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The Value of Money: Inflation, Hyperinflation, Fiat, and Bitcoin Cash as a Store Of Value
I've written previously about Bitcoin Cash in the Bahamas, and at a point, I mentioned that cash is a store of value (basically, I wrote it is the “ultimate” store of value). I wrote that meaning that each unit is broadly accepted inside an economy as it is. Each euro or dollar represents the price written on it, and no confusion is there for the parties involved in a transaction.
Probably, I didn’t cover this subject as detailed as I should have. The meaning is that cash is a concrete representation of value in a manner the value is also contained as a number on each unit.
When we pay $1, everyone accepts it as $1. No merchant will tell you your $1 is worth half. Of course, prices are subject to inflation. I was talking about the representation of value inside a dollar bill.
In retrospect, the word (ultimate) I used was incorrect, although it was meant as a representation of value in the form of what is mostly accepted as money by an economy.
Cash today (as throughout financial history) is "fiat". Fiat currencies are released by a government and used to be backed by gold for centuries. The "gold standard" was removed on two different dates. Once in 1933 (1931 in the UK) and finally in 1971 when the gold standard was completely abandoned by the Nixon administration (Nixon Shock).
Fiat currencies today are backed by trust in the government and the performance of economies. The issuance of new fiat was supposed to be at a low stable rate, enough to induce slight inflation (~2%) that would encourage modest spending and increase of the economic activity.
Governments with the financial tool of Central Banks are always in control of cash. In the US the Central Bank is called the "Federal Reserve" (or FED), and is the link between the private banking sector and the government, in control of the macroeconomic activity.
Economies in the capitalist system have certain phases or cycles.
Lending is responsible for these phases and, in total, the indicators should move higher in the long term, otherwise there is no progress made for an economy. Eventually, this indicator also explains the progress of humanity throughout the centuries and is still grossly affected by population growth. An economy with a shrinking population will have to face various difficulties.
First of all, I am against centralized control of cash. I wrote and advocate the separation of money from the State since government control of the economy brings terrible results.
Capitalism is a powerful system for progress, although it also suffers from inherent difficulties to achieve a completely free market system and tendencies for monopolization of entire sectors. Government lobbying and influence on politicians is an advantage of the powerful corporations, not the small businesses that play by the book.
We vastly underestimated corruption even today when trillions of dollars/euros are flowing off to off-shore financial paradise islands, thus reducing the wealth of the populations.
Another negative indicator we observe is the reaction of governments when economies are closer to the brink of recession.
The actions taken are usually having a negative effect since the plan is to just ease the economic pain for the short term, but eventually, increase the long-term suffering and reduce individual wealth.
The action in both previous economic disasters (2008 - 2020) was excess spending and massive issuance of new money in circulation.
Using the Consumer Price Index (CPI) that measures inflation the buying power of $1 at the beginning of the century now requires $1.63 to match it. Roughly speaking, we can have in mind that our money sitting at a bank with very low-interest rates, lose half their value within 25 years (in western more stable economies).
In case we meet a prolonged increase in inflation, this turns out that our money will depreciate faster.
Under these terms, cash, of course, is not a good store of value but the economy won't collapse with 10% inflation. In fact, in the 80s the western economies enjoyed huge and sustainable growth levels. Although, there was a danger of the 10% official rate growing higher and creating havoc. While 10% may be sustainable as an official figure, 20% inflation means the economy is overheating. Even higher inflation than 20% creates a loss of trust in an economy and fears of a recession is imminent. While in 2008 inflation was at relatively low levels, the bubble formed in the real estate was enough to begin a recession.
The most recent excessive money-printing by the FED, the ECB, and most other Central banks has dire consequences that are only becoming visible in the long run.
The plan is to increase the money supply and allocate most of it to corporations, so the production wouldn't halt because of the Covid pandemic. An enormous stock market bubble has been formed with prices of stocks decoupling from the real economic indicators.
Many questions arise when such an extreme action is taken. How much will this affect inflation levels and what about the debt nations have amassed? Who is going to pay for all of this? Even the most hard-core Keynesian economists would instantly ask this question, yet nobody did.
Everyone was glad to receive government aid. Someone has to pay back this money though since it is written as government debt.
Inflation will not reach hyper-inflation levels as Jack Dorsey suggested and once again he has proven he doesn’t understand economics. Inflation is an issue though, and for 10% (official) levels, it will be a sign of a problematic economy.
For the short term (up to 2 years from today) there is no concern for higher than 10% inflation in the Western economies unless energy prices keep increasing exponentially, which probably will not happen.
This is the issue here. Energy prices dropped with the beginning of the pandemic because of these two events: i) drastic drop in demand, and ii) Saudi Arabia pushed excess supply in the market after a confrontation with Russia on energy price action.
Energy prices rise today after the demand for Russian gas in the EU was higher than previously and the supply of gas was stable. Russia didn’t directly ask for higher prices, but simply lowered the supply of gas on spot markets, while it honored completely all its agreements with nation-states of the EU. The gas price, though, is not fixed in these agreements but follows the spot market price, which can be manipulated by stabilizing or lowering supply.
Russia has become a strategic supplier of European energy. But under the control of supply, it can produce enough to cover its contracts, although limit spot sales.
Oil and Gas were never a free market. Oil price is negotiated by the OPEC cartel and its price was always manipulated. Certain macroeconomic criteria may push prices down for a while but an agreement within the cartel will be reached to sustain oil at higher levels.
