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Ionuț Bălan: Currencies and Cryptocurrencies Like Flogs For a Dead Horse

01/04/2021 6 min read


Ionuț Bălan: Currencies and Cryptocurrencies Like Flogs For a Dead Horse

Reading Time: 6 minute

The Bitcoins and cryptocurrencies in general are seen as attractive mostly due to their immateriality, to their virtual blending into the code strings that generate them and form their trading environment. However, this ‘pixie-behind-pixels’ statute also seems their weakest point.

by Ionuț Bălan

For the operation of the intrinsically immaterial bitcoins universe, whole arrays of very physical objects must work properly. Notriously, the Bitcoin is one of the world’s biggest electricity consumers of our time. For the mining, trading and spending of cryptocurrencies, there must be electrical power, internet and mobile communication networks.

And the enthusiasts have realized for some time that in the event of a technological catastrophe, the Bitcoin is dead. One huge and prolonged power outage would make the virtual currencies completely nonoperational. Without electricity and data transfer capabilities, the Bitcoin is out. Mining and trading become impossible. When power and internet are off, nothing is left, because nothing supports the bitcoins.

The biggest irony was revealed by the magazine Wired. To draw in the money of mainstream instutional investors, the big cryptocurrencies businesses have begun to offer bitcoin deposit and portfolio custody services. How is that done practically? For each account, a unique encryption key is generated on an offline laptop, which is subsequently destroyed. The encryption keys are then printed, and the printouts are locked in safes.

That’s how the physical universe and the classic monetary system take their revenge against the bitcoin: in the worst case scenario, the code cryptograms can be kept under the mattress.

Well, the IT engineers think they can compel the natural phenomena to work according to algorithms. Perhaps they should ask biophysicists to find out how it works…

I must mention, however, that these currencies have been proposed before the IT era. In 1976, Friedrich A. Hayek wrote a book called ‘The Denationalization of Money’, where he asserted that every individual or organization should be allowed to issue their own currency.

According to him, the central banks would keep their privilege of issuing dollars or francs, but other institutions would be allowed to compete in creating money, offering currency under their own brand.

Hayek was confident that the ducats he envisioned, issued so that prices expressed in them stayed constant, would take out the dollars or sterlings.

So this is the doctrinal support of the Bitcoin and other cryptocurrencies. The problem is that the dollar and the sterling are backed by strong, diversified economies. Alternative currencies are not, so they have to get blank checks. Conversely, the economies of the United States, of the Eurozone and of the United Kingdom are tangible references, and the money they issue are connected with the whole gamut of products and services.

Cryptocurrencies are linked to a much smaller, qualitatively poorer offer than the euro, the dollar and the pound.

They do not generate trust; they are just a response to the quantitative easing (QE) practiced first in the Anglo-Saxon world, then in the Euroland. They are practically a haven. Purchasing them does not involve trust, but discomfort with the excess of dollars and euros. Because virtual currencies are not only devoid of the competitiveness of Western economies; we could also expect difficulties in trading, due to the mismatches of supply and demand.

Two more observations are necessary. First, the cryptocurrencies have exchanged rates in accordance with their ways of operation: without central banks, built on an arithmetic algorithm borrowed from bookmakers,.

Second, the moments of transition – from monetarism to a responsible management of economies – are best sensed by those who have money to launder. This raises serious doubts about the morality of lawmakers and about their possible collaboration with those who bring to light the incomes made in the shadows.

And a very serious question is, what happens to the alternative currencies when their references disappears? They are not anchored in demand and supply, like the said reference – it is mere leverage. Of course, the reference too lacks intrinsic value, unlike a century ago, when one could take a banknote to a bank and get its equivalent in a certain value – a couple of grams of gold or silver.

To the difference of the past, money nowadays certify fluctuating property rights on a certain amount of goods and services. Sadly, the uncertainty and volatility result from the oscillation of that amount according to the inflation of monetary mass by the central bank. Even so, the dollar, euro and pound are better instruments of exchanges.

Don’t take my word on it; listen to someone who asserts a central bank allowed discretion on the money offer is a fox in a henhouse. He’s Murray N. Rothbard.

He nevertheless says that money are not sought for themselves, but because people trust that the money-merchandise will be easily accepted by anyone in exchange. People even accept paper tickets marked as “dollars”, not for their aesthetic value, but because they are certain to be able to sell them for the goods and services they want.

