Bitcoin is almost as bs as fiat money
— Elon Musk (@elonmusk) December 20, 2020
When the world’s second-richest man tells you that an extraordinarily volatile digital currency created by an unknown person or persons in 2009 is less “bs” than fiat money like the dollar, it should set off screaming alarms. Those alarms should have gotten even louder when Musk, whose net worth as of writing is $166.9 billion, put his money where his mouth was by putting 1.5 billion dollars of Tesla’s cash into Bitcoin. As someone who believes that Musk is right (and also owns Bitcoin), it’s worth asking why Musk and a lot of other people are so skeptical about the dollar. The answer is “inflation” and at a minimum, we need to take a very brief surface-level glance at America’s monetary history to understand what’s going on.
Gold has stood the test of time as a store of value for more than two thousand years, so if you have gold, you have a reliable store of wealth. Unfortunately, gold isn’t very portable or easily splittable into smaller amounts, so creating dollars that represented gold made it easier to trade, pay salaries, and do everything else we do with money. From 1879 to 1933, Americans could trade in their dollars to the government for an equivalent amount of gold. FDR stopped the practice because he wanted to print more money to get us out of the Great Depression. Still, up until 1971, foreign governments could trade their dollars for gold, but Nixon put an end to that and drove a stake through the heart of what was left of the gold standard. Why did FDR and Nixon do this and why have other presidents continued this practice? All sorts of explanations are given, but the short answer is that being on a gold standard puts limits on how much money the government can print. That leads to more economic corrections, which are not necessarily a bad thing even though they can be painful in the short run. Additionally, when you can simply make as much money as you want, it TEMPORARILY leads to more prosperity and it allows you to simply print as much money as you need to deal with war or economic crisis. Sounds good, right? So, why would anyone want to be on the gold standard and have every dollar backed by gold? Because if the government can print as much money as it wants, it inevitably prints far too much, devalues the currency, and people lose interest in holding what they believe is worthless paper. Many people are unaware of this, but this has already happened once in the United States during the Civil War. The South printed so much money to fund its debts, that inflation went up 9000% during just the four-year length of the war. Could the same thing happen again in modern times? Absolutely.
Fast-forwarding to today, if you look at the official statistics on inflation (the Consumer Price Index), it doesn’t look so bad. Over the last decade or so, it averages out to less than 2% per year. Of course, it doesn’t take a genius to figure out this is bogus and the real inflation rate now is probably AT LEAST 7%. If you look at some of the increases in prices over the last few decades, you get a better sense of how much of a bite inflation is taking out of your wallet. For example, in 1972, the average cost of a new car was $3500. Today, the average cost of a new car is $40,857. The cost of going to college has gone up 3009% in the last 50 years. Per capita, healthcare spending in 1970 was $353. Today it’s 31 times higher at $11,582. You can go on and on with these kinds of comparisons and yes, there are sometimes other factors at work, but inflation counts for most of the increase.
There are some interesting debates among economists about why America isn’t already in such a state of hyperinflation that it would require everyone to bring a briefcase full of money to the store to buy a Hershey bar, but the truth is no one really seems to know for sure and there is certainly no guarantee that will continue. That’s doubly true since we printed 23.6% of all the dollars in circulation LAST YEAR. This is what we do now in the United States. We have a war, economic crisis, or pandemic and our solution to the problem is to print more money backed by nothing other than our promise to pay. This should be of great concern to most of the people reading this column for two reasons. The first is that once investors conclude that investing money in Treasury bonds is no longer a safe bet because of inflation, it will create a death spiral, forcing the government to pay for spending through money printing instead of by issuing debt. The other reason it should freak you out is that a lot of the people reading this are relying on payments in dollars for their retirement. Social Security, pensions, cash savings – what will they be worth when you need them? Maybe not much at all. This has happened in other nations in the past, it’s happening in nations like Venezuela, Sudan, and Argentina today and it seems highly likely to happen here unless the Fed tightens monetary policy.
Inflation ends up being one of the most regressive taxes in existence because as a practical matter, it hurts the poor and middle class much more than the rich. That’s because the rich can afford to put a big chunk of their money into hedges against inflation like gold, silver, art, real estate, and now bitcoin. The poor and middle class? Not so much. They may benefit by having the real value of their debts reduced by inflation, however.
No one can predict exactly when America will go bankrupt or when inflation will finally get completely out of control, but if you have even a passing understanding of economics you can see it’s coming. You may not know exactly when the boat is going to sink after having a hole torn in the hull, but you should be smart enough to start figuring out where the lifeboats are situated. So, think about what you would do if every single dollar you have was suddenly worth a penny? Whatever it is, you should probably get an early start since we’re headed in that direction and seem increasingly comfortable printing massive amounts of money backed by nothing.
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