Column – If you look at the status of the current financial system, it cracks on all sides. With a little imagination, you might say it is a junkie, addicted to undesirable habits.
All over the world money is scarce and needed, while on the other hand (central) banks create it to a large extent. Is Bitcoin the way to get rid of this addiction?
Everybody has the urge to be wealthy somewhere. Money doesn’t grow on our backs. There’s nothing to do but earn it. It is different for the financial system. Money creation is possible. Money is not covered by gold. (Digital) printing is the order of the day. Right now.
Where you used to be able to exchange the dollar at the Federal Reserve for gold, this standard was abandoned in 1971. The so-called Nixon shock put an end to this system. A series of economic measures taken by U.S. President Richard Nixon turned the dollar (and therefore any other fiat currency) into a kind of drug.
Central banks, such as the European Central Bank (ECB) and the American Federal Reserve, have the power to stretch the balance sheet. In this way, the ECB’s balance sheet grew to a peak in the past week. In 2020 alone, 2000 billion new euros have been distributed in the European Union.
It is not only in Europe where this situation occurs. Things are no different in America. Their balance sheet grew to $7,151 billion this week.
Do you see anything remarkable in these two graphs? Look at the years 2008 and 2020. Coincidentally, these are exactly the years of the crises. With every crisis, the central banks decide to make a cash injection. Each time they stretch the total money supply a little further.
Corona is to blame for the fact that the money printer has been turned on. After all, the motto is: save what can be saved. Even fiercer: of all the dollars currently in circulation, 22% have been put into circulation this year.
The whole idea behind this is: stimulate consumption and use. But for savings this is fatal. The value of money evaporates like an ice cube in the sun, as I wrote in a previous column: “The necessity of Bitcoin. Attention! Saving money costs money.'”
Physical laws unleashed
If you ask me this all looks like an addiction. The printing of money is something you prefer to avoid, but which happens anyway. But why? The answer is: nobody stops it. Money no longer has any physical value. The physical laws of scarcity have been abandoned. The creation of something out of nothing is possible. Money is not gold. Money is trust.
The banking world is like a junkie on a park bench. Always looking for more, more, more, because otherwise it creates an unpleasant situation. Just like a drug or alcohol addict can no longer live without it.
We live in a world based on guilt. If you are not in debt as a private individual, you are essentially richer than almost any country. Government debt is not a strange sensation.
In an economy that comes to an abrupt standstill, this causes problems. There are two solutions to this:
- reforms and the cancellation of debt;
- Pumping up the economy with new money.
You can already feel it coming. At the moment the latter is happening. And that makes it an addiction. It is a drug. The way back is (almost) impossible. If we put it next to some of the criteria of an addiction, it has amazing similarities:
Tolerance: an ever-increasing dose (money) is needed for the same effect. And that is certainly the case (see the tweets above).
Abstinence symptoms: leaving everything as it is does not work. Banks need bailouts. Companies like KLM need help. Because it can be done. Because (apparently) it has to be done.
You use it longer than you want: Dutch politics started the year with a first support package to combat the coronacrisis. By now we are almost at the third package. The drug seems infinitely necessary. And don’t get me wrong: a social safety net and support packages can be extremely valuable. But what matters to me is the extent to which you become dependent on it.
You do everything you can to get it done: the central banks around the world are rushing to find ways to achieve even more. The new tool, the Central Bank Digital Currencies, must become the linchpin here. A bank account, directly at the central bank, that sounds great, doesn’t it?
In the meantime, the IMF is calling for cooperation from all over the world. Last week, Managing Director Kristalina Georgieva called for a new ‘Bretton Woods moment’ during the annual meeting of the Executive Board. The idea: more cooperation between governments to get the world economy back on track.