Monetary Expansion: What It Means And How Cryptocurrency Is Different
We hear a lot about money printing. This is something that many feel is a problem. However, few take the time to consider what it really means.
As stated in the past, we have this idea that inflation bad, deflation good. We hear inflation and are conditioned to believe prices go up. Little thought is given to asset prices. Of course, we hear about the cost of housing yet nobody is stating they want show up at closing and have to pay $20K because the price of their house went down.
We also do not hear people hoping they get a year cut in pay. This is also overlooked in the equation. Obviously, we are dealing with something more nuanced than the price of vegetables going up.
Therefore, when we look at "money printing" we have to understand it is not as clear as people claim. These matters are more complex (and interconnected) than the Twitter economists make it out to be.
So let us dive into things and see how cryptocurrency can change things.
Currency Value
What gives currency value?
This is a question most people will get wrong. If you asked this of 100 people, you would get answers like the "faith and credit of the government", oil, or nothing.
All would be wrong.
The answer to the question is the economic productivity tied to the currency. That is what gives it value. Regardless of what people say, the more production that is tied to it, the more valuable it becomes.
Actually, before looking at that, we have to understand what money is. This is a tool that was designed to replace barter. Hence it is a mechanism on a path to an end; it is not the end. So what is that conclusion?
This moves right back to economic productivity. Money was created to facilitate trade. It enabled a farmer to sell goods such as eggs without swapping it for lumber. Hence we have the idea of medium of exchange.
Money Printing
When countries get in trouble, they often turned to money printing. This historically means creating more banknotes that were pushed into the economy. Of course, this notion is obsolete since we do not conduct much business in paper currency.
The problem with this approach is that the money supply can expand yet it will devalue the currency unless economic productivity can follow suit. Since most money printing countries were facing dire economic circumstances, we know this is impossible, especially at the rate the money supply was expanded.
Here is where we end up with the idea of "too much money chasing too few goods and services". Notice this is a physical world situation, a point we will come to later.
Politicians and Keynesian
Most currencies are not facing this situation, especially among the major one. They operate under fractional reserve banking where the expansion of the currency (or legal tender) is done through bank loans. The central banks have lost control of that once the transition from banknotes to digital money took place.
If the currency isn't the problem, what is the issue? This is where politicians enter their picture, specifically their need to spend to buy votes.
Most countries around the world are engaged in deficit spending. It is a situation we saw for decades. Since the taxes collected are exceeded by expenses, the only way to close the gap is to sell debt. It is simply making up for the lack of revenue to cover the expenses.
This is not creating more currency since the debt is sold for the legal tender. Hence, US Treasuries are sold into the market in return for US dollar. This is what the Treasury sends out to pay the government's bills.
As long as the debt is sold, all is well. This allows the politicians not only to keep spending but also covering the servicing costs. Even if a country has engage in Ponzi debt, if buyers show up for the debt, the charade can continue.
It is only after the music stops that a sovereign debt crisis unfolds. That is the nuclear bomb the world is facing.
How Is Cryptocurrency Different
We know cryptocurrency was created in the digital world. It never existed in physical form. This is an important factor to consider. The digital world expands at a rate many times faster than the physical. It is here where economic productivity can explode. This is reflected in the fact that technology companies tend to have higher growth rates over extended periods that exceeds that of those like Home Depot.
Another major factor is cryptocurrency is not controlled by anyone. That means it is not legal tender (with the exception of El Salvador). Here we see how nobody is forced to use any single currency. It is all a choice.
It is also where economic productivity comes in. If a coin or token has not activity tied to it, there will not be any value. There is no forced mandate pushing people to use a particular token. Instead, people are free to opt for whatever suits their needs.
This is actually in keeping with what took place historically. Business is what decided the success or failure of a currency. Merchants always did what was best for them. The same is true today.
So while there is the ability to create unlimited cryptocurrency, if there is not the economic productivity backing some of them, they will die off.
We can see clearly how this is the case.
Of course, none of this addresses the problem of politicians spending money. As we know, they will do this regardless of the monetary system. The main challenge is they do not pay in cash but buy on credit. Governments issue debt for the currency they make payments in.
Ultimately, it doesn't matter whether the currency is USD, GBP, LTC, BTC, or gold coins. This is secondary to the politicians spending, something they are not going to volunteer to give up.
The benefit of cryptocurrency is it operates outside the hands of politicians. Those systems that are truly decentralized are going to maintain value since the political establishment cannot muck it up. Over time, we can expect economic productivity to gravitate towards these areas since the friction is reduced. This is what commerce seeks.
It is also where growth takes place.
This is an important consideration in a technology era. We know that developments such as artificial intelligence can really alter how our economies are structured. For this reason, a new monetary system is required.
Here we see another benefit to cryptocurrency, one that is outside the scope of this article.
In conclusion, cryptocurrency is operating in a different realm and addressing issues that are not being focused upon by the existing monetary system. The ability to expand as needed, without friction, if invaluable. It is also something that present system does not provide.
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"The benefit of cryptocurrency is it operates outside the hands of politicians. Those systems that are truly decentralized are going to maintain value since the political establishment cannot muck it up."
This is very true. In the hands of politicians they mess up things. That's why most Countries do not want to legalize Crypto or do not want to accept it usage in their countries.
So easy to overlook this. I think that's why during the crypto craze, everyone was talking about what their coin DID. Every coin advertised itself as if it solved all the world's problems, creating a lot of buzz and activity associated with the token... some of these coins are almost worthless now.
An eye opener I like this
Not really. At least not the cryptocurrency exchanges. They are regulated by the governments. Partially this is why BlockTrades ended its cryptocurrency trading service 13 days ago (on 2023.06.30).