AN OPEN LETTER TO GOVERNMENTS: HOW TO FIX THE MESS YOU CREATED IN OUR GLOBAL FINANCIAL SYSTEM By Itoko Mirai
PART 1: STATUS OF OUR CURRENT SYSTEM
Dear governments and central banks around the world –
Our financial system is messed up. It is unrepairable. Your greed for power led us to a pathetic situation and you probably wonder if there is any feasible way out. In this article, I will review how we got here, and then explain why you should see cryptocurrencies as your savior instead of a threat. And the sooner you embrace it, the better it is for everybody, including you. I will also write it in a language that the average citizen can understand.
There are many culprits for the current dire situation, but the two main drivers are the reliance on fractional reserve banking and fiat currencies. Fractional reserve banking (FRB) allows banks to create money out of thin air. Essentially, for every dollar that is deposited into a bank, the bank can create nine dollars out of nothing. The bank can now lend up to ten times what a customer deposited. Thus, for every ten dollars a customer deposits, the bank only holds one dollar while the other nine dollars are lent to other customers, who may pay them back to the bank. Or sometimes not. So, when citizens deposit money into a bank, they mistakenly believe that the bank “holds” their money. This is completely false. The bank merely has an obligation (liability) to the customer, but the money now belongs to the bank (as an asset).
The system works well as long as there are no crises. In absence of defaults and threats, banks are able to honor customer withdraws. In other words, banks are “solvent”. But, as we have seen throughout history (most recently in Greece a few years ago), when credibility crisis hit, everybody wants their money at the same time, generating “bank runs”. Then banks say “sorry, we only have a fraction of your money” – we are “insolvent” and unable to meet our obligations.
Fiat currencies, which are essentially currencies created solely by governments, compound the problem. You see, just like people, governments need discipline to prevent bad behavior. Centuries ago, we used precious metals (mostly gold & silver) as money. These metals have a somewhat limited supply – i.e. you can mine them, but there is an increasing cost & difficult associated to increase supply. Hence, even if governments wanted to “create” more gold & silver, they could do so only in a limited way.
In the last few centuries, paper money attached to gold was introduced. It was way more convenient to carry around a piece of paper than heavy metals. People could take paper money to a bank and exchange it for a certain weight of gold. But for nearly half a century now, this “gold standard” was extinguished. The Dollar, Euro, Yen and every other national currency are now backed solely by “full faith and credit of a government”. But what happens when governments are broken? Do people still trust the “full faith and credit” of a broken government? You see, money is essentially TRUST. It is a language and technology to communicate value. Central banks should adhere to the task of not “debasing” their currency- i.e. not printing more money out of thin air.
As we can see throughout history, this trust is repeatedly breached, since governments just cannot resist the temptation to print money to finance their irrational spending (and wars). Additionally, central banking seems a very communist concept where the economy is being centrally controlled by bureaucrats, who are keener to attend to their own interests over the public interest.
When governments print money, they consequently decrease the purchasing power of every single unit already in circulation. In fact, for the past hundred years, the dollar – which is currently the world reserve currency – has lost approximately 98% of its value. Most fiat currencies have lost even more. So, now you have lawyers, doctors, plumbers, and other professionals worried about learning how to invest in order to protect their hard earned money from being devalued by inflation.
Moreover, governments’’ revenues are almost always insufficient to cover expenses; hence our governments run deficits year after year, increasing the debt. This happens with virtually every government around the globe, and it only gets worse. In the USA alone, the government deficit went from about USD 8 trillion to USD 21 trillion the past decade alone. It now sits at over 110% of the USA GDP. In fact, the USA GDP went from $16 trillion to $18 trillion in ten years. Hence, to fund every one dollar of GDP growth, debt increased by five dollars. It is quickly becoming impossible to service this debt (even with low interest rates); let alone ever pay or reduce it. In fact, the debt is only expected to increase in the near future.
