Bitcoins, Capital and the Inflation Tsunami

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We can sadly remember watching with a mixture of helpless horror and fascination the video of those unfortunate individuals who wandered out on the quiet beaches of Southeast Asia before the Indian Ocean Tsunami. What were they thinking? We can only imagine… “What a day, the tide is out so far! I can find all kinds of treasures that never are never usually uncovered by the sea. What surprises await me?” Sadly, for them, there was a big one.

Inflation is analogous. Most of our fellow citizens are pragmatic beachcombers. They are simply not interested in theories or threats of future inflation that has not yet materialized. Most of them do have the time or inclination to listen to lectures on the superiority of Bitcoins, capital or other private alternatives for money. Most do not realized that failed money and banking policy are responsible for the largest U.S. economic collapse since the Great Depression and its disappointingly gradual recovery. Right now inflation is nowhere and interest rates, if one can get a loan, are very low. As long as inflation is a non-event, dollars will do just fine and Bernanke’s Fed will provide plenty of them.

Is the inflation tsunami assured? Well put it this way, quantitative easings 1 through n have pumped an unprecedented amount of intrinsically valueless fiat money into the U.S. economy. That inflation has not already occurred is only due to the fact that the U.S. money, credit and fractional-reserve banking system is still broken. When it finally regains its greed and euphoria, watch out. The only way then to stop the inflation tsunami would be for the central bank to re-absorb high-powered money at exactly the right rate to maintain price stability. Can this be done? Is the Federal Reserve and Bernanke up to the challenge? Let’s just say that if they are, it will be the first time in the 100 year history of the Federal Reserve. Clearly the odds are heavily stacked against avoiding the financial tsunami. It would be a feat akin to stopping the Titanic on a dime.

As if that weren’t enough, the public sector hyenas are already barking and salivating at the near-term prospect of the departure of Bernanke from the Federal Reserve. They have all kinds of grandiose, crack-brained spending agendas that will require the full-force fire hose of fiat money to be turned on to finance them. Incredibly, they think that under Bernanke the Federal Reserve has been too tight! If you thought that the rounds of quantitative easings were over the top, just wait! Over the next year or two the Titanic will not stop on a dime. Instead, it is likely to get a new captain who will order full speed ahead and the lookouts sent to bed. The new Fed Chairman will not be an inflation hawk.

When will our financial beachcombers care? When the purchasing power of the dollars in their accounts or wallets is rapidly being devoured by the fire of large and pervasive price increases—when the inflation tsunami has really struck. Then, interest in private monies—Bitcoins, commodities, and capital—will seriously emerge. Real assets will be one of the few havens of value in an inflation fire. Only when serious inflation strikes, will most individuals be open to and interested in storing their value and managing their trades in a different way. Open to the argument of al alternative private money.

The discerning reader may now object, “But I seem to remember that the stock market or the value of capital did not fare so well during the last major U.S. inflation of the 1970s? Why is capital then a haven for value?” Because, dear reader, the value of capital and the return to it was then and still is denominated in dollars. Moreover the tax burden that fell upon it—capital gains, corporate income tax, etc.—rose with inflation. Therefore capital was clearly not inflation neutral. Given our current tax structure, it still isn’t. However, if capital was money or the benchmark of value of all other goods, then, of course, there would have been no fiat money inflation of the 1970s. Remember, inflation is everywhere and anywhere an outcome of the expansion of a fiat money at a faster rate than the underlying growth rate of the economy, as Milton Friedman has so famously and accurately observed. It is just as accurate to think of inflation as a devaluation of a fiat currency—being printed at too high a rate—as it is to view it as a general rise in prices.

Of course, Bitcoins and other private monies aspiring to be the accepted benchmark of value and medium of exchange would face the same issue as capital, as long as their value was denominated in terms of the prime adversary—dollars. With an ultimately fixed supply, Bitcoins can be expected to appreciate at the nominal growth rate of the economy. When dollar inflation comes, transactions in them would occur at increasingly higher dollar values. Expect the government tax man to come knocking at the door. This will make them non-dollar inflation neutral as well. The cure? Redefine the game of value in terms of Bitcoins or capital instead of dollars. When the monetary value of a Bitcoin or capital is just one, there is no “capital gain” and the problem is solved. Of course, this logical outcome will not come without a serious fight, since the government will then have been stripped of its most fundamental financing power. Its fundamental power to steal. Its tool that has historically allowed monarchs, dictators, entrenched bureaucrats and politicians, and other such thieves to have their cake and eat it too. Governments have traditionally enjoyed the privilege of being monopoly counterfeiters, of printing fiat money with abandon, thereby stealing real output from the rest of us. Then, adding insult to injury, governments could tax the value of our real assets, because they were appreciating in fiat money value, thereby stealing real output from us yet again!

Readers who are interested in further development of the arguments presented here are urged to obtain our recent book, Capital as Money. It can be purchased by means of link to this website. We are so excited and enthusiastic about the recent optimistic traction of an alternative, private currency that we now encourage readers to choose the option of purchasing our book with Bitcoins.

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