It has become commonplace to normalize the extreme of fiat. The last such case was in September, when the federal government broke another record by crossing the $33 trillion national debt threshold. A decade ago, the US government’s outstanding loans already exceeded America’s annual GDP.
The Congressional Budget Office (CBO) now projects a 2% increase in federal debt per year. The established dynamic is one of greater indebtedness because there is simply no way to repair budget deficits with tax revenues alone. This year alone, the United States Government had to pay $711 billion in net interest payments.
Ultimately, the Federal Reserve, as a money provider, has to continue to increase its balance sheet so that the United States Government can keep up with its debt obligations. Inevitably, the Out of nothing The creation of new money leads to the devaluation of the dollar, the world’s dominant measure of value.
And as previous monetary cycles taught us, when the measurement of value becomes warped, limbs can soar to cartoonish levels.
The destabilized legacy of modern money
As the Weimar Republic led to and after World War II ended, the new binding framework was established in 1944. Known as the Bretton Woods Agreement, it established the dollar as the world’s reserve currency. Although it technically collapsed in the early 1970s, it left behind the IMF, the World Bank, and the legacy of debt-fueled growth.
More precisely, Bretton Woods positioned the dollar as having the largest Net International Investment Position (PINI). The US Government took full advantage of this advantage, as evidenced by the fact that the PIIN turned negative decades ago, causing the US to owe more to foreigners than it owes to the US.
Where does this leave the world?
In short, in a state of unsound money. Last year, loans from OECD countries increased 43% above the 2011-2019 average. At the same time, borrowing costs have more than doubled since 2021, creating a situation where much of economic output goes to servicing debt.
And as governments borrow more money to pay off debt, this leads to high debt expenses. In turn, money printing becomes the preferred remedy for paying off debt, instigating inflation. But as high interest rates are introduced to curb inflation, higher levels of debt need to be covered.
This is the spiral of currency devaluation. The destabilized macroeconomic landscape puts pressure on us to find other ways to preserve wealth and overcome monetary erosion. Some seek bond yields, others seek dividends from stocks, but others turn to a reinvented monetary system outside of central banking.
The decentralized promise of bitcoin
For money to be sound, a basic prerequisite must be met. Since the creation of new money depends on the government’s desire to spend beyond its means, the money itself must be separated from the government.
In this way, moral hazard can be nipped in the bud. At first glance, this task seems impossible:
- In a given territory, a hierarchy always emerges that governs it.
- One way or another, the upper echelon has to maintain legitimacy in order to govern.
- Legitimacy comes down to the issuance and management of money.
In turn, it is the money they issue that is perceived as legitimate and becomes legal tender to set the price of goods and services. However, even if that currency itself is physically sound, by virtue of counterfeits like gold, it can be attorney and manipulated.
bitcoin broke that barrier of impossibility, forever changing the perception of money. Limited by mathematics, cryptography, and computing power, bitcoin eliminates the need for a central authority.
The bitcoin account record, the blockchain, is maintained in a decentralized manner and anyone with access to the Internet can participate in its verification. In addition to having permissionless access to the public ledger, bitcoin is independent of the government and the nation.
For the first time in monetary history, it was possible to send and receive payments without borders, without entangling any bank or currency exchange office. Although this can be done anonymously, the public bitcoin ledger is auditable at all times.
Eliminating moral hazards: the path to a sound currency
Ultimately, incentives govern behavior. With fiat money, the government always has an incentive to spend extravagantly. It then prints money to make up for the holes in its balance sheets, while leaving the taxpayer with another form of tax: inflation.
Inflation is the immediate manifestation of central banking, but there are many others. During the Great Recession of 2007-2009, central banks bailed out financial institutions that took on too much risk to the tune of $498 billion. These banks had to be bailed out to keep the entire financial system stable, but if this is added to the pie, then risk-taking becomes the norm.
It is from this great moral risk that the pseudonym Satoshi Nakamoto took the step with bitcoin. Furthermore, as central banks change their monetary policies, they tend to generate financial bubbles. Low interest rates caused major bubbles to burst, the technology bubble in the late 1990s and the housing bubble in the early 2000s.
