Or maybe it was the journalists who didn’t want to see the downside of the Corona measures? Indeed, some economists understand very well what is happening. January’s spike in inflation is likely just the beginning of a troubling trend that makes Bitcoins more necessary than ever.
So, to put it bluntly and, for my sake, in an overly sweeping way, the fact that our mass media have largely ignored the obvious monetary consequences of the measures taken against the Corona pandemic is, at best, a complete failure and, at worst, a crime. Either way, the media have denied their role of critically scrutinizing official pronouncements, just as they have denied their role of helping citizens emancipate themselves with the right information.
Otherwise, it would be impossible to read this sentence in the Süddeutsche at the beginning of 2021: ” Economists were surprised by the significant rise in inflation.” This sentence ends a short news item under the headline “Prices rise surprisingly strongly,” which reports that “the upward trend in prices” accelerated in January. Compared with the previous month, prices had risen by an average of one percent, or about 20 times what you get in your savings account for the year, it said. This price increase was the strongest in 6 years, he said.
The framing by headline and final sentence expresses twice how surprising the Süddeutsche finds this development. The fact that it murmurs nebulously about surprised “economists” instead of naming names could indicate that it is not economists who are baffled, but an editorial team that has lost all sense of monetary policy in the frenzy of the Corona figures.
What “surprising” development are we talking about? The money supply in the eurozone increased by 12.3 or 15.6 percent in 2020, depending on whether you look at M3 or M1. In the same year, the amount of goods that can be bought for this money, i.e. the economic power, fell by 5.1 percent in Germany and by as much as around 7 percent in the eurozone. So we have significantly more money, but fewer goods.
Every eighth grader and every craftsman knows what the economists and journalists find surprising: You get fewer goods for the same money. Prices go up. The logic is as trivial as it is fundamental.
A world of zombie believers
Most economists understand this, of course. Gunther Schnabl, for example. Or VWL professor Christian Kreiß, who published a clear-eyed article on Telepolis yesterday with a disturbing ending. Kreiß writes about the strategy of central banks to flood markets with money since 2008 to prevent a collapse of the economy. The dollar money supply has increased ninefold since 2007, and the euro money supply has increased sevenfold.
This rapid increase in the money supply is matched by an equally rapid increase in debt – especially government debt – which is already more than three times global economic output. All this would still be bearable if economic growth were to keep pace. But this has fallen over the past year – in which the money supply rose more than ever.
“An enormous amount of new paper was brought into the world in 2020, representing a claim on economic output that does not exist at all. So many money and asset holders are living in an illusion, the mistaken belief that their money and bond deposits are still fully valuable. But they have not been for a long time. We live in a world of zombie creditors.”
This statement is as correct as it is well known; at best, it is new for the economic editors of the Süddeutsche and their poor readers. What makes Kreiß’s article interesting is that he doesn’t stop there. Instead, he sketches several scenarios of how things could go on. “Bankruptcies, a financial crisis, bank failures, sovereign insolvencies, mass unemployment, chaos and unrest.”
- First, central banks could continue their expansionary monetary policies. Both the European Central Bank and the U.S. Federal Reserve have announced they will not only stick with policies to spur inflation, but intensify them.
- According to Kreiß, however, a continuation of the low interest rate policy would lead to real estate and stocks being worth infinitely much in principle (as the euro is worth infinitely little in principle).
- The extreme rise in asset prices already illustrates this logic. But in the long run, this will lead to distortions in the rental market and a bubble. Therefore, the continuation of this policy is not sustainable.
To counteract this, central banks could try to reduce the money supply by raising interest rates. However, higher interest rates would drive many companies and also industrialized countries to ruin. Therefore, this option is unlikely to be viable. A debt cut would make more sense, but since the creditors – the 0.01 percent of the super-rich – have extreme political influence, this is unlikely to be enforceable either. So inflation would remain. With an inflation rate of 10-20 percent, the debt could be cut in half within 5-10 years. Such inflation would have many dire consequences, but would still be the most bearable option. However, it would be difficult to force, given global overcapacity and the weakened purchasing power of Europeans.
Therefore, Kreiß finds other scenarios more likely. The more pleasant option would be a “wave of bankruptcies, a financial crisis, bank failures, sovereign insolvencies, mass unemployment, chaos and unrest.” These corporate, bank, and sovereign bankruptcies are also a form of debt default, “but a disorderly, chaotic one that is likely to trigger a downward vortex with dire, sometimes incalculable macroeconomic and societal consequences.”
If that’s the more pleasant scenario – what’s the other? War. After all, the two world wars “were already, in purely economic terms, valves for barely sustainable economic conditions before 1914 and before 1939.”
Hope for the best, be prepared for the worst
Of course, there are many shades of gray and other scenarios here. For example, the economy could simply shrink until it finds a new equilibrium. This could lie in property relations, which, according to French economist Thomas Piketty, was the historical normal state of capital: a much higher level of inequality, which allows the upper class to live splendidly off the pensions of their capital, while the lower class has to spend most of its income on rent and food – and the middle class simply disappears.
Expropriations beyond those caused by inflation would also be conceivable. The template for this could be Cyprus, where banks stopped online transfers overnight and then took a cut from all customers who had more than 100,000 euros in their accounts. It would also be conceivable to expropriate shares, increase the tax burden, or, in the last instance, set fixed prices and much more – precisely all those poison pills with which governments from Venezuela to Nigeria are slowly and stably driving their countries to ruin.
Governments that have ridden their country into evil with a mistake rarely admit to having made a mistake. They usually pat themselves on the back, say they did the right thing, but not enough of it, which is why they increase their diets and poison the market even more. If a government already seriously thinks that it is possible to increase the money supply by more than 15 percent in one year without any nasty consequences, then there will hardly be any stupidity that it cannot be trusted to do. History and the present are full of examples of this.
Bitcoin as a good resting place
Buy Bitcoin, not because you expect high returns and appreciation. You might get that, but you might not. Instead, buy Bitcoins because they protect you against some of the consequences of worst-case scenarios.
If governments manage to reduce their debt through massive inflation – say, 10 to 20 percent a year – you’ll have a liquid means of payment in Bitcoin that won’t be affected by inflation. Of course, stocks and gold perform a similar function of preserving value. However, they are not a globally valid means of payment.
It is probably more important that you can store Bitcoins yourself. Euros are in your bank account, shares are in your securities account with your broker. A wild-eyed government that insists that those who own “outrageous amounts” must be liable for their mistakes can confiscate these assets without you being able to defend yourself. You can then take legal action, and perhaps you will – eventually – be proven right. But until further notice you would be expropriated.
Many – or some – of the rich and super-rich have long since done so. They have shifted some of their wealth into Bitcoin, which allows them to protect themselves against the arbitrariness of a state system in crisis. Even if government bonds default, the government freezes bank accounts, confiscates stocks, robs gold from vaults – even then Bitcoin allows them to keep their assets safe.
Some companies, such as MicroStrategy or Square, have begun to hedge against the threat of fiat money inflation by buying Bitcoin for their company’s portfolio, and also taking the first steps toward taking custody of money into their own hands rather than delegating it to a bank.
We hope that all of this is unnecessary. But until then, a little bitcoin from a big exchange like binance will help you sleep more worry-free. That our advanced society, looking back on 12,000 years of sedentarism, will be able to deal with this crisis as well. That our democratically elected governments will have the wisdom to correct their own mistakes rather than cling to them, and that there will be a solution to this mess, perhaps consisting of small doses of each poison or a whole new way.