoin is like gold, but 1,000 times better.

Bitcoin represents a monetary revolution and removal of politician and bureaucrat power to influence the economy to such a great degree. Power is being transferred in favour of the individual and the community instead.

Stephan Livera is host of Stephan Livera Podcast, a show about Bitcoin.

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