This is an opinion editorial by Taimur Ahmad, a graduate student at Stanford University, focusing on energy, environmental policy and international politics.
Author’s note: This is the first part of a three-part publication.
Part 1 introduces the Bitcoin standard and assesses Bitcoin as an inflation hedge, going deeper into the concept of inflation.
Part 2 focuses on the current fiat system, how money is created, what the money supply is and begins to comment on bitcoin as money.
Part 3 delves into the history of money, its relationship to state and society, inflation in the Global South, the progressive case for/against Bitcoin as money and alternative use-cases.
Money, Society And The State
The guiding principle behind the Bitcoin standard is the separation of money and The State, borrowing from the enlightenment mantra of separating The State and religion. Admittedly, this sounds catchy and attractive, a true rallying cry (although I will say that even the separation of religion and state isn’t as distinct in practice as it is in theory). The argument seems to be that Bitcoin acts as some technologically juiced up version of the gold standard, where the money supply is exogenous, and The State enters the marketplace for money as any other entity would. This then constrains the capacity of The State to also embark on wasteful spending sprees and allows the flourishing of the market — a dream reality straight out of neoclassical economic textbooks!
Making Money: Coin, Currency, And The Coming of Capitalism,” talks about how during the early days of the United States, there was a shortage of commodity money as the cost of imports exceeded proceeds from exports. The government decided to issue IOUs as a means of paying its soldiers and created economic value for this money by making it acceptable as tax payment, thereby overcoming the drag of a constrained money supply on economic activity. This story is repeated across history, whether to fund wars and imperialism — the French colonial power did something similar in Africa to mobilize labor — or to finance infrastructure and development.
Check Your Financial Privilege.” Let’s now move towards how the progressive narrative of hyperbitcoinization talks about its power to liberate the Global South from the dollar hegemony and the exploitative global financial system. The two main pain points upon which this argument rests are that these countries suffer from extremely high inflation and have large portions of their populations without access to financial services. Let me focus on the first value proposition because that is centered on the adoption of Bitcoin as money, while the financial services use-case can be achieved in multiple ways (this includes Bitcoin as an investment and a store of value — I think Bitcoin has a useful role to play here). The proposed solution is that through adopting a currency with fixed supply, governments won’t be able to print their way to high inflation and hence the cyclical economic crises these countries face will be averted.
Fadhel Kaboub provides excellent analyses for why these countries have been stuck in a rut for decades. His main point is that these countries produce low value-added goods by offering cheap labor and resources (e.g. minerals) but import high value-added items (e.g. technology) and critical supplies (e.g. food, energy, medicines, etc.). Therefore, they get stuck in a trap because to move higher along the economic value chain, they need to expand their imports, which increases the trade deficit, which leads to foreign debt and so on. Privatization and deregulation within the profit-maximizing context make this worse. This is a simplified account but explains the gist of it.
postcolonial setup and regional tensions, or Argentina’s installed right-wing dictatorship that was supported by the IMF (similar to IMF’s dealing with Macri’s government recently), or the brutal sanctions against Venezuela. All of these realities lead to supply chain issues and constraints on physical resources which drove prices higher, leading to money printing becoming a last-ditch effort to provide short-term relief, similar to Europe trying to paper over its current energy crisis.
How does Bitcoin fix any of this? Its adoption could put a limit on government spending but then what? Not only could that also be achieved by dollarizing (accepting the dollar as legal tender) or pegging the domestic currency to the dollar — I do not support these whatsoever — it would be disastrous for economic development as it doesn’t deal with the underlying sociopolitical factors that led to that situation in the first place.
Zoltan Pozsar’s inside versus outside money thesis. The former is a form of money that is the liability of one party (e.g. fiat currency, bonds, etc.) while the latter is not (e.g. gold, other commodities). As trust in the global system breaks down and geopolitical tensions rise, his thesis is that countries will move away from inside money — as holding U.S. treasuries is the current favored asset — towards outside money options to minimize risk of sanctions and asset seizure. Since gold has no inherent value either, it requires considerable energy and hassle to move around, and mining it has terrible environmental and human costs, I would argue that Bitcoin offers a viable alternative, at least from a diversification perspective, for countries holding reserves. Matthew Pines made a similar argument in a piece for Bitcoin Magazine recently.
There are too many reductive, albeit catchy, one-liners and analogies that prevail in the Bitcoin community. While the broader critique of the current system is warranted, these simple narratives obfuscate the focus of resistance. Money is not information or transportation or any such inanimate act, and hence cannot be simply technologically upgraded; rather, it is a social phenomenon that comes out of the dominant ideology, class relations, etc. It is not “cheap money” (low interest rates) that is misallocating capital and driving inequality, but rather the pure profit-seeking nature of the economy coupled with power being centralized in mega-corporations and state capture by the elite.
Fear mongering of hyperinflation or claiming the U.S. is on the same path as Venezuela just belies a lack of understanding about how the economy works, drawing attention away from the real issues of energy shortages, supply chain disruptions, climate catastrophe, etc. I don’t pretend that the solution is obvious — that is where political schools of thought come into play and create a healthy debate of ideas. However, we need to at least build a common foundation around the operations of the current system, as many of those facets, if not all, are grounded in objective reality.
Lastly, I think it is a testament to the Bitcoin community that it is grounded in creating awareness and educating people from different walks of life. Many people have remarked that learning about Bitcoin was their gateway into understanding the current system and its pitfalls. This is where other communities, particularly the left, have not done as much as they could have — but Bitcoiners should also realize that there is a multitude of heterodox schools with a robust history of scholarship around these topics. These should be continuously engaged with, as some in the community do, rather than ignoring them for simply not believing in Bitcoin.
This is a guest post by Taimur Ahmad. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.