“But he has nothing on him,” said a small child. – Hans Christian Andersen, The Emperor’s New Clothes
The 21st year of the 21st century was when the masks of central bankers fell and the ugly truth was revealed: there is no blueprint, no expert advice behind fiat monetary policy. The only ambition is to put the box on the road for at least a few more years.
The monetary policy of perpetual inflation is acting as unwitting marketing for Bitcoin as more and more people seek a lifeboat for their purchasing power.
Inflation: more if transient
Central bankers around the world, fearful of the “deflationary spiral” that they are, have been trying to incentivize inflation for more than a decade, since the Great Recession of 2008. Finally, they succeeded. And make no mistake, the inflation rates we are seeing right now are a direct result of money printing. As Ludwig von Mises once pointed out in a 1959 lecture published in 1979, inflation is a policy, not an accident:
Inflation, once unleashed, is a beast that can quickly spiral out of control. Even central bankers seem a little puzzled by how quickly inflation has risen. In the first quarter of 2021, the consensus of “professional forecasters” polled by the Philadelphia branch of the Federal Reserve predicted an inflation rate of 2.2% for the end of 2021. The reality? Almost 7% for the last quarter of the year. The European Central Bank (ECB) was also off the mark: forecasts ranged from 0.9 to 2.3%, while actual inflation climbed to 5% by the end of the year.
Following this embarrassing display of incompetence, the Fed finally withdrew the word “transitional” when discussing the inflation rate, and the The ECB has almost doubled its inflation forecast for 2023.
The mandate has changed
“The monetary policy objectives of the Federal Reserve are to foster economic conditions that achieve both stable prices and maximum sustainable employment.” – fed
“The main objective of the ECB’s monetary policy is to maintain price stability.” – ECB
The primary mandate of central banks has for decades been to “maintain price stability,” which generally meant keeping inflation around 2% per year. The Fed has always had a “dual mandate” of price stability and maximum employment. The Fed and the ECB seem to have unilaterally changed their mandates over the past two years.
In the summer of 2020, the Fed redefined its inflation target as follows: “The Federal Reserve now intends to implement a strategy called Flexible Average Inflation Targeting (FAT). Under this new strategy, the Federal Reserve will seek an average inflation of 2% over a period that is not formally defined.
This means that the current inflation rate of 7% is well within the mandate, since there is no clear definition over which period inflation should reach 2% on average.
The ECB did not change the definition of its mandate, rather it chose to ignore it completely. When they deal with inflation, they simply expect it to come down over the medium term. But the ECB is doing little to fight inflation and instead keeps interest rates below zero percent, which of course leads to pumping more money into the economy, resulting in a rise in inflation.
Now the real question is, why are they doing this? Why are central banks simply ignoring decades-old mandates to keep inflation low and doing everything to keep it from climbing even higher?
Because this emperor has always been naked; the price stability mandate is a lie. Debt servicing and stock market performance have always been the true captains of this ship. The low rate of consumer goods inflation was the result of strong deflation in growth, with technological developments driving down costs due to increases in productivity. Alas, the effect of deflation on growth may be muted for now, with onerous regulations, trade barriers and pervasive misallocation of capital among the main culprits. And when the technology-induced deflation is eliminated, all that remains is the ugly face of the Cantillon effect. Monetary policy is there to serve the State and the financial sector, to hell with savers.
Fiat monetary policy, simplified.
Any significant rise in interest rates that could slow inflation would only reduce nuclear stocks and render debtors insolvent, with governments among the first to fall. The United States has a public debt/GDP ratio of 120% (an unprecedented level of debt since the Second World War), while certain European countries have debts of 150% (Italy) or even 200% (Greece).
Inflation is therefore a conscious policy, preferred by the powers that be to a deflationary crash and widespread bankruptcies. Instead of outright collapse and insolvency, monetary policy aims for a smooth default through currency depreciation, which means that it is savers, wage earners and retirees who are annihilated.
Bitcoin, the conservative lifeboat
Bitcoin serves as a monetary lifeline for people forced to transact and save in monetary media constantly degraded by governments. – Saifedean Ammous, The Bitcoin Standard
Since it doesn’t look like central banks will be saving us from inflation anytime soon (since they are the very source of it), we need to look for solutions outside of official policy. Undoing the effects of fiat monetary policy can be difficult at the societal level, but it is quite simple at the individual level. Bitcoin is available to everyone, 24/7, with no permissions required – if you do your homework and avoid KYC pitfalls.
Bitcoin is sometimes described as investment or speculation, but it mostly looks like savings. Bitcoin has all the characteristics of a sound currency and can be held securely by an individual, eliminating counterparty risk and dilution risk caused by changes in monetary policy.
When combined with the understanding that the road to hyperbitcoinization is bumpy and that bear markets are a natural occurrence, bitcoin can actually be understood as the conservative choice in today’s world.
2022: More of the same
It’s hard to take the Fed’s recent hawkish pivot seriously. They can raise the rates a bit only to throw up their arms a few months later and say, “See? We tried, but the economy was going to collapse!
What will happen instead is more or less the same. As Greg Foss brilliantly put it, you can’t taper a ponzi.
Bitcoin remains the only viable lifeboat for most people. But can Bitcoin accommodate everyone who needs it, right now in 2023? And above all, can billions of people own their bitcoin without depending on trusted third parties? In the pre-lightning era, this would have been impossible. Since Bitcoin on the base layer can process around 300,000 transactions per day, it would take almost 10 years to create a single UTXO for each of the first billion people. The Lightning Network and Taproot (which opens doors to things like Eltoo, a much-improved Lightning Network protocol) bring the vision of one billion sovereign Bitcoiners much closer to reality.
2022 is unlikely to be a breakthrough year. Instead, the fiat monetary regime will continue to deteriorate, while Bitcoin will continue to improve. And the world will gradually learn to despise the former and appreciate the latter.
This is a guest post by Josef Tětek. The opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.