As some of the smartest individuals to ever walk this earth go out of their way to innovate and improve technology by leaps and bounds, the world is on the precipice of a great monetary renegotiation that is only set to accelerate in the months ahead.
Indeed, technology is a deflationary tool on many of our goods and services. Decades ago, music albums were released on CDs which sold for $20 each. Fast forward to today and customers either buy music off iTunes for half the price or use all-access subscriptions services like Spotify to the same effect. This is the case despite the accelerated currency debasement we’ve seen over the past decades.
The same can be said of various industries, whether it’s food, clothing or other goods and services. Essentially, the digitalisation of these processes have increased efficiency while bringing down the cost of production, as innovators looked to apply technology to do more with less.
In the years following the 2008 financial crisis, however, currency debasement accelerated and concerns of money devaluation started becoming more pronounced with 2020 being the year where such worries peaked their way into mainstream consciousness. As covid-19 measures shut down entire economies and brought everything to a standstill, the very life-blood of a functioning society suddenly came under threat as people adapted to a new situation.
To attempt to mitigate this problem, central banks continued to print money, with trillions entering circulation through various means but largely via financial markets. However, the frightening reality of this monetary expansion is only truly appreciated when seen in the context of the last 40 years. Indeed, one can see that gradient is fairly steady until you get to 2008. After that crisis, there’s a sudden exponential expansion of the money supply, such that 25% of the entire increase over the last 40 years was produced in the last four months alone. The same is true of every other debt-based economy.
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The rationale central bankers use for such monetary expansion revolves around the idea that a central authority must perform a balancing act between inflationary targets and economic growth. To do this, US central bankers look at the consumer price index, or CPI, which essentially shows the cost an average citizen pays for common purchases, based on an array of products and services condensed into one number.
Now, while certain products and services are becoming less expensive due to innovation and efficiency and eventual obsolescence (like CDs), US central bankers think they can raise inflation based on CPI figures when in fact, such basic goods and services should become cheaper, not stay the same with innovation.
In effect, central banks are swimming against the tide and trying to get a 2% inflation figure on a basket of goods that are deflationary, and until money is taken outside their control, this is unlikely to happen, partly due to misaligned incentives in debt-based economies.
Amidst money printing and lock down procedures this year, the public has seen a rapid surge in prices for assets and services which exist in limited quantities, such as certain property, precious metals, collectibles and bitcoin. These rising prices stem from currency devaluation and is a reflection of the market pricing in this reality.
However, inflation benefits debt-based economies, because if the money is worthless then the debt is also worthless. This perpetuates the incentive problem and hurts economies. Every government works on the same system, but with bitcoin technology, the great monetary renegotiation is coming at lightning speed. As an individual, all this boils down to the simple fact that the only real way to protect (and multiply) your wealth is by sticking it in high value assets, i.e., limited and useful assets which people will compete for during this cycle.
In 2020, several mainstream entities anticipated this great monetary renegotiated, allocating capital in various markets which have stood the test of time. MicroStrategy’s move into bitcoin and Warren Buffett’s open exposure to gold are a testament to this shift, among other bitcoin advocates like Paul Tudor Jones and a growing list of reputable firms and individuals.
This sets a precedent for others to follow as mainstream institutions pile into bitcoin, whether as an inflationary hedge or in recognition of bitcoin as a never-seen-before technology (or both).
Indeed, the great monetary renegotiation is already underway and while the incumbent winners are already palpable obvious, this negotiation has only just begun.
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