The Problem With The Bitcoin Narrative
What do you think of something that was built on entirely false premises?
This is the situation with Bitcoin. We have another example of this in action.
In an article on Bitcoin.com, Swan Bitcoin’s Terrance Yang is claiming Bitcoin only companies should be large enough to have a seat at the table with regulators. The view is the government is hostile towards crypto, something that cannot be disputed.
Where this goes off the rails is with this:
“For decades now the [U.S.] Federal Reserve Bank and all major banks and institutions have been the key negotiators at the table. We recently published a detailed study of why this needs to change and how [the] Federal Reserve drives the Cantillon Effect which in turn impacts inflation and fiscal debt,” Yang said.
Here we go with words that sound good yet are totally bogus.
So let's dig into the claims.
False Narrative
Swan Bitcoin was nice enough to write an entire post breaking down the Cantillon Effect for us. Again, it sounds good but is nonsense.
It explains 5 steps of how this works. We do not even need to get past step 1 before we see how misguided they are.
Here is what it says:
The biggest problem and danger of quantitative easing is the risk of inflation. When a central bank floods the economy with money by printing it, the supply of dollars increases, which causes inflation.
How does the US Federal Reserve flood the economy with money? If it could do that, why the song and dance with QE, interest rate manipulation, and an assortment of other indirect policies to get money into the system?
The answer stems from the fact it cannot.
These people, like most, never ask what the Fed is printing. Is it generating actual banknotes, those physical pieces of paper with dead people on them? No. So what are they printing?
If one does even the slightest amount of research, the Fed prints reserves. This is not legal tender. It is a liability on the balance sheet of the Fed that is actually a bank instrument. This is an obligation to a depository institution that requires a master account with the Fed. It is not broad economy money. In fact, the banks cannot spend it on salaries, stock buybacks, or buy shirts with logos on them.
That means we have misguided notion 1: when the Fed engages in QE, it is NOT printing dollars. Therefore, it is not increasing the money supply at all. Understanding the difference between the monetary base and money supply is crucial. What they are calling the money supply is actually the monetary base.
Moving onto step 3, we have this gem:
To lower interest rates or bail out financial tumults, the Fed performs a kind of financial alchemy — it prints money and acquires more bonds. As bond prices grow, interest rates and yields gracefully come down. Low-interest rates mean more businesses and people can borrow money.
The first sentence is accurate although they believe it is USD being printed when it is not. However, the Fed is using it for a transaction with the member banks to acquire the assets. This is where the accuracy stops.
It is a false presumption to believe the only criteria for lending is interest rates. The Fed cannot force the banks to lend. To believe this is the cause of inflation is going counter to Milton Friedman's interest rate fallacy which spelled it all out.
Commercial banks operate based upon their own best interest. If QE takes place when the economy is shaky, do you think banks are going torush out and lend. It is wrong to believe cheap money is accessible money.
Sure, Apple can run to the bond market and get a boatload of cash for next to nothing. The restaurant owner, who wants to open up a second business has been screwed the last 5 years. These types of entities didn't have access to the money.
Higher interest rates incentivizes banks to lend. The reason is simple: they make more money. Banks are not excited about low interest rate environments.
Supply and demand means that when demand will drive up rates. This is something overlooked in the discussion. If interest rates are low, the supply of money is restricted. How can this be?
It boils down to demand from qualified borrowers in an environment favorable to banks lending. If we have a raging economy, which we haven't seen in over 16 years, banks can get higher rates. The fact that rates were down for so long shows how poor the economy was in spite of politicians pounding their chest. It is why some called it the "silent depression".
What This Means For Bitcoin
As stated over the years, the promises of Bitcoin are bogus. The dreams of the maximalists will never come to fruition.
That does not mean, however, that Bitcoin is worthless and has no place. We see a couple features that will ensure its ongoing utility, as long as these do not change.
- decentralized Network that is open to anyone
- the ability to transfer value, in any quantity, without counterparty risk and settle in a decentralized manner on a ledger outside the banking cartel
Both of these carry value. They are also required. As long as the mining pools do not get overtaken by major corporations, these two benefits will remain in place.
As for the price, that is driven by markets. There is no telling what that will do but based upon the sentiment that can arise, it is likely higher prices are in the cards.
This is the end of the Bitcoin narrative. The two articles linked show the premise upon which many approach Bitcoin, unfortunately not understanding the system. If one is not even aware how the money supply is affected, how can it be determined that higher prices are a result of "money printing". When it comes to legal tender, the Fed prints very little of that these days.
The M2 money supply is misleading because it shows the monetary base. It does not isolate bank lending which is true dollar creation, at least in the way we operate today.
