Previous sustained surges in consumer prices – otherwise described as big levies of inflation taxation – have brought in their wake episodes of monetary normalization. These have usually featured a “return to gold” or at least to monetary rules associated with the gold standard. The 2021-2 surge will likely prove an exception thanks in no small part to an unholy alliance between crypto and unsound money. The alliance spells trouble for the ideal of sound money.
Let’s preview that conclusion by considering a counterfactual response to the 2021-2 inflation shock and indeed further back to the long monetary inflation since, say, 2012. In this counterfactual there is no crypto “mania” – whether due to lack of founding “genius” or to legal/regulatory inhibition. Almost certainly gold would have flourished as an alternative money to fiat monies in their “race to the bottom”.
At least in some political jurisdictions the authorities would have responded to popular demand for an escape from the inflating dollar by permitting a growth in the private monetary role for gold. Accordingly, banks and non-bank financial institutions would have gained regulatory consent to create deposits or other types of liability in gold usable directly for transaction purposes. Offsetting balances of these financial institutions could be cleared directly through a gold clearing house by physical transfers of bullion. A new type of liability would have been virtual gold banknotes (otherwise described as digital gold coins), constructed around new blockchain technology. Increasing use of gold as a money at a private level could well have been a forerunner to gold having a resurrected role as a monetary standard in the aftermath of the surge in consumer prices.
In this counterfactual reality, without all the safety scares as spawned by “bitcoin mania”, financial institutions under some political jurisdictions could well have obtained regulatory permission to issue a new type of liability in established fiat monies – digital banknotes (otherwise described as coins) based on the new blockchain technology. In turn the demand for these digital notes/coins could have become a large and stabilizing element in the overall demand for monetary base (in which they would form part). This would have set the stage for the building of a monetary order in which monetary base would be pivot, consistent with interest rates being wholly market determined and free of official pegging or manipulation.
Instead, crypto mania has fanned a regulatory clampdown – which paradoxically has almost totally bypassed crypto whilst inhibiting all other forms of novel monetary competition for deeply rotten fiat money. As illustration, moves by JP Morgan Chase (JPM) to issue its own virtual dollar coin were smothered by US regulators. They were ostensibly concerned by all the ways this could be used by bad actors or lead to the small guy being misled. The main non-bank issuer of virtual dollar coins (more broadly described as stablecoin) – Tether – is reportedly in the sight of a regulatory attack, perhaps for the good reason that these are advertised as perfectly safe though they do not seem to be backed 100 per cent by cash and say Treasury Bills.
Strangely however Bitcoin and more broadly crypto has avoided any crackdown outside China. This is despite huge questions about the extent and nature of bad actors using these – whether state entities in Iran, North Korea, and more broadly, cyber ransom merchants, Russian and other mafias and so on. The reason for no crackdown so far is surely not found in the crypto industry sales prospectus that the transactions use of the new monies by bad actors is much less than by other actors, including most of all the presently high-volume speculative traders.
One does not have to be a conspiracy theorist to ask why the favouritism here, even though the crypto industry is entirely decentralized without any control centre in command. Yes, we may see on the political scene some emerging influence in Washington from certain institutions whose power and wealth derives from crypto, but these surely pale in comparison with the big bank lobbies. Rather what we see here is the coming together of an unholy alliance between the crypto industry and the establishment of the monetary status quo, all without any active diplomacy.
On the one hand, all those in the crypto industry are obviously content to be spared meanwhile any regulatory assault. And many there will also be content if they think about it to be spared competition from other forms of possible innovation which would create better money forms than now available in the present rotten fiat range. Less competition from gold money, less competition from new forms of fiat money, and no regulation to speak of to track bad actors, what could be better?
And why the kid gloves with respect to crypto from the authorities? “Cryptomania” suits their narrative that without their interventions and regulations this “cancer of the free market system” would spread.
Beware, however, the crackdown which is to come when the present virulent monetary inflation enters its really sour stage. The crypto industry has dug its own pit. The crypto industry has become the perfect fall guy for the political regimes of the present unsound monetary status quo when the storms arrive. There is no mercy in unholy alliances, especially when it is the apparently more powerful partner to the alliance which acts.
Instead of the next Crash and Great Recession in the aftermath of high inflation becoming the springboard to monetary reform in a sound direction as in the past, it will be the crypto industry barons or their underlings who will be metaphorically hung. There will be no sparing of potential but chocked competition during the great inflation. It will be even more firmly entrapped in an enhanced network of regulations.
The bigger point here is that bitcoin and crypto more broadly, unlike gold, do not contain the seeds of a potential threat to the existing unsound monetary order. Bitcoin, quite simply, could not become the basis of a new global monetary standard. A bitcoin anchor is no match for a gold anchor. Its list of defects includes total rigidity of supply, unknown degree of competition over the long-run from other cryptos, no non-monetary use (akin to jewellery), no mechanism which would mean that consumer prices over the long-run (in bitcoin) would revert to an unchanged mean.
Rather, at best, bitcoin or any other crypto might one day become a high-quality hedge asset with possible specific transactions outside well-lit areas. Gold, by contrast, always has the potential to undergo reincarnation as anchor for mainstream money, whether in the US, Europe, or globally. Gold, not Bitcoin, is the essential enemy of the unsound monetary status quo. Prince Metternich, wherever he may be, surely realizes that distinction. Bitcoin mania suits him just fine for now.