Unit 1 Lecture Notes

My book, and my writing in general, deliberately steers clear of making predictions about the future, because economic analysis is not a crystal ball that allows us to extrapolate what the future will look like. The best we can do is identify trends and patterns and then attempt to understand how they could evolve. The subtitle of my book describes The Bitcoin Standard as 'The Decentralized Alternative to Central Banking', but the text leaves open the possibility that central banks could purchase bitcoin and use it as a reserve asset if it continues to rise in value. International payment settlement happening with Bitcoin is already a reality, and the first viable alternative to the global cartel of government-protected central bank monopolies. If this network continues to develop and adds further layers that make it easier to spend bitcoin, then not only would central banks lose control over the international payment infrastructure, but their currencies would also lose value as more and more of their citizens ditch them and adopt Bitcoin instead. Would it not make sense, then, for central banks to buy bitcoin and use it as a reserve asset with which to back their currencies?

The case for such a move seems compelling at first: If Bitcoin increases in price, any country that uses it as a reserve will witness its international cash reserve account rise in value, which would make it less likely for their government or central bank to run into balance of payment problems. The more the reserves appreciate, the more leeway the government has with its own spending and international payments. Further, it would allow central banks to sidestep restrictions imposed by the US government and its central bank on international capital movement. Countries like China, Russia, Iran, and North Korea have their international trade and finance restricted to varying degrees by US sanctions, and this could be ameliorated if they could settle payments with each other (or other countries' central banks) using bitcoin.

But on closer inspection, this possibility looks increasingly unlikely. While China, Russia, Iran, North Korea and other countries may hate the US Dollar-based world financial system, they love having their own fiat currencies far more than they hate it. Should one of these countries announce the replacement of even a small amount of reserve assets with bitcoin, the impact on Bitcoin's price would likely be massive and that small portion would grow into a not-so-small portion. Other countries could follow suit in an attempt to replicate the first country's success; the likely effect would be a significant drop in the value of national currencies used as international reserve assets, as each central bank scrambles to sell some of its international reserve currencies for the quickly-appreciating bitcoin to back their own currencies and preserve their value. The more this happens, the more precarious is the position of any central bank lagging behind, as they witness the demand, and thus the value, drop for the international reserve currencies held in their own reserves (leading to their own currency becoming increasingly worthless). Currencies lagging behind and with low bitcoin backing would be subject to speculative attacks by large bitcoin holders scenting blood in the increasingly weak international cash balances. Even countries with moderate bitcoin holdings would be vulnerable to these attacks until their currency is entirely, not just partially, backed by bitcoin. The end result of such a scenario is that the only currencies that survive will be the ones fully backed by bitcoin.

While not inevitable, it is quite possible that the first central bank that moves to use bitcoin as a reserve asset will trigger a central banks' "reverse bank run" on buying bitcoin, the end point of which is that only currencies that survive are the ones fully backed by bitcoin. It might just not be possible to bite from the apple of bitcoin hard money reserves without falling from the governmental Garden of Eden of fiat money.

China, Russia, and Iran may like to make a lot of noise about the unfairness of the US Dollar global monetary system, and how it privileges the US internationally, but these governments are not run by sound money Austrian-school educated economists who would like to see a return to the 19th century gold standard. Decades of western cultural imperialism mean that even these countries are ruled by the kind of leftist, socialist, Keynesian, and similarly inclined economists who idolize inflation as the key to solving all of life's problems. These governments do not hate the US Dollar for being fiat money, but rather merely for being another government's fiat money. They recognize and understand that their extremely elaborate states and bureaucracies, with their far reaching control of their citizens' lives and large monopoly industries to benefit them and their cronies, are utterly dependent on their ability to continue creating their own money. The Chinese communist party, Putin's police state and budding global empire, Iran's Islamic republic and its budding regional empire are all utterly reliant on easy money. Without it, these governments and their powerful cronies would be neutered.

We know this because these countries have long talked about shifting to gold for international payment settlement and as a reserve asset without ever doing it. While they've accumulated gold as a wise hedge against their US Dollar reserves, they refuse to settle their own trade using gold and continue to rely on the swift network. As much as they would like to dethrone the dollar, they cannot dethrone it by replacing it with one of their own currencies; none of the other countries want to get rid of the dollar only to have another government introduce something identical. They certainly don't want gold to replace the dollar, as that would force them to operate under a gold standard and neuter their governments and the plutocrats who control it. Bitcoin poses a similar risk in that regard, and they're highly unlikely to even take the first step of using it as a reserve asset because, unlike gold (which has had this role for thousands of years), a central bank's purchase of bitcoin would quickly boost its appreciation and monetization.

Aside from the self-interest of the ruling elites in these countries, US power is another important factor that may stop them from adopting gold. The IMF, which is a tool of US monetary policy, has long banned its members from tying their currency to gold. Many instances of "democratization" and "regime change" that the US has blessed countries with are arguably motivated by preventing alternative monetary arrangements. The US still has the world's strongest military and the strongest currency, and any global financial crisis that happens, while having its root causes in the dollar, is likely to only make the dollar stronger, not weaker, as happened in 2008. For all its flaws, the dollar is still the most liquid of all national currencies, and the one with the least default risk behind it, since all other countries have obligations in the dollar which none of them can print. Unlike Bitcoin, central banks are centralized, and so are the governments behind them. Any country that chooses to dabble with Bitcoin as a reserve currency is highly likely to risk arousing US foreign policy's interest in bringing it democracy and regime change. It will most likely never come to that however, because central bankers today have only managed to obtain their jobs by being so completely and thoroughly inculcated with Keynesian and statist propaganda of economics that they'll be the absolute last in the world to understand the significance of Bitcoin and how it's a viable alternative to what they do. The recent report by the Bank of International Settlement, and this interview with their chief economist, make it pretty clear that central banks thinking about bitcoin today is largely a recycling of 2015 nocoiner propaganda and concern trolling over fees for buying a cup of coffee, along with the obligatory claptrap about the disruptive potential for blockchain technology. They are completely oblivious to the possibility of second layer scaling solutions being introduced onto Bitcoin to make it function more like a settlement network among banks, i.e. a replacement for central banks. The central banker is the last person capable of understanding that money does not need the state, and the last person to get the significance of bitcoin.

Finally, to understand Bitcoin's value proposition as a long-term store of value despite its short-term fluctuations requires a certain degree of low time preference, which you can't expect to find in any modern government bureaucracy or the individuals that staff them. The uncertainty and short-term nature of democratic rule instills a short-term orientation in these bureaucrats and all but guarantees that politics is a short-term power and money grab. Politicians or bureaucrats can be expected to rationally prioritize their self-interest in short periods in office over their constituents' long-term future. Chapter 1 in Hans-Hermann Hoppe's masterpiece, Democracy: The God That Failed, contains an excellent discussion of this point.

The mental models that govern rulers and bureaucrats and central bankers all over the world, the self-interest of these elites in maintaining inflationary money, and the threat of US military and economic power against any defections from the dollar standard all lead me to be highly skeptical of the possibility that central banks will adopt Bitcoin any time soon. It's far more likely we'll see a Bitcoin Standard develop as described in the subtitle of my book: a highly compelling decentralized alternative to central banks and a global payments settlement layer that runs on the hardest money ever invented, operating outside the purview of modern states. Best of all, this system is likely to continue to grow for a long time before the powers that be even notice its true significance or understand the devastating implications for their careers.