The Great Recession itself was caused in part by low interest rates as they made it easier for borrowers to obtain mortgages, leading to the subprime mortgage crisis.
In turn, when bubbles burst, central banking leaves a trail of recession in its wake. Deep down, people find it difficult to orient themselves towards the future. Then, as bubbles, taxes, government spending and inflation continue to pile up, what was once the norm becomes a distant dream for many.
On the international stage, competing for monetary supremacy can further lead to destabilization to the point of financial exclusion. The Russia-Ukraine conflict made this point acutely, when the US government used the dollar as a weapon to inflict pain on its geopolitical rival.
In the middle, Europe suffered the most from the sanctions against Russia, abundant in natural resources, boomerang against Germany, the economic engine of the EU. For both individuals and nations, bitcoin becomes a potential self-sustaining wealth machine outside the moral hazards of central banking and politicking.
In a distant alternative future, one must wonder if large-scale conflicts, along with infrastructural and economic devastation, would be possible even without fiat money.
The way forward: institutional adoption, speed, efficiency and artificial intelligence
After many market crashes and custodial learning opportunities, cryptocurrencies in general are on the brink of a crisis. breach of legitimacy. This is best exemplified by BlackRock’s request to launch a bitcoin exchange-traded fund (ETF). Larry Fink, the head of the world’s largest asset manager, with $9 trillion of assets under management, has made a complete U-turn from his previous hostility toward bitcoin.
In contrast to 2017 statements framing bitcoin as “showing how much demand for money laundering there is in the world,” bitcoin-spot-etf-will-democratize-crypto-ceo-larry-fink”>Fink is promoting bitcoin at an unprecedented level:
“We believe that if we can create more tokenization of assets and securities – that is bitcoin – it could revolutionize finance”
However, Fink also said that “right now it costs a lot of money to transact with bitcoin.” Although he inferred it in the context of general cryptocurrency investing, it is a fact that the bitcoin mainnet is not suitable for daily currency use.
For global mass adoption, the bitcoin blockchain’s 7 transactions per second capacity would have to increase dramatically to offer near-instant payments, whether for online purchases or in-store merchants. This is where bitcoin scaling comes into play, the most popular example being the Lightning Network.
With an average base rate of 865 mSats ($0.000243), the Lightning Payment Highway has also proven to be nearly instantaneous as more nodes are added.
Taking advantage of the programmability of smart contracts, Lightning Labs has also integrated artificial intelligence (ai). Thanks to LangChainBitcoin and Aperture, ai agents can directly interact with bitcoin via LN, enabling the exchange of funds both on-chain and on the Lightning Network.
This opens up a whole new field of applications, without even having to resort to credit cards or fiat money to make payments. In the near future, we can expect to see real-time cost settlements, pay-as-you-go ai models, micropayments for content, lending, and equitable resource sharing as LN smart contracts automate subscriptions, rental, or even salaries.
We could even see ai-powered financial, underwriting, and underwriting advisors all using Lightning Network smart contracts to execute investment strategies.
Although bitcoin‘s core code is conservative, Ordinals has shown that functions can be attached without any forks, whether soft or hard. Just during the first two months of Ordinal’s hype, as non-fungible token (nft) creation grew, bitcoin-blockchain-as-average-block-size-surges/”>More than 350,000 signed up to the bitcoin mainnet.
More recently, bitcoin developer Robin Linus released “BitVM: Computing Anything on bitcoin” bitcoin-bitvm-whitepaper-computation-smart-contracts”>White paper. Again, without forks, it shows that bitcoin smart contract logic can be executed off-chain but verified on-chain.
Linus predicts greatly expanded use of bitcoin if BitVM is implemented in writing/debugging bitcoin contracts.
“Potential applications include games such as chess, go or poker and, in particular, the verification of validity proofs in bitcoin contracts.”
However, all that potential remains in the “putting the cart before the horse” stage. bitcoin‘s primary task should be to drive financial emancipation from the whims of the central banking system. With Lightning Network in the game, even the bitcoin-into-money”>Federal Reserve admitted that the necessary ingredients are there.
This is a guest post by Shane Neagle. The opinions expressed are entirely their own and do not necessarily reflect those of btc Inc or bitcoin Magazine.
