As Bitcoin falls below $10,000 amid South Korea’s potential ban on all cryptocurrency trading, exchange-traded investments such as Bitcoin Investment Trust (OTCQX:GBTC) are following it lower. People caught up in the euphoria need to take a hard look at the future potential of the cyptocurrency fad from a socioeconomic perspective and decide whether it really has a future.
Many followers of the subject are well attuned to the usual money laundering/crime financing argument for more regulation being needed in the space. However, few investors have thought as deeply into why our governments have fiat currencies, what the consequences would be for going back to a gold-like standard, and why our governments would probably never allow their legal tender currency to take a backseat. This article will discuss how fiat currency has become a powerful tool of governments to control their economies through monetary and fiscal stimulus with the conclusion that governments will be hard-pressed to give up their right to create legal tender, as it could be detrimental to society.
A Century of Currency Market Improvements
Before the 20th century, most countries around the world maintained the gold standard. However, during the beginning of the 1900s, developed countries around the world moved back and forth between the gold standard and fiat currency as governments needed to print money in order to finance the war efforts of WWI and WWII and also to increase government expenditures during the Great Depression.
The withdrawal from the gold standard saw the rise of fiat currencies being “pegged” to one another and the adoption of systems such as the European exchange rate mechanism that allowed currencies to float within a narrow band. These peg systems also eventually proved unsustainable as governments spent billions defending their currency’s exchange rate, which would often prove to be a detriment to their domestic economy. The most notable example is in 1992 when legendary investor George Soros was attributed with breaking the Bank of England as Britain was slow to drop their 2.70 German mark peg to the British pound despite high domestic inflation and low interest rates.
Modern Socioeconomics Are Against Cryptocurrenies
Moving forward to today, most government fiat currencies float freely to reflect changes in the domestic economy and act as an automatic stabilizer to make their countries labor/exports more or less competitive. There are still some exceptions, with the euro common currency being the most notable. However, keep in mind that some Greek and Italian citizens would be quick to point out the downfalls of the common currency as they try to recover from the 2008 financial crisis.
While there are no massive world wars to finance today, society has developed into a social democracy in which services such as healthcare, education, and pension plans are provided by government. Unfortunately, as seen below, governments are unable to follow through on their political promises without running budget deficits and going into debt.
Data from CIA World Factbook
Early cryptocurrency followers were quick to point to these debt loads as a reason not to trust government fiat currency. They wished instead to create their own currency that would be better store of value, as it could not be debased by governments printing money. However, this point of view failed to grasp the reasons our elected governments have debt and run budget deficits.
There are reasons the world slowly dropped the gold standard, and those same reasons lead one to think cryptocurrencies are probably not going to be our new payment system. Our modern social democratic economies need the ability to print money in order to finance the social spending they were elected to carry out. While blockchain technology represents a breakthrough in assurance and security of electronic transfers, investors should not confuse the technology behind Bitcoin and other cryptocurrencies with the digital “asset” itself. In my opinion, in the decades to come our fiat U.S. dollars, British pounds, and euros might very well be exchanged through blockchain “technology”, but the Bitcoin and cryptocurrency fad will be long forgotten.
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