That is an impression editorial by Taimur Ahmad, a graduate student at Stanford University, concentrating on energy, environmental policy and international politics.
Authors note: This is actually the first section of a three-part publication.
Part 1 introduces the Bitcoin standard and assesses Bitcoin being an inflation hedge, going deeper in to the idea of inflation.
Part 2 targets the existing fiat system, how money is established, what the amount of money supply is and begins to touch upon bitcoin as money.
Part 3 delves in to the history of money, its relationship to convey and society, inflation in the Global South, the progressive case for/against Bitcoin as money and alternative use-cases.
Bitcoin As Money: Progressivism, Neoclassical Economics, And Alternatives Part II
*The following is really a direct continuation of an inventory from the previous piece in this series.
3. Money, Money Supply And Banking
Now onto the 3rd point that gets everybody riled through to Twitter: What’s money, what’s money printing and what’s the amount of money supply? I want to begin by saying that the initial argument that made me critical of the political economy of Bitcoin-as-money was the infamous, sacrilegious chart that presents that the U.S. dollar has lost 99% of its value as time passes. Most Bitcoiners, including Michael Saylor and co., want to share this because the bedrock of the argument for bitcoin as money. Money supply rises, value of the dollar boils down currency debasement as a result of the government, because the story goes.
I’ve already explained partly 1 what I believe concerning the relationship between money supply and prices, but here Id prefer to go one level deeper.
Lets focus on what money is. This is a claim on real resources. Regardless of the intense, contested debates across historians, anthropologists, economists, ecologists, philosophers, etc., in what counts as money or its dynamics, I believe it really is reasonable to assume that the underlying claim over the board is that it’s a thing which allows the holder to procure goods and services.
With this particular backdrop then, it doesnt seem sensible to check out an isolated value of money. Really though, how do someone show the worthiness of profit and of itself (e.g., the worthiness of the dollar is down 99%)? Its value is in accordance with something, either other currencies or the quantity of goods and services which can be procured. Therefore, the fatalistic chart showing the debasement of fiat doesnt say anything. What counts may be the purchasing power of consumers using that fiat currency, as wages along with other social relations denominated in fiat currency also move synchronously. Are U.S. consumers in a position to purchase 99% less making use of their wages? Needless to say not.
The counterarguments to the typically are that wages dont match inflation and that on the short-medium term, cash savings lose value which hurts the working class since it doesnt get access to high yielding investments. Real wages in the U.S. have already been constant because the early 1970s, which in and of itself is really a major socioeconomic problem. But there is absolutely no direct causal link between your expansionary nature of fiat which wage trend. Actually, the 1970s were the beginning of the neoliberal regime under which labor power was crushed, economies were deregulated and only capital and industrial jobs were outsourced to underpaid and exploited workers in the Global South. But I digress.
Lets get back to the what’s money question. Aside from a claim over resources, is money also a store of value on the medium term? Again, I would like to be clear that I’m talking no more than developed nations so far, where hyperinflation isnt a genuine thing so purchasing power doesnt erode overnight. Id argue that it’s not the role of money cash and its own equivalents like bank deposits to serve as a store of value on the medium-long term. It really is likely to serve as a medium of exchange which requires price stability only in the short run, in conjunction with gradual and expected devaluation as time passes. Combining both features an extremely liquid, exchangeable asset and a long-term savings mechanism into a very important factor makes money an elaborate, and perhaps even contradictory, concept.
To safeguard purchasing power, usage of financial services must be expanded in order that folks have usage of relatively safe assets that match inflation. Concentration of the financial sector right into a couple of large players driven by profit motive alone is really a major impediment to the. There is absolutely no inherent reason an inflationary fiat currency must result in a lack of purchasing power time, particularly when, as argued partly 1, price changes can occur due to multiple non-monetary reasons. Our socioeconomic setup, where I mean the energy of labor to negotiate wages, what goes on to profit, etc., must enable purchasing capacity to rise. Lets remember that in the post-WWII era this is being achieved despite the fact that money supply had not been growing (officially the U.S. was beneath the gold standard but we realize it had been not being enforced, which resulted in Nixon leaving the machine in 1971).
Okay where does money result from and were 40% of dollars printed through the 2020 government stimulus, as is often claimed?
Neoclassical economics, that your Bitcoin standard narrative employs at various levels, argues that the federal government either borrows money by selling debt, or that it prints money. Banks lend money predicated on deposits by their clients (savers), with fractional reserve banking allowing banks to lend multiples greater than what’s deposited. It comes as no real surprise to anyone who’s still reading that Id argue both these concepts are wrong.
Heres the right story which (trigger warning again) is MMT based credit where it’s due but decided to by bond investors and financial market experts, even though they disagree on the implications. The federal government includes a monopoly on money creation through its position because the sovereign. It generates the national currency, imposes taxes and fines inside it and uses its political authority to safeguard against counterfeit.