Here is an analogy: a family earns $60K/year, spends $80K/year and is already in debt for $100K. Next year, they will earn $62K/year, but will increase their expenses even more, to let’s say $70K/year. And they still need to service their increasing debt. How can this be sustainable over the long term? Isn’t a default just a matter of time?
Again, this applies not only to the USA, but to virtually every country. Now, politicians only care for the short term and will always transfer the problem to the next in office. Not only politicians intrinsically lack the motivation to solve this problem, they are in fact incentivized to make it as bad as possible. It is an architectural problem with our governance system. We are now quickly approaching a point where this illusion cannot be hidden any longer. The public is quickly learning that foundations of our global economy are about to implode.
2: A (MUCH) SUPERIOR FINANCIAL SYSTEM EMERGES
In the first part, we learned that governments (1) use banks to create money out of “thin air” through fractional reserve banking; and (2) use “fiat” currencies to print “out of thin air” as much money as they please, when they please. It is a whole lot of money creation out of thin air!
We also learned that money is essentially TRUST. And the trust that people placed in governments has been abused multiple times, and it is now quickly eroding again, especially among younger generations. As more people inevitably learn how the system is corrupt, a global crisis is imminent. A new monetary system will inevitably emerge.
As we saw, gold was effective in keeping governments relatively honest, since the supply was hard & costly to increase. In fact, during the “golden era”, the amount of progress and wealth generated was arguably the highest in human history.
Now, let’s imagine that we can engineer a monetary system from scratch. What attributes should the ideal system have? Here is an idea:
1) Sovereign from external influence: nobody (especially not corrupt governments) should be able to control the money. Remember that power corrupts, and absolute power corrupts absolutely.
2) Limited supply: The supply should be transparent, predictable and IMMUTABLE by design. IMPOSSIBLE to tamper.
3) Censorship resistant & permissionless: Nobody should be able to dictate who can or cannot use the system. Everybody who WANTS should be able to join & exit the system, but NOBODY should be FORCED to use it.
4) Fast & cheap to transact: self-explanatory.
5) Other traditional money attributes: must be widely accepted (ideally globally), easily transported, durable over a long time, one unit must have always the same value of another unit (e.g. one dollar cannot be more valuable than another dollar), divisible (e.g. distinct dollar bills and coins denominations), recognizable, and convenient.
Well, a few cryptocurrencies, more specifically Bitcoin, offers exactly this. They are engineered digital money with attributes that are simply orders of magnitudes superior to fiat currencies and precious metals. In fact, their design was inspired by precious metals supply. Besides solving the sins of the current monetary system – especially fractional reserve banking and inflation of the money supply – they also offer new possibilities that are just not possible to imagine today, since they are also programmable money.
Now, as a government I know what you are thinking. You are afraid of this new system. It is too new, too dangerous. And I would agree. It is really hard to separate signal from noise. The amount of FUD (fear, uncertainty and doubt) that surrounds the cryptocurrency space is overwhelming. Hence, I suggest you dig deep (I will point you to some resources later), learn about money and cryptocurrencies, and then arrive at your own conclusions.
I can assure you that the vast majority of the people who truly understand the technology and economics believe that crypto is a superior system to the fiat money system we currently have. You will learn that many of the criticisms to crypto (e.g. excessive energy consumption) are correct, but not as bad as portrayed.
For instance, “Crypto is only used by criminals” is false. Fiat currency, more specifically the US Dollar, is the preferred currency of criminals. Cryptocurrencies are only a tool, and bad people use it for bad things, just like they use the internet for bad things. Most people use it for good and legitimate purposes.
“The crypto-space is full of scams” is true. Most coins are either outrights scams or unintentional scams. “Crypto is hard to use and to secure” is also true. “Crypto is too hard to understand” is also true, since it is a multi-disciplinary subject involving computer science, economics, game theory, history, and psychology. “It is too volatile” is also true, since adoption of something so disruptive just cannot be linear.
