The theme of this site is getting rid of debt. Debt is an odd sort of thing. We know when we have a debt; it’s exactly that debt that we want to punch in the face! We believe that our debt is denominated in New Zealand dollars or in any other government currency.
By far the most misunderstood aspect of government money is that it represents debt. Money in the modern sense is not dollars, or Euro, or Pounds; money is debt. Money may also be measured by the relative value in that currency of any good or service we want to buy or sell.
Here we’ll explain how it is that government money is debt and then we’ll move on to cryptocurrencies, the most famous of which is Bitcoin.
The main reason that government money is actually debt is based on the deposit banking system. Let’s say the government requires banks to keep 10% of all deposits in the bank physically. That means that for every one hundred dollars people deposit the bank can lend $90.
The person who deposited to $100 and the person who borrowed the $90 both have claim on money totaling $190 but in reality only $100 exists.
The Beat Goes On
The first borrower deposits the money ($90) in her bank so she can write checks on it and her bank lends to another person $81. The process gets repeated again and again until there are demands on about $600 even though only $100 really exist; the rest is debt.
How Money Disappears
This aspect is quite simple to understand. What is much harder to wrap our heads around is the notion that if a lot of people paid off their debt, money would simply disappear.
The $90 that the bank lent the first borrower seems to be real money. That’s why the second bank could use it to lend $81 to the second borrower. So on, every bank uses money that the first bank created out of nowhere because the bank was still obligated to the full $100 deposited by the original depositor.
All the banks along the way created $500 dollars out of thin air. This money would disappear if everyone paid off their debts at the same time.
It’s also important to understand that the original $100 was also created out of nowhere sometime in the past.
The modern government regulated banking system is entirely an Emperor’s New Clothes system. As long as we continue to pretend that our money really exists we can continue to go to the movies, eat in fine restaurants, gamble at online casinos for New Zealanders, take cruises, and attend cricket matches.
The money continues to exist as long as we continue to pretend that it exists. It all almost came to an abrupt end in 2007-2008 when the international banking crisis came to a head. The crisis seemed to have begun as Americans walked out on mortgages they could no longer afford to pay off. The money literally disappeared but it was also “owed” to other people who had deposited the money on which the mortgages were lent out.
The crisis was exacerbated by the realization by bankers that they were up to their eyeballs in debt reduction meaning disappearing money. So they found all kinds of ways to hide from the impending demise of themselves. They sold mortgage-backed assets knowing full well that the mortgages themselves weren’t backed by anything.
The banks also sold derivatives which meant that the banks were establishing layers between themselves and the explosive debt.
When the crisis hit, the banks were still in the crosshairs of a major banking meltdown. Money was about to disappear and the banks would be unable to give money to the people who rightfully would want their own money. The bailout that President Obama engineered was supposed to stimulate the economy of the Us and through the US to the rest f the world. It didn’t happen because the banks kept the money in house, adding to their reserves and not making any loan that looked remotely risky.
Along Comes Bitcoin
Because Bitcoin is mined, figuratively not literally, it conjures up an image of gold which was mined literally and provided the physical backing for government money back in the day. When governments spurned gold, they laid the groundwork for the crisis of 2007-2008 and every crisis to come.
Bitcoin is intended to replace government money when the inevitable government money crashes and burns.
In Venezuela today, the inflation rate is nearing 100,000% annually. Venezuelan government money is not worth anything. It is reminiscent of Weimar Germany where the money was so worthless as money, people used it instead of firewood to heat their homes.
In theory, people will flee into crypto-currencies if their country’s currency fails. But the example of Venezuela is telling: the people there don’t have access to any form of currency so they have reverted to barter.
If Bitcoins or any of the many other crypto-currencies are not allowed to circulate in a major crisis they will prove to be as useless as government money. The government might adopt a crypto-currency as the country’s new currency. That would only happen if the government’s people already owned a very large amount of crypto-currencies.
It’s All in the Name
When Bitcoin was first introduced nobody gave it much thought. As the nominal value of Bitcoins rose people started calling it a crypto-currency. This is meant as a denunciation of Bitcoin; it isn’t a ”real” currency; it’s a “crypto”-currency.
You’ll know something very big is afoot when the government and the big media start dropping the prefix crypto. When they do, head for the hills!
Bitcoins are limited as opposed to government money which we have seen is functionally unlimited. Bitcoin represents purchasing power; it is not debt, yet. So, Bitcoin may replace dollars and other currencies in some transactions. Eventually, governments will allow fractional banking in Bitcoin and the merry-go-round will start up all over again.