You can find two distinct ways that HAWAII interacts with the monetary system: one, through the central bank, it offers liquidity to the bank operating system. The central bank will not print money once we colloquially understand it, rather it generates bank reserves, a particular type of money that isnt really money that’s used to get goods and services in the true economy. They are assets for commercial banks which are useful for inter-bank operations.
Quantitative easing (those scary big numbers that the central bank announces it really is injecting by buying bonds) is categorically not money printing, but merely central banks swapping interest bearing bonds with bank reserves, a net neutral transaction so far as the amount of money supply can be involved despite the fact that the central bank balance sheet expands. It can impact on asset prices through various indirect mechanisms, but I wont go in to the details here and can let this great thread by Alfonso Peccatiello (@MacroAlf on Twitter) explain.
Therefore the the next time you hear concerning the Fed printing trillions or expanding its balance sheet by X trillion, consider about whether you’re actually discussing reserves, which again dont enter the true economy so usually do not contribute to additional money chasing exactly the same quantity of goods story, or actual profit circulation.
Two, the federal government may also, through the Treasury, or its equivalent, create money (normal people money) that’s distributed through the governments bank the central bank. The modus operandi because of this operation is normally the following:
- Say the federal government decides to send a one-time cash transfer to all or any citizens.
- The Treasury authorizes that payment and tasks the central bank to execute it.
- The central bank marks up the account that all commercial bank has at the central bank (all digital, just numbers on a screen they are reserves being created).
- the commercial banks correspondingly mark up the accounts of these customers (that is money being created).
- customers/citizens have more money to spend/save.
This kind of government spending (fiscal policy) directly injects money in to the economy and is thus distinct from monetary policy. Direct cash transfers, unemployment benefits, payments to vendors, etc., are types of fiscal spending.
The majority of what we call money, however, is established by commercial banks directly. Banks are licensed agents of HAWAII, to that your State has extended its powers of money creation, plus they create money out of nothing, unconstrained by reserves, whenever a loan is manufactured. Such may be the magic of double-entry bookkeeping, a practice that is in use for years and years, where money makes being as a liability for the issuer and a secured asset for the receiver, netting out to zero. Also to reiterate, banks dont require a specific amount of deposits to create these loans. Loans are created subject to if the bank thinks it creates economic sense to take action if it requires reserves to meet up regulations, it simply borrows them from the central bank. You can find capital, not reserve, constraints on lending but those are beyond the scope of the piece. The principal consideration for banks to make loans/creating money is profit maximization, not whether it has enough deposits in its vault. Actually, banks are creating deposits by making loans.
It is a pivotal shift in the story. My analogy because of this is parents (neoclassical economists) telling children a fake birds and bees story in reaction to the question of where babies result from. Instead, they never correct it resulting in a grown-up citizenry playing around without knowing about reproduction. That is why a lot of people still discuss fractional reserve banking or there being some naturally fixed way to obtain money that the private and public sectors compete over, because thats what econ 101 teaches us.
Lets revisit the idea of money supply now. Considering that the majority of the profit circulation originates from the banking sector, and that money creation isn’t constrained by deposits, it really is reasonable to declare that the stock of profit the economy isn’t just driven by supply, but by demand aswell. If businesses and people aren’t demanding new loans, banks cannot create new money. It has a symbiotic relationship with the business enterprise cycle, as money creation is driven by expectations and market outlook but additionally drives investment and expansion of output.
The chart below shows a way of measuring bank lending in comparison to M2. As the two have a confident correlation, it generally does not always hold, as is glaringly evident in 2020. So despite the fact that M2 was surging higher post-pandemic, banks weren’t lending because of uncertain fiscal conditions. So far as inflation can be involved, there’s the added complexity of what banks are lending for, i.e., whether those loans are increasingly being useful for productive ends, which may increase economic output or unproductive ends, which may end up resulting in (asset) inflation. This decision isn’t driven by the federal government, but by the private sector.
The final complication to include here’s that as the above metrics serve as useful measures for what goes on within the united states economy, they don’t capture the amount of money creation that occurs in the eurodollar market (eurodollars have nothing in connection with the euro, they simply make reference to the existence of USD beyond your U.S. economy).
Jeff Snider gave a fantastic run through of the during his appearance on the What Bitcoin Did podcast for anybody who would like a deep-dive, but essentially it is a network of finance institutions that operate beyond your U.S., aren’t beneath the formal jurisdiction of any regulatory authority and also have the license to generate U.S. dollars in foreign markets.
The reason being the USD may be the reserve currency and necessary for international trade between two parties that could not need anything regarding the U.S. even. For instance, a French bank may issue financing denominated in U.S. dollars to a Korean company attempting to buy copper from the Chilean miner. The money created in the forex market is anyones guess and therefore, a true way of measuring the amount of money supply isn’t even feasible.
This is exactly what Alan Greenspan had to state in a 2000 FOMC meeting:
The thing is that people cannot extract from our statistical database what’s true money conceptually, either in the transactions mode or the store-of-value mode.