Other criticisms are in fact not bugs, but features. For instance, “nobody controls it” is a feature – and not a bug – precisely because this decentralized system prevents the system to be taken over by a group of corrupt self-interested people.
The crypto system is a voluntary system. Unlike the fiat government system that forces you to use their currency, in crypto you only use if you want it. And you do not need to obtain any permission – everybody can use it by downloading free software to their phones/computers. It is impossible to destruct since there is no central point of failure, no person or group responsible for running it. And, by design, it resides outside the current fiat system; it is parallel to it, and hence immune to its flaws. It is simply a superior system.
PART 3: HOW GOVERNMENTS CAN LEVERAGE CRYPTO TO THEIR ADVANTAGE
In part 1, we learned how fractional reserve banking and fiat currencies created by government created a financial system that is unsustainable and soon to implode. In part 2, we learned that a few cryptocurrencies offer us a parallel system, outside the current fragile fiat system. Now, we will argue that governments are probably better off by embracing this new crypto-system rather sooner.
As we saw, Bitcoin (and a few other cryptocurrencies) is “hard” money. By design, it is protected from external tampering, since its supply is embedded into the mathematical software code and nobody can ever change it. Gold is also “somewhat hard” money, since its supply can only increase through the costly and difficult process of mining.
On the other hand, fiat money is “easy” (or “soft”) money since central banks can create more money solely at their will. In fact, fiat money is one of the “easiest” moneys ever created in the history of mankind, while Bitcoin is the “hardest” form of money ever created. And history shows us that, over time, people will repeatedly adopt “hard” money over “easy” money. That was exactly why gold was adopted and is still valued today.
While fiat money inflation varies across countries, gold inflation is currently less than 2% per year. Bitcoin inflation rate is currently less than 6% per year, will decrease to 3% in 2020, and then halves every four years. The maximum supply is capped at 21 million bitcoin. This is embedded in the code and is immutable by design.
Hence, I understand governments are afraid of crypto since it disrupts their control of money. But, let’s admit that your system will implode soon, maybe in just a couple more years. You are already in overtime, you have no choice. Just look at Venezuela, Greece and other countries to learn what happens when people lose trust in their government.
In the beginning, just a subset of the population adopts “hard” money and let go of the “easy” money. This is happening now where young, tech-savvy, ivy-league educated professionals are driving adoption. Others will follow and crypto adoption will grow in a process that happens gradually at first, and then suddenly.
Furthermore, time is ticking and countries will compete to adopt the “hardest” money. By now, all countries already know that virtually all governments are at the cusp of insolvency –i.e. unable to honor their financial obligations. Adopting “hard” money will be the most honorable way to “reset” this system (you might also need to partially default on your obligations). The longer you wait, the bigger the “reset” will be.
Now, you also run the risk of having another country pull a “Bretton-Woods” on you. This means that by adopting “hard” money before you do, other countries may gain a significant geopolitical and economical advantage.
Hence, to recap, it is a chess game and it is not looking good for you. Fighting crypto is useless because, just like gravity, it cannot be killed; even if you have the “authority” to regulate it, you lack the “ability” to kill it. Sure, you can create obstacles by banning/regulating the crypto-to/from-fiat exchanges, but you cannot destroy the software; just like media companies could not stop music from being distributed on the internet. This is a fight that you cannot win and any action to make it more difficult will simply further validate the need for this new system. Also, there will be a race among countries to adopt “hard” money, since early movers will reap benefits, while followers will suffer.
Thus, governments have limited time to replace the failing fiat system while Bitcoin can wait forever. In other words, governments desperately need Bitcoin, while Bitcoin needs nothing– it simply exists. You know who wins when you are fragile and the other one is anti-fragile. I’d suggest you make friends with it…
Uninformed people claim that Bitcoin is a bubble – it is not. Bitcoin is simply math embedded into code. It is reliable, immutable and trustable. The real bubble is the current fiat system which it is orders of magnitude higher – the value of all crypto is around USD 100 billion, while global debt is around USD 250 trillion (this is over 300% of global annual Gross Domestic Product). Bitcoin is merely the pin and the potential savior for this irresponsible fraudulent system.
