At the time of writing, our economies are dominated by a Keynesian approach to governing and tweaking the system. After the great depression and the deflationary environment that resulted from it, the governments shifted from a classical economics system, to one where intervention was the main focus rather than letting the market decide freely.
By manipulating the interest rates and government spending they could target inflation and thus stimulate or discourage spending. Price would slowly rise throughout the years at a controlled pace.
Austrian view on monetary policy.
Building on the classical theory of economics where government intervention was not needed, Austrian economists bring to the table a view where allocation of resources down to the individual level is more important and that they are the real driver behind macro economics trends. by appropriately allocating resources in the first place the prices of goods and services will eventually reach an equilibrium.
The booms and busts of the post 30’s era have all come and gone and changed the economy in small ways. The latest crash in 2008 however introduced something new, excess liquidity through quantitative easing and low interest rates. A purely Keynesian situation.
You don’t need to be an economist to deduce from that chart that something is off. The amount of liquidity injected by the government spiked after 2008. Whenever there is excess supply of a certain good, it will inevitably lose value.
In that case we have excess money and a loss of value of money is called inflation, a rapid and exaggerated loss is called hyperinflation. It is however clear that we are not in this situation, in most of the world at least.
This is due to M0 not trickling down to M2 through the credit system or in other words the banks are not making this liquidity available to us, they are hoarding the cash. And for now everything seems healthy (see chart below)
Some would have you believe that this injection of cash from the federal reserve was just a masquerade to appease us by keeping the bank solvents in the books and thus keeping the faith in the currency strong and that it would never translate to inflation as interst rate will rise and the money will slowly be repaid to the government. Sure, but the issue is that the money is still there, dormant and waiting to be loaned or even worse used as a leverage for traders, and when that liquidity hits the market we can bid farewell to the USD.
When the next crash or downturn comes, and at some point it will inevitably come, what would be the first thing the banks will do? That’s right, they will use that excess liquidity in a reflex of self preservation.
Nobody wants to be the second Lehman brother after all and if past behavior is something to account for, banks would not hesitate to act purely in self interest (remember the repackaging of subprime loans?), they are just humans with a banking license after all.
Ah Finally! we are getting to the interesting part. let’s look at what Bitcoin is first. “It is an public trust less peer to peer currency with a limited supply”. A more technical explanation is available here but let’s not go too deep.
Trust less means that it eliminate the need for a third party to independently verify each transaction and to keep up with the books or more simply said, it eliminates the need for a bank. it achieves that by making the ledger public thus verifiable by anyone.
The limited supply is the part that most interest us. When there is demand for a good that is limited, the price inevitably goes up and if that good is a currency then it becomes more valuable. The government cannot decide to just print more money but it is forced to very carefully allocate the proceedings it collected from taxation and to shift the governance power from entities like government and banks back to the people.
An increase in perceived democracy and freedom. A deflationary currency does sound controversial at first. Why would I spend today when I can save and be richer tomorrow. The answer is quite simple in that case, after an adjustment period, the average spender will be used to spend in the basic needs as a first step and then in luxuries as a second step. the price of goods and services will be fluctuating at first but as the world goes into this new paradigm, price will eventually reach a slowly moving equilibrium in each community.
Furthermore, a universal easily transferable currency will promote trade in smaller unbanked communities and will positively impact the developing and the developed world. The bottom line is that all resources will try to be as efficiently allocated as possible, a view that the Austrian school of economics is putting forward.
Quite naturally nothing is perfect and Bitcoin does not solve all issues. The adjustment period I mentioned above could be very brutal if the transition is not nurtured, an ad-hoc temporary solution could be pegging FIAT currency to Bitcoin and operate on fractional reserve for a while similar to the gold standard.
Another issue I perceive is the inequality in the distribution of Bitcoin, early adopters will clearly have more power and depending on the nature of these individuals it could create a new type of social antagonists that the governments will have trouble fighting against. Proper defense and more efficiently allocated resources could greatly help with these issues. As any uncharted territory, a global economy reliant on Bitcoin could also bring unforeseen problems.
The Keynesian model of economic governance has now created too much liquidity controlled by the banking sector. If the government doesn’t reduce this liquidity, the next economic turmoil could bring along a high inflation climate due to the banks unloading this liquidity. Austrian economists view aligns with the Bitcoin deflationary nature as it forces all resources to be efficiently allocated including liquidity. Problems such as adjustment period and bad actors could arise however with efficient governance these issues can hopefully be tamed.