Fiat Money Babel Bitcoin Clarity
Come on, let’s go down and confuse their language so that they do not understand each other.-Genesis 11: 7
The curious task of economics is to show men how little they know about what they imagine they can design. -Friedrich August von Hayek
A price system is a network for the exchange of information. It works best when built on neutral monetary support shared globally. The more complex society becomes, the more urgent is the need for a neutral monetary standard that does not introduce noise into economic signals.
Knowledge loves company
One of the deepest ideas in economics is Hayek’s conception of the nature of prices. In a short, readable article titled “The use of knowledge in societyHayek explains why there would be no exchange – and no complex society – without the existence of prices.
Prices are data reflecting economic reality A modern economy generates billions of potentially relevant information about people’s preferences, investor risk appetite, scarcity of resources, how particular goods are made, etc. We must continually share this information so that we can coordinate our efforts. Like the great economist Leonard Read stressed, no mind knows how to produce even a simple thing like a pencil. The economic reality is constantly changing. Likewise, the pricing system is constantly evolving, which makes it difficult to paint an accurate picture of what is really going on. When the prices emerge in a clear way, they reflect reality and we can cooperate well. When prices are prevented from emerging or adjusting freely – and therefore no longer reflect reality – our ability to cooperate is hampered.
As Hayek puts it, prices communicate “knowledge of the particular circumstances of time and place.” The dominant ‘use of knowledge in society’ does not happen through books, televisions or classrooms; it is the price system which is the main network for the exchange of knowledge of mankind. And it is incredibly effective.
A brief example. Turkey produces around 80% of the world’s hazelnuts. Now imagine that something is happening in Turkey: a civil war, a nut burn, a meteor blow. How does the rest of the world find out that something happened and that nuts or peanuts should now be used whenever possible? Not from a TV. The surge in the price of hazelnuts first shatters history. The price only communicates the most relevant information: that hazelnuts have become relatively rarer. It doesn’t matter where in the world the hazelnuts are produced or what happened there, what matters is that nuts are now more expensive and people need to save money.
“In abbreviated form, by some sort of symbol, only the most essential information is transmitted and transmitted only to the persons concerned.” -Hayek
A price system is a minimum viable means of knowledge transfer. This allows us to cooperate globally, even if we do not share the same language, culture or worldview, as these factors do not matter for economic cooperation. The prices are objective guides in our common struggle to survive and prosper.
There are billions of pieces of information that can be relevant to any production process, consumer decision, or investment opportunity. Without a price for imparting knowledge of local circumstances, we would be groping in the dark. And this is precisely what companies without a price system have ended up doing: inca empire in the Soviet Union, societies without a labor price mechanism turned into slave states that saw little or no progress.
Oh it’s noise money that you got here
We have already established that for prices to properly convey economic signals, they must represent the underlying economic reality. But prices are often actively prevented from doing so. There are three factors that affect the way prices do their job: how prices emerge, how they propagate, and the quality of the price support (money).
How prices emerge: Prices should derive from the concept of private property i.e. private money and capital, land and buildings, machinery and technology, etc. With ownership in private hands, the incentives are in place to use it effectively. The rewards for good decisions as well as the punishments for bad ones go to those who are most receptive to them. On the other hand, protecting homeowners from the consequences of bad decisions – as is the case with bailouts or subsidies – is a sure way to cripple the price system, because then prices no longer carry the weight. risk component. For a popular illustration of such moral hazard, see the film The big court.
How Prices Spread: Even if prices emerge undisturbed from the foundation of private property, price regulation can kill the signal before it spreads. During the 20th century, one of the most popular forms of price regulation was rent control. The results of the rent control are best illustrated by a popular joke by Swedish economist Assar Lindbeck, who compared its effects to the bombing of cities. Indeed, price regulation such as rent control leads to a degradation of capital; with prices kept below true market value, it is no longer worth the trouble for homeowners to repair and improve their property.
