On January 1, 2000, the world was supposed to end. As history changed and the next millennium entered, it was expected that computer systems programmed in the 1960s and 1970s would fail. Storage space was expensive at the time. As a result, programmers often save space by recording years with only two digits instead of four, omitting the century. Once the century changes, logic will be lost, and systems will break down.
Massive IT projects have been launched to fix the problem and prevent looming disasters, such as the explosion of nuclear power plants. Alongside the booming technology industry, an even more thriving survival industry has emerged. Instructional manuals were published on how to survive the impending disaster – hiding under a table – while there was a healthy trade in bunkers and expensive survival packs.
In a proactive move, the US Federal Reserve eased monetary policy. The booming Internet and its early successes brought technology to the masses. Combined with loose financing conditions and growing public enthusiasm at the turn of the millennium, this ignited a unique boom in stock markets, especially for technology and internet stocks.
The world has not come to an end. Instead, people began to wonder what would happen to companies that had no chance of making a profit and relied on constant infusions of investor funding. Doubts began to spread, stock prices began to fall, and over the course of 2000, the dot-com bubble burst.
The final nail in the coffin of the 2000s bubble came on September 11, 2001. The terrorist attack on the World Trade Center in New York made it seem as if the world was truly about to end. Air traffic stopped, war broke out, and recession ensued. Stock markets have collapsed and continue to fall.
Once again, the US Federal Reserve intervened to save the economy and financial markets. Interest rates fell, credit became cheap, and the economic downturn slowed. Beginning in early 2003, stock markets began to recover. Slowly at first, then faster. Exceptionally low interest rates have stimulated economic activity, although not as intended. The bursting technology bubble was quickly replaced by a massive housing bubble, especially in the United States.
The movie The big short It begins with a quote from Mark Twain:
“It’s not what you don’t know that gets you into trouble. It’s what you know that definitely isn’t.”
History provides us with many examples of how stubbornly and for how long people, and even entire societies, hold on to false beliefs. A good example of this is the geocentric worldview held by many in the Middle Ages: they believed that the universe revolved around the Earth. Galileo Galilei professed a dissenting belief and was threatened with death and excommunicated because of it. The Church’s self-image and special interests prevented such an inconvenient truth. But as with truth, there comes a point when it cannot be denied.
The same applies to the financial crisis of 2007-2009. Behind many of the financial products offered were mortgage-backed securities of little or no value. This fact also cannot be denied in the end. The markets for these securities and the financial products based on them collapsed, and many of the banks and financial institutions that held them collapsed. In the end, the entire financial system collapsed. Major and well-known banks have gone bankrupt, financial markets have dried up, and even healthy companies are at risk of failure.
The terrifying and astonishing part was the response of governments and central banks – with bailouts. With the exception of Lehman Brothers and a few others, almost all the major institutions were bailed out. At the time, Chancellor Angela Merkel guaranteed the German people that their bank deposits were safe – a promise she likely would not have been able to keep if it had been reneged on.
The central element of the bailouts was, and still is, money printing. Governments have generously bailed out important banks and companies connected to the financial system by introducing new money. Central banks have financed and continue to finance this by buying government bonds, lowering interest rates, and providing very favorable financing conditions to banks.
This point is very important. When a central bank buys maturing government bonds, it means it increases the money supply or prints money. In the movie economyPeter Praet, chief economist at the European Central Bank at the time, says it quite clearly: “It’s not physical money, but electronic money.”
Printing money means increasing the amount of money in circulation. This results in all our money being diluted. Ultimately, this makes it less valuable since there is more money involved but the same amount of goods.
When new money is created – that is, when money is inflated and then spent, regardless of what it is spent on – prices will eventually rise, and the money held by everyone becomes less valuable. In other words, when new money is created, everyone who already has money is disadvantaged a little.
Only those who receive the new money benefit first, which are usually banks, shareholders, companies, as well as borrowers and thus the government. Those who own goods or assets that were first purchased with the newly created money also benefit. This primarily includes real estate, stocks and tangible assets in general.
This inflation must be distinguished from individual price increases. If demand for city center locations suddenly rises because people move from the countryside to the city, property prices will rise in city centers, while they will fall in the countryside. With inflation, prices rise almost everywhere. Price increases resulting from high demand or low supply, such as after a poor harvest, are limited and offset by lower prices elsewhere.
