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Bitcoin was developed to fight inflation. Damn it! This crisis is “deflationary”. And now

April 26, 2020

“Generals are always waging the last war.” An old saying to think about. It is true, sometimes we start imaginary battles with ghosts from the past without realizing that the world is different and requires new strategies from us. A new weapon to fight an old war is an outdated weapon at birth. Because what worked for the Nazis cannot help us much in the war against modern terrorists. Now consider why you should design an anti-inflation currency at a time when inflation is not a real problem. Satoshi Nakamoto is certainly a genius of programming and cryptography. Writing codes is brilliant. But is it really a macro economic messiah? Are your money theories really on the road? Would it be advisable to give up fiat to use bitcoin in an alleged separation of economy and state? This crisis is deflationary. Is Bitcoin Salvation?

It is not uncommon for a small group of passionate people to insist on waging a war that does not really take place and provide solutions to problems that do not really exist. Today’s world is full of warriors and everyone has a cause. “The earth is flat,” some say. “Queen Elizabeth is an undercover alien,” others say. The truth is that they are all conspiracy theorists today. From the sofa in our house, with a keyboard in hand, the world has no choice. And of course our remedy is the best. And since everything always remains in one big hypothesis, we are always right and nothing can go wrong. Utopias are certainly perfect if you dream. The problem arises when it is put into practice. It is very easy to criticize out of the box. But being in the arena and taking the punches is something else entirely. The real world is not as perfect as the imaginary, but the real world is real.

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Bitcoin was developed to fight inflation. Damn it! This crisis is “deflationary”. And nowBitcoin was developed to fight inflation. Damn it! This crisis is “deflationary”. And now

Let’s talk a little bit about inflation, deflation, and the problems of a fixed supply currency like Bitcoin for a modern economy. I’m not talking about Bitcoin as a fixed asset or even Bitcoin as a payment method. Here I am talking about the fact that we are traveling back into the distant future and that Bitcoin is the legal tender of all economies in the world. Central banks no longer exist. And the state and the economy are separated in a fundamentally libertarian universe. It’s a kind of utopia that many in the crypto community sometimes imagine. Many cryptocurrency enthusiasts don’t just think of Bitcoin as an excellent commodity. You go much further. You speak of a planetary revolution in an epic crusade against Fiat Money and against the entire world monetary apparatus. The big question here: is this really feasible?

Inflation is obviously a problem. If the money pressure is too high, the purchasing power is watered down. The coin is losing value and that’s not always a good thing. Ideally, printing money goes hand in hand with the production of goods and services. Because if production exceeds the amount of money, we would have deflation that is as harmful as inflation. Deflation is really terrible. The value of money increases and the markets lose value. People prefer to accumulate money than invest it in the real economy. And that leads to unemployment and unproductivity. In the past, when metals were used as money, governments had their hands tied and the crises were much deeper. Of course, you can always mix gold with other metals to “print” more. And “false” gold certificates could be provided to cover government spending. But not much else can be done.

Deflation caused the Great Depression of the 1930s. And in this crisis, deflation is the big threat. We know that inflation is the product of ruthlessness in printing money and spending debt. On the other hand, deflation obeys other laws. The overproduction of goods and services affects. That is, when the market becomes saturated with things, prices drop. This is the case, for example, with raw materials such as oil. A lot is produced, which puts pressure on fuel prices. Improvements in production and distribution chains also lower prices. Example: China. Example: online trading. Chinese manufacturing and the efficiency of the digital economy make things cheaper. Another deflationary factor is a fall in demand. With no demand, prices collapse.

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The corona virus came and the world went into quarantine. All locked up in their homes, shops closed and mobility paralyzed. Demand is falling dramatically. Businesses stop recording income. You cannot pay wages. And the layoffs begin. Debt is piling up and people are eating their savings. There is no money at all and the economy is in a terrible crisis. Prices are falling due to a drop in demand. And the crisis will continue as soon as the quarantine is lifted, because it will take us a while to go back as before. This situation in an economy based on a scarce currency like gold or bitcoin would be a real disaster. Bitcoin’s anti-inflation policy, for example, would lead to even greater deflation. Unemployment could not be stopped and the hunger pandemic would reach an apocalyptic level. You don’t have to be a genius to know that we’re going to have a global social outbreak.

Money needs to be injected to boost demand and create the inflation we need right now to stop the deflationary picture we are presented with. Despite the opinion of some libertarian thinkers, deflation does not correct itself. If the correction is achieved, it may be too late. The world could be on fire. Libertarian utopia is not very practical. Very pretty on paper. In practice, however, the result would be a world in ashes. We have the past as evidence. The world worked with hard coins for centuries. It is not the most flexible system of all. There are clearly more disadvantages than advantages. Going back in time is a dream, but it is not a very reasonable dream if we think about it in detail.

Well, Satoshi Nakamoto, the 2008 crisis and inflation. In 2008, printing money (indiscriminately) was held responsible for the crisis. A lot of money on the street, a bubble formed and the crisis was the explosion of that bubble. Then the idea arose that in an economy with a hard currency like gold, the crisis would have been avoided. The 2008 crisis was interpreted in this way by many. In fact, YouTube has dozens of documentaries with these ideas. But I’m afraid things have been misinterpreted. Which is not unusual. Historical facts are always misinterpreted.

The crisis exploded due to (massive) defaults on mortgage loans. Oil through the roof due to production cuts in oil producing countries. Local wages due to technological change, immigration and the pressure of globalization. The debt grows irresponsibly. Above all, consumer debt. People with mediocre jobs live the American dream in a big way and finance everything with their credit cards and subprime mortgages. That turned out to be a recipe for disaster.

The problem wasn’t printing money per se. A labor market that is affected by globalization and wages that are affecting increasing raw materials due to production cuts and the excessive debt that is motivated by the cultural fixation of life above our means. It wasn’t a crisis caused by a fiat currency instead of a hard currency. This core is not that simple. Let’s go back to gold and now. Or let’s invent a scarce digital currency. And so everything is solved. No, I’m afraid the world is more complex.

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We emerged from the 2008 crisis thanks to the fiscal and monetary stimulus from the bailout plans. One could criticize how to deal with things before the crisis, but at the time of the crisis the answer was not that bad. The right thing was done. Of course, I am not talking about golden parachutes for bank employees or similar things. I refer to the monetary policy of money printing to overcome the deflationary picture that emerged during the crisis. The authorities were right there.

Nobody says fiat money is a good long-term investment. Of course not. That would be a terrible idea. Saving in Fiat is a bad plan. You need to invest in assets, real estate, companies, stocks, bonds, gold and of course Bitcoin. This is the smart way to invest.

This crisis is deflationary. And central banks have to print money to revive the economy. This liquidity increases the price of assets. Bitcoin, of course. Why doesn’t the crypto community welcome the stimuli from the Federal Reserve and the European Central Bank, as they all do, Wall Street, London, Berlin, Tokyo, and Beijing? Ideology. Utopian thought. And a chronic misunderstanding of what happened during the 2008 crisis.

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