In the end, we keep having the same conversations, year after year, all tied to the crash of the US dollar. These people keep espousing the quantity theory of money as the reason for price increases, when that was actually debunked decades ago. People take what economists, a "science" that is nothing but theoretical, and hold it as gospel. They ignore how the international banking system operates to push forth an ideology like it is a religion.
Ultimately, these people buy into the nonsense of what people like Jerome Powell and Ben Bernanke said. It is ridiculous that this is the case, especially when Bernanke, post-Fed, got rather honest with everyone.
I will leave you with this quote:
Finally, former Chairman Bernanke emphasizes “monetary policy is 98% talk and only 2% action.”
He is openly admitting the Fed is a not a bank, it doesn't do money. Instead, the Fed is nothing more than a propaganda organization.
It comes right from the mouth of one of its own chairmen.
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With fractional reserve banking, the Fed 'printing' new reserves allows member banks to lend out money (USD) that did not exist beforehand. As such, although 'technically' the Fed has not printed new dollar bills, the injection of new reserves into the system has the same effect, does it not?
One of the things Richard Cantillon said about inflation (in Essai sur la Nature du Commerce en Général, written somewhere around 1730, published after his death in 1734, translated to English in 1755, as An Essay on Economic Theory), was:
In essence, he was saying that, although new money entering the economy (all else being equal) will tend to cause a rise in prices, the rise in prices will not be equal and proportional throughout the economy. Certain prices will rise first, depending upon the place in the economy in which the new money is injected. Those initial changes will ripple through the economy in a way that is neither equal nor predictable.
As such, when the Fed prints new reserves, and the banks receiving those new reserves lend out the 'new money' thusly created, the receivers of those loans begin to purchase goods and services using money that did not previously exist, thus bidding up the prices of those goods and services (all else being equal). Those who receive higher prices then have more money to bid up the goods and services they purchase, and so forth. Although there is no net increase in production due to the new money (sorry, John Maynard Keynes, there isn't), the MIX of production is changed. The net effect being that the results of inflation (of the money supply) benefit those who are involved early in the bidding-up process at the expense of the late-comers. This is the essence of the Cantillon Effect.
It's interesting to see the examination of the Cantillon Effect and the debunking of certain premises, such as the misconception that the Fed is directly printing dollars during quantitative easing.
Thanks for providing a thought-provoking analysis of these complex economic and cryptocurrency concepts.
QE may not increase the money supply directly but the purpose is supposedly to encourage lending and investment which does affect the money supply.
"Sure, Apple can run to the bond market and get a boatload of cash for next to nothing. The restaurant owner, who wants to open up a second business has been screwed the last 5 years. These types of entities didn't have access to the money."
But isn't Apple going to spend that money? Whoever gets the money, whether giant megacorp or small business, it's likely going back into the economy, increasing the money supply.
However, more than QE it is really the constant massive government borrowing and spending that increases the money supply the most. In both Canada and the U.S. the money supply has increased by approximately 1/3 over the last three years. You mentioned M2 money supply above but M1 looks pretty much the same and that supposedly only includes the most liquid assets like checking and saving accounts.
The Federal Reserve claims to make decisions independently of Federal government spending decisions and that they do not finance the Federal debt. While that may not be their goal, in effect that is what they are doing. They currently hold $5 trillion in debt which is a little more than 20% of the public debt. Pre-COVID it was half of that. Purchasing $5 trillion of public debt plus its ability to affect things like the mortgage and other interest rates via the federal funds rate is an awful lot of action in my opinion and that isn't all they do. The Federal Reserve, to the extent anyone pays attention to it at all, is not popular. Sounds more to me like Bernake was just trying to play down what they do.
Yes, low interest rates are an indication of a slow economy. But they are not the CAUSE of a slow economy. Fewer people can afford (or you would think qualify) for higher interest rates. Also, since a bank sets its interest rate based in part on its cost of borrowing, I'm not sure there is much of an incentive difference when interest rates are higher. Pre-COVID the federal funds rate was less than 2.5%. During COVID it was near 0. Currently it is about 5.3%. Mortgage rates pre-COVID were around 4.9%, During COVID less than 3% and currently near 8%. In all three cases it's pretty close to a 2.5% difference. I suspect other types of loans track in a similar manner.
If it was really the market setting the interest rates free from the influence of the Federal Reserve you might actually find where the balance is. In any case, let's end the Fed and find out.
In as much as ther are so much promises attached to bitcoin,one of the thing I will say will help BTC if there can be more means of exchange and transaction coming up in the future