Many people are surprised when they are confronted with the idea that the manipulation of interest rates by central banks is a form of price control. But the point is that an interbank interest rate (which the central bank usually targets) is a type of price, and central banks do everything to control that price at the basis point (0.01%).
Neutrality of a monetary support: Prices do not exist in themselves; they must be expressed in terms of monetary support. The nature of the monetary unit plays a vital role in how the pricing system can do its job.
Let’s say a kilo of hazelnuts cost $ 10, but then it went down to $ 11. However, if these prices have emerged in a market economy without any government intrusion, the price growth may reflect two things: the supply of hazelnuts has decreased or the demand for hazelnuts has increased. Either way, market participants don’t particularly care about the details, as long as they register the signal of an increased shortage of hazelnuts.
But when money itself is not a neutral measure, there is a third potential cause for price growth: an increase in the money supply and the resulting dilution of purchasing power. Also known as: Inflation. The problem then is that the economic reality has not changed, so prices should not propagate a change in the signal. But with inflation, the price mechanism is distorted by noise and market participants adjust their behavior as if the signal is real.
Money with an elastic tender is like a rubber tape measure; it does not measure anything correctly because intrinsically it is subject to dynamic changes.
Currency support needs to be neutral for prices to work properly, but today’s fiat money is anything but neutral. Its supply is managed centrally by a state agency – a central bank – to achieve an arbitrarily defined target as an inflation rate on a narrow selection of consumer goods and services. The money supply of even the most stable fiat currencies is now increasing by 5-20% per year, causing chaos in the price system wherever this newly issued currency hits the economy. We have a term for some of its consequences: the Cantillon effect. But even acknowledging this barbaric effect only scratches the surface of what’s wrong with activist monetary policy today.
Fiat’s monetary policy essentially introduces a random number generator into the price system. It literally affects everything in our society: the nature of our jobs, our propensity to consume rather than save, even our culture (I recommend listening to a recent discussion between Stefan Livera and Saifedean Ammous).
The non-neutrality of monetary support is much more serious than the restriction of private property or price regulation because it is a global phenomenon. We currently have around 180 national currencies and all of them are subject to a centrally managed activist monetary policy. It is no exaggeration to say that all fiat currencies are on a hyperinflationary trajectory, where the timescale over which this occurs is the only difference.
The global nature of the fiduciary standard is perhaps the main reason why the problem of monetary neutrality is not widely recognized and addressed today, let alone by the economic profession. The case is simply that “everyone is doing it”. It is difficult to imagine a monetary medium that is not controlled by the state when such a form of money has been unknown for over 50 years now. When money is defined as “the thing the state decrees”, of course, only fiat is then recognized as money. From this point of view, all the problems of the current monetary systems could be solved by introducing more and more experimental policies like quantitative easing, pension facilities, negative interest rates, CBDCs, etc.
A result of human action, not human design
“The price system is only one of those formations that man has learned to use after having stumbled upon it without understanding it. -Hayek
The price system is the result of human action – millions of people using their property and following inducements – but not human design. Attempts to design and manage this system fail, whether they take the form of restriction of private property, direct price control, or manipulation of the fundamentals of monetary support.
It is certainly naive to believe that a significant part of humanity will grasp the importance of the price system and defend it against intervention. Much more realistic is the prospect that people who follow nothing other than their own private motives will opt out of the fiat system and choose bitcoin, as it asserts its value as a reliable store of value over the years.
Bitcoin will begin to repair the price system as it progresses in adopting a store of value to a medium of exchange. It may take a while, as people will still be incentivized to spend fiat rather than bitcoin as long as they earn their salary in fiat. But it will happen nonetheless, with pockets of fiat collapse around the world followed by ascending bitcoinizations, culminating in global hyperbitcoinization.
Bitcoin as a neutral monetary medium will allow the price system to operate undisturbed and become the superconducting information superhighway of humanity.
This is a guest article by Josef Tětek. The opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.