Money cannot be made up of thin air, through a social contract or by issuing paper tickets with new names, Rothbard adds. They must stem from a valuable non-monetary merchandise. In practice, precious metals like gold and silver, which are in high and constant demand per weight unit, acquired the role of money against other merchandises. And if money is still called ‘geld’ or ‘argent’ in some languages, the ancestral support is evident.

Mises’s regression theorem proves that money must have their origin in a non-monetary useful merchandise traded on a fraee market.

Rothbard underlines that the essential problem of Hayek’s ducat is that no one would accept it. The tickets with new names could not hope to compete against the dollars and the pounds, which appeared as gold and silver weight units and have been on the market for centuries as a means of exchange and instrument of monetary calculation and accounting.

But I have not ended my argument; eventually, officials of the European Central Bank (ECB) claimed that the bitcoin is not a systemic risk. Really? Not even when used as guarantee for financing in classic currency?

On the contrary, the ECB should suggest how dangerous the bitcoin leverage is. That’s about how the interwar crisis has occurred – on a background of false confidence. Because the bitcoin can surge indefinitely now, but in a couple of weeks it can plummet from thousands of dollars to tens.

And the economies that would waver after the shock would not be the American or British ones, but those of “tigers” like Brazil, Singapore, South Korea and others, dependent on liquidity from inward investment or from bonds issues.

More precisely, as things are now, it seems there are people who want the U.S. and Britain to have their own Greece. Sucha country, when left with the burden of worthless guarantees, tries to regain its balance with the help of domestic saving, but it quickly becomes obvious that it is insufficient, and then the economy crashes, the inflation is reignited and the interest rates soar. It is useless to block by administrative means the capital withdrawals – the investors will step back from other risk areas.

I say it again: to the extent the ECB’s initial intervention was this, then the discussion was about regulation, not about explicit interdictions, there is a potential impact on states where American or British capital is present, like some in South America or Asia.

But let’s shift a bit our perspective. Let’s see why the central banks, which often include the supervision authorities, do not ban the ownership of bitcoins in subsequent instruments. It’s because of the QE.

In other words, when the bitcoin exchange rate suddenly drops, contracts go into red, savings decrease and the monetary mass is sterilized. The effects are impoverishment and indebtedness. So that is the reason for tolerating the bitcoin rise – its correlation with the quantitative easing.

On the other hand, as long as – like Stiglitz said – the bitcoin has no social role and thus it is hard to identify an economic event with a measurable impact on its evolution, it’s also hard to note rationally justifiable references. Finally, some persons or institutions circulate some levels, while being unable to base their references on a quantitative or qualitative analysis.

What would be the impact of a bitcoin – or of all cryptocurrencies – on Romania? To the extent the savings in the EU, and implicitly the investments, would dwindle, we would have a problem with the financing of our trade deficit. Also with the drawing of European funds, because an interest rates increase would loom, while the GDPs would shrink. In this stagflationary context, with lower budget incomes, there would be fewer resources for community financing.

That’s why the general interest is that bitcoins do not trigger a significant sterilization of the monetary mass, which would endanger the QE, change the paradigm and bring back or amplify the recession sequence.

If it becomes aware of that, Romania should play on budget surplus as a protection against disruptions in the investment flows and against a stricture of the flow of European funds.

On a fiscal surplus and with lower taxation, we would witness the opposite. Investments would come, drawn in by an attractive business environment; we would also be eligible for community funds, to the detriment of others.

It seems, however, that the serenity in front of danger is trailing since 2007. Then, with such expertise and vision, we are again at risk of a hard landing.

It is not the first time I write about all these, especially warning about the systemic risk. Well, it is about to materialize, and the European authorities are bracing for crisis.

The European Central Bank has surprised by declaring – no less – that it is analyzing the possibility of issuing its own cryptocurrency, giving the euro a ‘pixie-behind-pixels’ sister; which means the ECB is aware that the quantitative easing, with the negative interest rates it generates and with the associated overindebtedness, can only end in a crisis, so it tries to dampen the impact as much as possible. Commentators say that the reason of the Eurozone monetary authority might want its own cryptocurrency is Facebook announcement of one: the Libra. But preoccupation about the crisis is obvious, since the French are interested to implement norms for limiting the indebtedness to one third of the bank debtors’ incomes.

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