Firstly, a huge welcome to reading the first installment of my “Bitcoin Really Does Fix This Series”. It can be extremely difficult to get a solid fundamental understanding of just what this space is all about coming in cold. I am working to break down this space and give the reader a greater insight into bitcoin and the wider crypto space. Alas - lets begin.
The Rapidly Increasing Disparity of Wealth
The wealth gap between rich and poor is expanding in Western society - fast. The price of assets such as property continues to climb each year while wages remain relatively stagnant. As Generation Z comes of age; buying a house or being able to provide for a family - each year becomes a more distant prospect that may never be reached. This is a problem that has only started to really be felt in recent years and is getting worse over time. Typical political solutions do not address this problem as they never touch the root cause - the legacy financial system (LFS).
The legacy financial system is a broad term for how our established financial institutions typically operate in today’s world and how money flows in society. When you hear this term - think central banks, Wall Street, financial services giants, and the government itself. While bitcoin and the wider crypto space vastly improves upon many different parts of the LFS, it’s most profound area of impact is on it’s ability to protect wealth from the effects of central bank quantitative easing.
Quantitative Easing
Quantitative easing (QE) is essentially the printing of money to fund government spending.
In the early 20th century the majority of global currencies all operated under a gold standard, which meant the paper currency slips were redeemable for their value in physical gold. This was important because it ensured everyone was playing on the same financial playing field and that money saved in cash held its value relative to all other goods and services over long periods of time. By 1971, all major global currencies were fiat currencies, (this means they were not backed by anything of value). The US dollar acting as the global reserve currency had to fully sever its ties with the gold standard to avoid default, largely from overspending in the Vietnam War. Quantitative Easing has been used on a widespread basis ever since to fund government programs and yearly budget deficits. Recently, this has increasingly been on a larger scale than ever before - Central Banks have printed trillions and trillions of dollars globally to fund wars, bank bailouts and to prevent economic collapse amidst global coronavirus lockdowns.
It is important to note that creating money out of thin air does not constitute the creation of wealth. When new money is created, the wealth of everything that holds value in society is redenominated over the new total amount of dollars printed. As the renowned economist, Adam Smith states, the wealth of society is the “stream of goods and services that it creates”. It follows that the printing of more money, generally makes prices rise over sought-after things over time.
“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” - Milton Friedman
In the past 18 months, over 40% of all US dollars ever in existence have been printed. This essentially locks in a 40% inflation rate over a period of time, meaning that prices and especially prices of sought-after assets such as property are set to increase by 40%. This has the real effect of your hard-earned dollars being worth 40% less than when you worked for them. For example’s sake; from today - if it takes five years for the 40% inflation to manifest, you will have to earn 40% more dollars on top of your current salary just to maintain the same real income you have today in five years time (all other things remaining equal, such as taxes).
Money printing is the primary driver of inflation and the graph below shows the rampant increase in prices from 1971 up until 2015.
The first-order effects of this manifest in today's society with a rising neo-feudal class system. For example, Generation Z increasingly has less of a chance to acquire property to raise a family without saddling themselves with huge quantities of debt. Rent costs will continuously rise for the Gen Z renter who can barely afford to make ends meet while the value of the homeowner’s house will continually rise.
Long-term saving in fiat currencies such as in the dollar or euro no longer represents sound advice, especially due to the low-interest rates available to the saver. Each year inflation is compounding away money from savers. While the dollar amount doesn’t change - what those dollars can buy reduces a lot over time. A whole magnitude of first-order effects can be seen here.
Furthermore, many later order effects can be derived from the debasement of our money. One example that may be in part derived from the debasement of money may be the increased prevalence of depression or nihilistic thinking amongst the youth. Purchasing a property (see graph below), buying a car, or providing for your family is becoming increasingly difficult, with feelings of inadequacy or "what’s the point” to follow. The many further order effects that can be hypothesized are largely beyond the scope of this article.
Where Bitcoin Fits In
Amidst the financial crisis of 2008, a pseudonymous programmer created a decentralized digital currency called bitcoin that mimics and improves upon many of the properties of gold. See the comparison table showing the traits of money below:
Bitcoin is a disinflationary, decentralized, currency that has a fixed maximum supply hard-coded at 21 million bitcoins. This has a deflationary effect on the economy meaning prices trend downward over time instead of go up (example - rent). In a society operating under a bitcoin standard, bitcoin protects the value saved of the saver due to the fact it’s supply can never be increased. Bitcoin does an excellent job of serving as a digital pristine store of value. Over a long time horizon - bitcoin acts as money that is designed to appreciate in value, more and more over time; which gives the individual an excellent alternative to having your USD or Euros depreciate over time.
Entrepreneur and author Jeff Booth has spoken extensively on this topic. His book and podcast series with Robert Breedlove linked in the section below provide extensive further insight. In summary, the current system forces the wealth gap to continually widen. The average person saves a significant portion of their wealth in cash, which is continually depreciated due to monetary expansion (money printing); which in turn causes prices and asset valuations to rise artificially. Bitcoin gives each person an option to opt out of this cycle and an opportunity to save and secure their wealth.
Sources and further reading can be observed below.
Sources & Further Reading
The Jeff Booth Series, The What is Money Show, by Robert Breedlove.
The Biggest Scam In The History Of Mankind - Hidden Secrets of Money Ep 4.
The Price of Tomorrow, by Jeff Booth.
The Bitcoin Standard, by Saifedean Ammous.
Nicely said! These topics are hugely important and Bitcoin is the solution that can’t be ignored anymore — it’s great that you are shedding light on this and I hope it can help lots of folks continue to learn as it did for me. The charts are super helpful as well. Looking forward to the rest of the series.