Here he refers not only to the Eurodollar system but additionally the proliferation of complex financial loans that occupy the shadow bank operating system. Its hard to speak about money supply if it is hard to even define money, given the prevalence of money-like substitutes.
Therefore, the argument that government intervention through fiscal and monetary expansion drives inflation is merely not true because so many of the amount of money in circulation is beyond your direct control of the federal government. Could the federal government overheat the economy through overspending? Sure. But that’s not some predefined relationship and is at the mercy of hawaii of the economy, expectations, etc.
The idea that the federal government is printing trillions of dollars and debasing its currency is, to no ones surprise at this time, not true. Only considering monetary intervention by the federal government presents an incomplete picture as that injection of liquidity could possibly be, and perhaps is, creating for the increased loss of liquidity in the shadow banking sector. Inflation is really a complex topic, driven by consumer expectations, corporate pricing power, profit circulation, supply chain disruptions, energy costs, etc. It cannot and really should not be simply reduced to a monetary phenomenon, especially not by considering something as one-dimensional because the M2 chart.
Lastly, the economy ought to be seen, because the post-Keynesians showed, as interlocking balance sheets. That is true simply through accounting identity someones asset needs to be someone elses liability. Therefore, whenever we discuss paying back your debt or reducing government spending, the question ought to be how many other balance sheets get affected and how. I want to provide a simplified example: in the 1990s through the Clinton era, the U.S. government celebrated budget surpluses and repaying its national debt. However, since by definition another person needed to be getting ultimately more indebted, the U.S. household sector racked up more debt. And since households couldnt create money as the government could, that increased the entire risk in the financial sector.
Bitcoin As Money
I could imagine individuals reading till now (in the event that you managed to get this far) saying Bitcoin fixes this! because it’s transparent, includes a fixed issuance rate and a supply cap of 21 million. Here I’ve both economic and philosophic arguments for why these features, whatever the present state of fiat currency, aren’t the superior solution they are described to be. The very first thing to note here’s that, as this piece has hopefully shown so far, that because the rate of change of money supply isn’t add up to inflation, inflation under BTC isn’t transparent or programmatic and can still be at the mercy of the forces of demand and offer, power of the purchase price setters, exogenous shocks, etc.
Money may be the grease which allows the cogs of the economy to churn without an excessive amount of friction. It flows to sectors of the economy that want more of it, allows new avenues to build up and acts as something that, ideally, irons out wrinkles. The Bitcoin standard argument rests on the neoclassical assumption that the federal government controls (or manipulates, as Bitcoiners call it) the amount of money supply and that wrestling away this power would result in some true type of a monetary system. However, our current economic climate is basically run by way of a network of private actors that HAWAII has little, arguably inadequate, control over, despite these actors benefitting from HAWAII insuring deposits and acting because the lender of final resort. And yes, needless to say elite capture of HAWAII makes the nexus between finance institutions and the federal government culpable because of this mess.
But even though we take the Hayekian approach, which targets decentralizing control completely and harnessing the collective intelligence of society, countering the existing system with one of these top features of Bitcoin falls in to the technocratic end of the spectrum because they’re prescriptive and create rigidity. Should there be considered a cap on money supply? What’s the correct issuance of new money? Should this hold in every situations agnostic of other socioeconomic conditions? Pretending that Satoshi somehow could answer each one of these questions across time and space, to the extent that nobody should make any adjustments, seems remarkably technocratic for a residential area that is discussing the peoples money and freedom from the tyranny of experts.
Bitcoin isn’t democratic rather than controlled by individuals, despite it supplying a low barrier to enter the economic climate. Just because it isn’t centrally governed and the guidelines cant be changed by way of a small minority will not, by definition, mean Bitcoin is some bottom-up type of money. It isn’t neutral money either as the choice to produce a system which has a fixed supply is really a subjective and political selection of what money ought to be, instead of some a priori superior quality. Some proponents might say that, if you need to, Bitcoin could be changed through the action of almost all, but when this door is opened, questions of politics, equality and justice flood back, taking this conversation back again to the beginning of history. This is simply not to say these features aren’t valuable indeed they’re, when i argue later, but also for other use-cases.
Therefore, my contentions so far have already been that:
- Understanding the amount of money supply is complicated due to the financial complexity at play.
- The amount of money supply will not necessarily result in inflation.
- Governments usually do not control the amount of money supply and that central bank money (reserves) won’t be the same thing as money.
- Inflationary currencies usually do not necessarily result in a lack of purchasing power, and that that depends more on the socioeconomic setup.
- An endogenous, elastic money supply is essential adjust fully to economic changes.
- Bitcoin isn’t democratic money simply despite the fact that its governance is decentralized.
PARTLY 3, I discuss the annals of money and its own relationship with hawaii, analyze other conceptual arguments that underpin the Bitcoin Standard, give a perspective on the Global South, and present alternative use-cases.
It is a guest post by Taimur Ahmad. Opinions expressed are entirely their very own and don’t necessarily reflect those of BTC, Inc. or Bitcoin Magazine.