Cryptomania Part1- The US Financial System
Warning: This article may contain information you find alarming, disturbing and you wish you would have read after your Christmas shopping.
In 2018, the financial industry in the US was responsible for almost 40% of all corporate profits and the US financial system is still the most influential in the world. So, it makes sense to have a closer look at the US financial system in our quest to assess Bitcoin as a possible investment and even a currency. It was Alexander Hamilton who set the foundation for a strong financial and banking system which developed into something good over the years. So good, that on July 1st 1944, at a meeting of 44 nations in Bretton Woods New Hampshire, the US dollar was declared as the currency of the world. The ‘Bretton Woods System’ assured that each country established a par value in relation to the US dollar. This was possible because back then, the US dollar was as good as gold and pegged at $35 per ounce. It took almost 15 years to have the system operating but by then it started already to fail. Nixon is often blamed for abolishing the gold standard which was the foundation of the Bretton Woods System. But as so often, presidents don’t really make decisions, they just announce them. The system ultimately failed because important players, led by the US, didn’t follow the rules. The ballooning cost of the Vietnam War and the Race to the Moon had the US Treasury Department print much more money, than there was gold to back it up and countries grew suspicious of that. The US had to react to prevent an unprecedented outflow of gold. The Bretton Woods System was good and some aspects of it are still alive. The abolishing of the gold standard was supposed to be temporary (just like our GST I guess) and many, including former President Trump have demanded the re-implementation of it. While this is not impossible, it is somewhat unrealistic, especially for the US.
After abolishing the gold standard, we now have FIAT currencies. Paper or digital money that is backed by nothing but government promises. Money is now worth whatever the government tells us. That of course is a huge problem and has been destroying economies. One of the problems is that countries devaluate (manipulate) their currency to be a more desirable trading partner. China is a great example for that but is not alone. The US Treasury has been able to borrow and spend whatever they want. If the US government needs money, they create a loan with the Federal Reserve. They then print the money for the loan and receive an IOU from the Treasury. These IOU’s are called Government Bonds and sold at auctions to Central Banks around the world, Pension Funds, Wall Street and individuals. Everyone who buys these bonds is basically lending money to the US government. The US government then pays their bills with that money and pays off previous loans. It’s like somebody constantly obtaining new credit cards to pay off the old credit cards. Other countries sell goods to the US in exchange for US dollars and then use these US dollars to buy more of these government bonds. So, for the US economy to function, countries must be willing to loan more and more money to the US. The federal reserve system is like a ponzi scheme which has global proportions and the borrowed money can never be paid back. In 2008, the whole concept came almost to a crashing halt and the problems that led to the 2008 financial crisis have not been fixed.
The US has always been very creative in finding new ways to kick the can down the road and this has been going on for a long time. I don’t think that there is reason to panic. At this point countries are still more than willing to lend more money to the US and buy more of these bonds. Personally, I am much more concerned about politicians and other forces trying to gain popularity by blaming other countries for the arising problems within the US, like the rapidly increasing wealth gap. The impression that everyone is ripping off the US has become quite popular, as ironic that is.
So, may be the abuse and unsustainability of the current financial system got you interested in why more and more people see value in other things, like Bitcoin. In Cryptomania-Part2 we will look at that value Bitcoin could bring to the table.
Falk Hampel
