The most obvious narrative for future economic historians probably goes something like this. In the early 21st century, politicians lost control of spending. Debt rose much faster than GDP. Then, inflation made it much harder for central banks to continue printing money. But as soon as inflation moderated, in 2024, they went back to their old habits – lowering interest rates and inducing more and more people to borrow and spend.
By then, lowering interest rates was no longer an option – it was a necessity. The authorities needed low rates to finance and re-finance their runaway deficits. But investors became reluctant to lend more money to a borrower who was clearly going broke. Interest rates rose and the only recourse was to print money – trillions. The result was more inflation – the defining feature of the 2024-2034 period.
The International Monetary Fund reports that governments are creating a “$100 trillion fiscal time bomb”. When government bases its fiscal policy on large quantities of printed money, the system becomes unstable. There is no strategy the feds can use to defuse the bomb.
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In plain English, if they continue printing more and more dollars, people will soon want no more dollars. They’ll look for alternatives. A “time bomb” is only useful if it blows up. And a crime must have a victim. People – not wanting to get blown up – seek shelter. This is the problem the US Federal Reserve will face in the future, as a report from the Minnesota Fed, entitled Unique Implementation of Permanent Primary Deficits?, understands. Governments can only run permanent budget deficits if there is no escape route into bitcoins, so they must be banned or taxed to death.
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In 1971, a saver might have worked hard his entire career to lay aside $100,000. By 2024, that would have been devalued by about 90%. He was cheated out of $90,000. That’s why an inflationary system is unstable. People try to protect themselves. If they succeed, the policy fails. Or, to put it differently, inflation is just an underhanded way to tax people. But it only works as long as someone “pays” the tax. Let’s imagine a “revolt of the masses”. Alert to the scam, and seeing more and more debt, and more and more money printing, consumers might switch to gold or bitcoin, instead. Then, the government is forced into the “balanced budget trap”, because it can no longer borrow at reasonable rates and no one wants its printed currency.
This time a year ago, Argentina was almost there. People were so fed up with inflation and so savvy about how to avoid it, they were switching to dollars as fast as they could. Almost all substantial real-estate prices were quoted in dollars, not in pesos. Machinery and equipment, most of it imported, were priced in dollars, too. Online remote workers were paid in dollars, or bitcoin. And cab drivers, waiters and hairdressers were happy to get dollars whenever they could. The elites were beginning to realise they could no longer exploit the masses with inflation. Then, it was almost as if they wanted to lose the election and leave the mess to someone else to clean up.
As for the US, the rich can easily switch out of dollar-dependent assets and into stocks, commodity, gold or property funds. But what about consumers? Couldn’t they just move to bitcoin to avoid the inflation tax? No wonder some are beginning to ponder banning it.
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