How central banks paved the way for bitcoin’s birth

Half-a-billion dollar paintings. IOUs that charge you to hold them. Stocks at unprecedented highs.

We’re living in the “everything bubble”.

And the logical result of this bubble? $10,000 bitcoin…

How today’s monetary environment created bitcoin

At the time of writing, bitcoin hasn’t hit $10,000 yet. But it’s really not far off it.

My colleague Dominic will be writing more about the king of the cryptocurrencies specifically in tomorrow’s Money Morning, but I just want to consider what it says about today’s monetary environment.

I that it’s fair to say that low interest rates, and quantitative easing (QE) in particular, paved the way for bitcoin to take off.

Of course, bitcoin is far from unique in this.

Let’s say, for sake of argument, that a Leonardo da Vinci of shaky provenance is the most valuable painting available for sale in the world. What do you pay for the most valuable painting in the world?

Well, I guess you pay whatever you can afford. When that adds up to nearly half a billion dollars, well, that says a lot more about the perceived value of those dollars than it does about the painting.

And if you’re willing to buy a “risk-free” government bond at a price that will guarantee you a loss in nominal (ie before inflation) terms, then what does that mean for the value of everything else?

If your minimum required return is negative, then the price you will pay for every other asset is going to be driven higher. If you’ll pay up for a money-losing asset, what will you pay for one whose expected return is positive?

Loose monetary policy has affected asset prices across the board.

But when it comes to bitcoin, I’m not really thinking about the financial impact (although we’ll get to that in a moment). I’m thinking about the philosophical impact.

There’s no doubt that the events of 2008 changed the way that people view money. I’m going out on a limb here (in that I can’t point to any statistics that would prove this), but I suspect that most of us didn’t spend a lot of time agonising about the true nature of money before the entire financial system imploded.

But then, suddenly, it mattered. The financial economy and the real economy collided disastrously. And then the financial side came out with a whole load of solutions that made the real economy wonder what was actually going on behind the curtain.

I’m not saying that everyone understands how money creation works – economists still argue with each other over exactly what money is and what role it plays. But I do think it’s fair to argue that most people today have a much more abstract view of money. Even if they don’t know a great deal about it, they do know that it’s a lot more complicated than it might look.

And when you have central banks around the world almost literally printing money (it’s only not literally, because they do it electronically), you can hardly blame the rest of us for seeing money as far less tangible than it once was.

Magic beans, you say? Sounds plausible

Before 2008, if someone had told you that there was a currency that could be “mined” by computers doing very hard sums indeed, and that it would be worth something, even though it had slightly less chance of being accepted in your local Tesco’s than an ingot of gold, you would probably have been sceptical.

After 2008, the idea of mining something out of thin air sounds like honest hard work, compared to the idea of printing something out of thin air. You might be sceptical – but it wasn’t much crazier than everything else that was going on.

So when bitcoin launched in 2009, it was falling on fertile ground. The public was both angry at the establishment and suddenly distrustful of a financial system whose pipes had burst and flooded the whole economy. If ever an idea like bitcoin was going to thrive, that was the right place and the right time.

To be clear, I’m not dismissing bitcoin. I think there’s something there (though I’m not invested in it, and I do think that this current phase will end in tears). But it could only have taken off in today’s world.

Bitcoin is just the logical conclusion of today’s monetary policy. What happens when you can’t trust money? You find an asset that has a lot of the trappings of money (it can be moved digitally and swapped for other currencies), but which apparently removes the need for trust from the equation.

No wonder it’s rocketing.

  • Nicholas Wells

    Some people predicted the 2008 crash as far back as 1979. Just do a bit of research on Mike Montagne an economic guru and previous advisor to Ronald Reagan. He understood that creating money out of thin air, and more importantly loaning it at interest (usury) without ever accounting for the fact that no money was introduced into the system to account for the interest repayments, would (as it did) result in terminal failure.

    He was right, Ronald Reagan knew it but once in office chose to ignore Mr Montagne. The result, as predicted was an epic, and irrecoverable, failure of the system.

    The curtain has been firmly pulled back on the bankers and the IMO crooked monetary system now. Even the BoE admitted in their Quarterly Bulletin Q1, 2014, ‘Money Creation in the Modern Economy’ that money is created ALL THE TIME by banks every time someone signs a loan agreement. The bank then demands money to be paid back to the bank with additional interest. I am just staggered that people didn’t have the brain capacity to work this out in the past, or perhaps they did but enjoyed things whilst it lasted. Even Jesus told people that usury was wrong apparently 2000+ years ago!

    The UK Government discussed the above-mentioned money creation on 20 Nov 2014 as ‘Backbench Business’ (lol), with the opening gambit “The methods of money production in society today are profoundly
    corrupting in ways that would matter to everyone if they were clearly
    understood.” and ending with “a journalist from The Economist seriously suggests that this huge pile of debt created as money will lead to a wholly new monetary system”.

    The banks, Governments and of course unknowing public are complicit in this and the new system is inevitable. However my concern is what will happen when the 1% realise they can no longer control the entire system if the fraudulent banking system and reliance on fossil fuel disappear!

  • Momoko Miyamoto

    Fiat currencies are a “promise to pay” underwritten by the tax base and legal system of the sovereign country that issue them. Gold has been used as decoration, to symbolise status and as an industrial metal since humans first toiled to dig it out of the ground.

    Crypto-currencies on the other hand are a giant Ponzi scheme even more ludicrous than the infamous Dutch tulip bulb bubble. At least you can plant a tulip bulb and gain enjoyment from the resulting flower. Bitcoin (and others) is only underwritten by the greed of those piling in, in the hope of selling up to a “bigger fool”. When greed turns to fear, any illusion of value will evaporate.