US and EU
Inflation is today regarded to be increasing and stands at about 5,4% (official stats) in the US and 3.4% in the European Union. These are annual inflation levels.
In the US from this chart from the U.S. Bureau of Labor Statistics, we can see this is mostly the effect of energy prices rising excessively. This increases the cost of all other sectors since energy is vital for any business or industrial field.
That's two and a half centuries ago. The second-highest inflation level was in 1921 ~20%, although inflation rose again in the 80s at the 10% level.
Jack is not just wrong but also misinforming his followers with this statement. Hyperinflation requires a complete disintegration of an economy, total mismanagement of finances by the Central Banks, but also financial manipulation by centralized entities like the IMF and World Bank.
Economic hit-men often act against what the US considers enemies, but also sometimes act against what is historic friends and destroy economies as part of profiting through a globalization model.
Europe is still in a state of no will and no identity. Each country looks upon its own finance and will damage a neighboring EU economy if this happens to serve their interests. Sadly, with Germany in charge, Europe is divided into three parts today. Central Europe and northern countries, the ex-Communist republics (Eastern Europe), and the Southern countries.
Brittain (in my opinion) did correct to move out of this European Union. The reasons were valid, and it was the only EU country that listened to its people.
This move helped Russia though, in its geostrategic position against having a united Europe since NATO is a threat to the vast interests in the ex-communist countries and beyond.
Without taking any side on this, but only as an observer in the geostrategic chessboard we can recognize that as a fact.
Part of it is the exposure of the European Union to Russian gas. Europe was even subsidizing gas installations for homes and businesses in an attempt to reduce the cost of energy. Yet today, gas price is higher than oil.
This was another mistake by the EU and another win for Russia. The effect of the increase in gas price creates additional pressure not just on the EU but on the world economy.
I mentioned previously that Bitcoin Cash is a better store of value than Bitcoin and I stand by that. I explained that cash is also a store of value in the terms of being acknowledged by every participant of an economy.
I've also mentioned the word ultimate, under this pretext, that the overwhelming majority of participants of an economy accept and prefer to use "cash" (either at hand or in digital form in a bank account)
The Bitcoin features are those that have been there from the beginning and are currently shared by BCH and BTC. Inherent scarcity design. 21 million coins fixed supply and a halving that reduces inflation of new coins every four years.
However, I also explained that if this was just the case nobody would ever buy Bitcoin. Investors in BTC keep believing that it would be used instead of cash and instead of a crippling blockchain with a small block size that can't handle more than 4 transactions per second, a second layer would suffice to antagonize Visa/Mastercard/PayPal.
Why should anyone abandon the use of "fiat" and start using LN that by 99% will be available through regulated, centralized, custodial, and censorable financial hubs. No difference at all, and such a decision will be a time-consuming process. In the end, the people want utility and even the Lightning Network doesn't help with that.
Why would anyone pay with a credit card to buy LN coins and buy groceries, instead of just paying directly with the same credit card?
The El Salvador example is already bringing results and these are not favoring BTC. Nobody cares to use LN, since it is flawed by design. Instead, those that care for a change will choose to use Bitcoin in non-custodial form, under the same criteria people stopped trusting their banks & governments.
What we understand so far is that both these networks (BTC sidechains) increase centralization and government interference. Censorship will certainly apply in the Lightning Network, as financial hubs become dominant at times of high fees and congestion of the main chain.
A payment channel is required for two entities to conduct payment transfers, the creation of which incurs high fee.
However, Lightning Network also facilitates payment transfers through an intermediary in the network, who has payment channels with the two entities. This feature is extended by incorporating multiple intermediaries in the network to conduct a payment transfer from one entity to another leading to a web of payment channels. The intermediary charges a very low fee for providing the payment channel (Table 1).
The concept of LN is a flawed design and creates centralization with the use of financial hubs that will become indispensable at times of high congestion of the BTC blockchain.
What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.
I don't see BTC as a store of value for all the reasons mentioned in this article. BTC is expensive to use and a speculative asset currently at the hands of bankers and Wall Street fund managers.
Cash is a store of value if properly managed as it was in the EU with a limit of 2% inflation which is now gone through.
For any cryptocurrency to be called a store of value it doesn't matter if it takes 1m dollars of electricity to mine a block. BTC has appreciated purely because of speculation. 99.99% of investors never used it to transfer money, to make a payment, or for any reason. Nobody holds a private key today, just a mere 0.01%.
With BCH, however, everyone has a non-custodial wallet and owns the private key that is the vehicle to economic freedom.
Cash is not the ultimate store of value, of course. It will not sustain its value throughout decades. It is used as such, though, for a limited period which could be up to 2-5 years for a modest rate of loss of value (~1-10%).
Bitcoin Cash keeps all the positive Bitcoin features and offers a perfect digital currency, one that can scale on-chain without losing fundamental attributes. It is a currency that has better "store of value" characteristics than BTC since it is used in commerce without the need for centralized financial hubs and offers better chances of mass adoption at a layer-1 level.
In the next article, I will continue on the topic of inflation and explain my view on how universal adoption of Bitcoin Cash could proceed. Also, I will explain the reasons that led Elon Musk to select Dogecoin as his favorite one, with hints he has given on his view of digital money.
It is sad to see images that should have been public domain are under licensing agreements. There are charts required for education and contain invaluable knowledge. They are not private assets and anyone using them shouldn't be able to put any kind of copyright on macroeconomic indicators).