Inflation acts as a tax, but it is not viewed as such. The government can also take a small amount of money from each business and citizen to cover its spending instead of creating new money by issuing government bonds. In practice, it will be the same, except that it will not be that easy, and many people will complain and may vote to remove these politicians in the next elections.
Inflation is ambiguous, and in the public perception it is not the fault of the government but of others who create shortages of goods and profit from higher prices. It is always possible to find a political and public scapegoat for rising prices.
Peter Praet, former chief economist at the European Central Bank, states quite clearly that the performance of today’s financial and economic system depends on the creation of more and more money – in other words, on persistent inflation. If the recent financial crises have shown us anything, it is the knee-jerk reaction of governments: print money. Crises will always continue to arise for various reasons: the ongoing climate crisis, pandemics, wars, migration, demographics, etc. It is always possible to find justifications and excuses for printing money.
What does this have to do with Bitcoin?
One of the main and valid criticisms of a sound monetary system, where money cannot be multiplied uncontrollably, is that it provides no means of rapid intervention by increasing the money supply in severe crises. This is correct. You will have to save in advance, to set aside reserves.
If there is one thing politicians cannot do, it is save. There is always a good reason to spend money, whether it is simply to do good, solve problems, win over voters before an election, or even support a friendly businessman in his constituency.
The alternative is to increase taxes in order to finance these unexpected expenses. This would lead to adverse results politically and economically. It would scare away voters and take away their purchasing power.
The crucial point here is this: without the ability to print money at will, the pre-crisis boom would not arise in the first place, or at the very least would be much smaller. Subsequent crises will also be much smaller. This is evident in the economic cycles of the nineteenth century, when a strict gold standard was implemented.
Yes, there were many crises at that time. But it was short and less dangerous. Certainly, periods of low prices did not end in a horrific deflationary spiral.
The ability to print unlimited amounts of money leads to massive misallocations, which then lead to large corrections and thus crises. These crises in turn lead to more money printing, and are still continuing.
The greater the misallocation beforehand, the greater the corrections thereafter. A sound monetary system leads to sounder economic decisions, sustained recoveries, and short downturns in which misallocation is corrected.
Money that cannot be arbitrarily multiplied limits misallocation during booms and thus limits corrections during busts.
At the height of the financial crisis, on October 31, 2008, an anonymous person or group published the Bitcoin White Paper – six weeks after Lehman Brothers, one of the largest banks in the United States, declared bankruptcy.
On January 3, 2009, Satoshi Nakamoto launched the Bitcoin blockchain. The first block has been extracted. This first block contains the following message:
“The Times 01/03/2009 The Finance Minister is about to present a second rescue plan for banks.”
This was an explicit reference to a headline in The times January 3, 2009 – Repeated bailouts of a financial system still teetering on the brink of collapse.
Bitcoin was, and remains, the solution to a fragile financial system: to uncontrolled money printing, to the willful denial of reality, but also to the unfair and socially unjust expropriation that accompanies the creation of money.
The cap of 21 million Bitcoins and the absence of central control make inflation policy impossible. A person who owns Bitcoin cannot be stripped of his property by the uncontrolled printing of more Bitcoin.
They may not be stripped of their holdings by banks that go bankrupt or deny access to Bitcoin, provided they keep their Bitcoin in a self-hosted wallet and thus manage their access themselves. No central authority can revoke this access.
The timing of Bitcoin’s launch was not a coincidence. It was a reaction to a financial system that would have collapsed had money not been printed in a largely uncontrolled manner.
Bitcoin is sound money – a response to a broken financial system. It is a system that is not imposed from above. Participation is voluntary and open to all. Anyone with a computer, smartphone and Internet connection cannot be excluded. For many, this is a lifeline out of a paper money system that is unsustainable.
In contrast to an inflationary and opaque system, Bitcoin is fundamentally decentralized, transparent, and honest.
Find out more at Bitcoin: honest money!
This snippet is just the beginning. Dive deeper into how inflation affects your money, savings and time Bitcoin: honest money By Alex von Frankenberg, Ph.D. Paperback is available now.
