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Bitcoin the real "Trump Trade"
I can’t stand it when I hear people say it’s “not” Bitcoin, Dash or Litecoin but blockchain. Yes, blockchain is an extremely revolutionary application of almost mind-numbing flexibility and utility. However, cryptocoin has its own revolutionary place in the current financial market upheaval. In fact, we see the speculative mania around alt-coin as a primal reaction to the election of US President Donald Trump, and the rapid appreciation and expanding usage as the real ‘Trump Trade’.
To understand what we are saying, you need to go back more than two hundred years. Civilization needed a way to standardize transactions, and paper currency was a good solution. But civilians did not trust governments to have total and absolute control over monetary systems through the institutionalization of paper money. Prior to World War I, the general feeling was that personal wealth was to be protected and governments could not be trusted to behave. To keep governments in check, widely traded currencies were anchored to market-based commodities such as gold and silver. This meant any net expansion of the monetary base would have to be matched with underlying commodity money. Paper currencies were used only as an easily transferable claim against government holdings of those limited commodities, theoretically keeping government overspending and potential inflation in check. Amid fears of hyperinflation, this system worked, keeping governments honest and free of abuse. In addition, the slow expansion of growth meant the current money supply was adequate for the amount of economic activity.
However, changes in governments’ view of their relationship with civilians, together with growth-fueled demand for a broader monetary base, caused governments to abuse money and credit in the economy. Governments increasingly shifted to a Keynesian view of public policy, in which private enterprise was unstable and biased and only a strong governing hand should or could manage the economy. By unilaterally changing their mandate to achieve a variety of targets, governments provided themselves with bottomless piggy banks, which they quickly began to plunder. The deficit spending that powered most developed nations after World War II would not have been possible if miners had needed to dig up gold. The gold standard was effectively abandoned by the last major nations in 1944, with the Bretton Woods Agreement pegging currencies to the US dollar instead of commodity assets. However, national governments completely severed the relationship between the US dollar and gold in 1971, when the US ended the redemption of dollar holdings for gold. Global currencies were now a ‘free-floating’ , uncontrollable fiat money system whose value was no longer linked to any real asset.
Monetary policy abuse ramped up after the financial crisis. The US Federal Reserve twisted interest rates down to zero while blindly expanding the money supply by $4 trillion. The European Central Bank instituted a confusing policy of negative interest rates while also expanding its balance sheet by $4 trillion. Globally, central banks printed nearly $20 trillion in fiat currencies, indicating that there was no limit to the amount of paper money that could be printed under a system of monetary socialism. People quickly realized that the value of the paper currency in their pockets was seemingly arbitrary, controlled by internally appointed government monetary policymakers.
Even Milton Friedman, who long advocated for paper money, had second thoughts about the rejection of the gold standard. In a 1986 article titled ‘The Resource Cost of Irredeemable Paper Money’, he concluded that monetary policy mismanagement by government and central banks was significantly more harmful and disruptive than commodity-linked currencies.
The system we are left with is inconsistent and arbitrary, choosing winners and losers in this global game seemingly at random. Ordinary civilians have now become victims of governments’ abuse of the monetary printing press. History suggests that when people trust in government, money disappears: with policy expected to lead to high inflation, people shift their funds into alternative assets that they see as more stable and preserving wealth. This is the situation we currently face. As with the election of US President Donald Trump, the candidate was far from a perfect solution but sufficiently different from the current system that people were willing to take a risk. Alt-coins carry risk, but for most people concerned over the abuse of monetary policy and decentralized forms of wealth exchange, they are the logical direction. Whether through Bitcoin, Dash, Litcoin, or other alt-currencies, people will continue to opt out of governments’ monopoly on money.