As a a professional research economist my first contact with crypto currency came with my ever increasing commitment to Austrian School economics over a decade ago. Always a free marketeer in the traditional classical liberal mode it was becoming increasingly obvious to me fiat currency, fractional reserve banking , politicised central banks & Keyensian theory were simply on life support systems. Politicians, main stream media & academia were the power source behind the gravity defying system in place in the western ‘democracies’.
I have been a committed gold bug since the mid 1990s, my time managing fixed interest for a major City house persuaded me protecting pension values by investment expertise was not enough. It is not possible to keep up with the planned degradation of fiat currencies in a political environment committed to inflation whilst at the same time facilitating controlled deception of its impact. Pensions in the private sector cannot be spoofed for ever, people retire & have to be paid. In Britain today private sector pension funds are on average underfunded by thirty percent. The public sector is of course underwritten by the tax payer, so the great index linked jamboree continues, but that is not my beef today.
Shadow Stats & the Chapwood research teams argue real inflation is circa 9%, not the 2% targeted by governments. Inflation is a tricky thing to measure, the undergraduate faces a different rate than the middle aged professional man, the old age pensioner fights a lone battle of quiet desperation in a totally separate bubble. The middle class public sector worker & pensioner are ring fenced, a natural result of being part of the same remuneration dynamic as politicians & civil servants, one thing is sure, we are not ‘all in this together’.
The Austrian School economist knows inflation means an explosion in money supply. It is a monetary phenomenon, the media & politicians regard inflation as the rise in prices as determined by the State in their basket of goods & services, (CPI). Acceleration in the quantity of money via the financial system gives rise to the Cantillon effect, a natural result of which is those first receivers of money can apportion it before it has become degraded by its increase. The effect of this situation is whilst white goods, flat screen TV, mobile ‘phone prices & such have remained subdued through productivity increases & technology advances, the price of houses are outside all but the very wealthy or highly paid. Investment instruments are similarly inflated, bonds & equities in particular. Even allowing Shadow Stats & Chapwood to be way off the mark (which I don’t believe) investment grade bonds yielding one percent in an inflationary environment of five percent is unsustainable. Long term loss on investment is built in, guaranteed, undenied by the issuer !
Where can the investor run? Gold is the primary refuge. But no Austrian School economists would agree gold is an investment. Gold is money. Proven over 5000 years. A 1905 gold sovereign will buy you today pretty much exactly what it will buy you when it was minted. The US Dollar has been degraded against gold by over 90% since the abandonment of the gold standard in 1971.
Let me then turn to crypto & digital currency, of which all Austrian School economists are sympathetic. Today fiat currencies are digital. That mortgage or car loan which you take out at the bank is digital. It manifests itself as you sign the agreement. It does not exist, it simply appears. My aide memoire Magic of Banking explains the workings, not the point of this article. But the mere fact that a relatively junior bank clerk can invent money shows how fragile the system is. It proves how ephemeral is the concept of your deposit. It can disappear with equal simplicity. Here today, gone tomorrow. Gone in a decade by design. The western world is run for the benefit of the creditor not the saver.
Money must be a store of value, if it is not this it is not money. It must fit with the concept of time preference or why would one hold it?
So digital currency as it is today is flawed. The great reset of which we hear, with its new concept of traceability is yet another faux monetary system. The Austrian School economist denies the right of the State any role in money. It is why we are mostly gold bugs. Other than outright theft it is beyond their control. It is therefore a genuine store of value.
Let me return to crypto currency. My fellow Austrian School chums, Claudio Grass, Pat Barron, Lew Rockwell, Jeffrey Tucker are all sympathetic to crypto currency to varying extents. The keystone of that sympathy is the contempt of politicians, academia, MSM & the manipulation of private citizens money. It is in our DNA.
For years I have been asked about crypto currencies in universities where I have been invited to speak on Libertarianism. (Always by undergraduates, often banned at the last minute by student unions &/or the faculty). My response has always been that I am not equipped to comment, sympathetic in principle but I like to stick to what I know.
Clearly if the Fed & probably BoE & ECB are considering crypto currencies, presumably with a view to hijacking the concept with criminal intent (reset) I must bring myself up to speed. I have therefore put my toe in the water. A very interesting experience thus far.
This is but part one of my steep learning curve on the logistics but not the principle which i have been observing since its inception. An appeal for cooperation from the crypto community has met with a massive informative response. I now have a wallet containing bitcoin! Let me make something clear. I am not a Damascene convert to bitcoin, because I have never been hostile to it. But I have a heavily overweight precious metal portfolio which must be diversified. I do not accept the understandable but somewhat naive evangelical crypto belief hypothesis that somehow it is gold v bitcoin. They are complimentary, portfolio percentages are for the individual.
Bitcoin is new, gold has been around for thousands of years, but paper money came about because gold comes with logistical baggage, it still does. Bitcoin is highly volatile for cash as an asset class, less so if it were stabled with equities. Where does it fit? Money must be available for international settlements, crypto is totally designed for this. Yet money for it to be modern real money, or a medium of exchange if you prefer, must be internationally acceptable, in 1971 the petro dollar took centre stage, but of course it was & is a political currency it failed at the first fence for the Austrian School economist. Bitcoin cannot be degraded because the supply is finite. (Gold supply is not finite but is close when you crunch the numbers).
My colleague Patrick is both a bitcoin holder & my techie partner, but I must be very frank, without him the purchase would never have been made. Bitcoiners will leap up & down in denial but I have checked amongst many old clients & friends, most gave up or enlisted grandchildren to do it. Some of the well meant advice to help me to my purchase from experienced bitcoiners might as well have been written in Serbo Croat. I want gold sovereigns I phone my dealer, buy them on my card & they arrive the next day. I can spend them in New York, Sydney, Hong Kong or Toronto with a very simple process. I can sell a small number in any Yorkshire market town at spot less 3% at most.
I am very new to the logistics, not new but still not anywhere near expert on crypto. But money in most banks is at more risk to the average citizen than under his pillow. Nearly all banks are broke, either they or bankrupt governments will steal your money sooner or later. I have a good handle on how to stop them stealing my gold, but I am not yet sure about the security of bitcoin against a determined kleptocracy as are most States. I continue my voyage of discovery.
Godfrey Bloom was a City fixed interest prize winning fund manager & sat on the EU Parliamentary Economic & Monetary Affairs committee for five years.
The Goodnight Vienna Audio file