As a reminder, just a few centuries ago, church and state were commingled. Today, most civilized nations would agree that separating church and state was beneficial. It is now time to separate money and state. I’d suggest you, governments, drive this process and try to look good while doing it, because it will happen regardless of your desire. Now, it is your move!
PART 4: MY MOTIVATION TO WRITE THIS OPEN LETTER
In writing this article, I have simplified some concepts. And to be honest, I have negligible hope that governments will consider my argument. It is more logical to imagine that governments will continue to expand until they explode, creating global collapse that they will be unable to control.
I have ZERO INTEREST in convincing anyone to adopt Bitcoin & crypto. My goal is simply to alert the average citizen and prompt them do their own research – one simply cannot appreciate Bitcoin until they understand financial systems. People should arrive at their own conclusions and then act accordingly. Henry Ford smartly said it a century ago: “If people knew how our financial system really works, there would be a revolution tomorrow morning!”
The financial future of an individual is too important to be left in the hands of corrupt governments. If citizens want, they should be able to take control of their financial sovereignty. If they end up broke, they only have themselves to blame. I imagine that, in a few decades, future generations will laugh at us because we allowed government to control our money. This idea will soon be inconceivable.
Even if cryptocurrencies eventually fails in unforeseen ways, they will have a perennial merit of exposing the flaws of the current financial system. Instead of watching Netflix every night, people need to learn about money and central banks. They should ask questions, for instance, who owns the Federal Reserve in the USA (hint: it is not Federal), why does it exist, how it was created? Is it in our best interest to have one centralized entity in control of our money? How can we do better? Just keep in mind that virtually the whole world has a similar system. Learn about Keynesianism and the Austrian School of Economics.
As we learned, money is essentially trust. Going forward, every person will need to decide whether they will prefer to trust governments – i.e. other people deciding what is in YOUR best financial interest – or whether they prefer to trust software code, that is transparent, and immutable by design.
We are about to experience an unprecedented wealth transfer: from the old – who tend to venerate the current political system – to the young – who are often unable to articulate their reasoning, but simply distrust the establishment; from the tech-challenged to the tech-savvy; from slow corporations & governments to individuals and nimble start-ups; from the corrupts – who believe in centralization of control & power – to the honest citizens who choose to trust computer code over a group of human beings.
More importantly, if you do not like this new economic system, you are free to never use it. You may continue to use the inferior “easy” fiat money that governments impose on you. Just note that you should be free to choose! Both systems will likely co-exist for many decades, eventually forever. Someone put crypto like this: “Unlike bank deposits, you own it with no middleman. Unlike bank deposits you spend it peer to peer with no middleman. Unlike fiat, the supply is fixed. It resides outside the current fiat system. If you are pro-freedom, you just cannot be against Bitcoin!”
Finally, I urge people to separate signal from noise. Remember that cryptocurrencies challenges the very top of the global power pyramid. Thus, bear in mind that crypto has plenty of powerful enemies. Crypto has been and will be attacked in all fronts – technological, economical, psychological, etc. Thus, if you hear someone talking badly about cryptocurrencies, please find out their motivation. Also, I suspect that bad actors are infiltrated all over the system and are intermittently “pumping and dumping” the crypto market just to create FUD (fear, uncertainty and doubt) and delay the inevitable adoption of a superior system based on the “hardest money ever created”.
THE FUTURE OF MONEY HAS ALREADY ARRIVED; IT IS JUST NOT EVENLY DISTRIBUTED YET!
PS: If you want to learn more, a good starting point is learning from Andreas Antonopoulos and Saifedean Ammous. Their content is invaluable and will also point you to additional resources. It is a long journey, but a critical one if you want to control your future financial well-being.
Nothing is this article is financial advice. You must do your research and seek professional investment advice.
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