As Global Trust Ends, Nations Adopt Bitcoin – Bitcoin Magazine
This is an opinion editorial by Ansel Lindner, a bitcoin and financial market researcher and host of the “Bitcoin & Markets” and “Fed Watch” podcasts.
Two forces have dominated the globe economically and politically for the past 75 years: globalization and trust-based money. However, the time for both of these forces has passed, and their decline will lead to a major reset of the global order.
But this is not the global, Marxist type of Great Reset promoted by Klaus Schwab and those attending Davos. This is an emerging, market-driven reset characterized by a multipolar world and a new monetary system.
Globalization is coming to an end
The first reaction I usually get to my claim that the age of hyperglobalization is coming to an end is flippant disbelief. People have so completely integrated the environment of the dying global order into their economic understanding that they cannot fathom a world where the cost-benefit analysis of globalization is different. Even after COVID-19 exposed the fragility of complex supply chains, like when the US almost ran out of surgical masks and basic medicines or when the world struggled to find semiconductors, people have yet to realize the shift that is happening.
Is it so hard to imagine that the businessmen who designed such fragile, overcomplicated production processes did not properly weigh the risks?
All it takes to break globalization is for risk-adjusted costs to change a few percentage points and outweigh the benefits. The money saved by outsourcing a variety of tasks to a variety of jurisdictions will no longer outweigh the possibility of the complete collapse of supply chains.
These concerns about fragile supply chains did not go away when dire COVID-19 policies ended. Now they have moved on to worries about trade wars and real wars. US trade sanctions against China, the Russian conflict with NATO proxy Ukraine and subsequent sanctions, the US’s apparently erratic position on Taiwan, the coronation of Xi Jinping and his Marxist revival, the Nord Stream sabotage, the clear division of international consensus at the UN and even the arming of these international institutions, and finally, the Turkish ground offensive against the Kurds – all these things should be interpreted as an increase in costs.
Gone are the days when complex supply chains were resilient against typical risks. The risk today is much more systemic. Sure, there were skirmishes around the world and disagreements between parliaments, but great powers did not openly threaten each other’s spheres of influence. The risk-adjusted costs and benefits of globalization have changed radically.
Credit does not like conflict
Very closely linked to the deglobalization of supply chains is the deglobalization of credit markets. The same factors that affect businesspeople’s physical, risk-adjusted costs and benefits are also felt by bankers.
The banks do not want to be exposed to the risk of war or sanctions that destroy the borrowers. In the current environment of deglobalization and increasing risks for international trade, the banks will naturally withdraw from lending for the associated activities. Instead, the banks will finance safer projects, probably fully domestic or peer support opportunities. The banks’ natural reaction to this risky global environment will be credit contraction.
The deglobalization of supply chains and credit will be as closely linked on the way down as on the way up. It starts slowly but picks up speed. A feedback loop with increasing risk that leads to shorter supply chains and less credit creation.
The credit-based US dollar
The prevailing form of money in the world is the credit-based US dollar. Every dollar is created through debt, making every dollar someone else’s debt. Money is printed out of thin air in the process of making a loan.
This is different from pure fiat money. When fiat money is printed, the balance of the printer adds to assets alone. But in a credit-based system, when money is printed in a loan, the printer creates an asset and a responsibility. The borrower’s balance sheet then has an offsetting liability and an asset, respectively. Each dollar (or euro or yen, for that matter) is therefore an asset and a liability, and the loan that created that dollar is both an asset and a liability.
This system works extremely well if two factors are present. One, highly productive use of new credit is available, and two, a relative lack of exogenous shocks to the global economy. Change one of these things and a breakdown is bound to happen.
This dual nature of credit-based money is at the root of both the spectacular rise of the dollar in the 20th century and the coming monetary reset. As global trust and supply chains break down, hoarding assets in banks becomes riskier. Russia found this out the hard way when the West confiscated its reserves of dollars held in banks abroad. How is trust possible in such an environment? When credit based money creation is based on trust… Houston, we have a problem.
Bitcoin’s role in the future
Fortunately, we have experience with a world that doesn’t trust itself – i.e. all of human history before 1945. Back then we were on a gold standard for reasons that included all those that bitcoiners are very familiar with (gold scores) high in the attributes that serve well money), but also because it minimized trust between great powers.
Gold lost its mantle for one reason – and you’ve probably never heard this anywhere before: because the post-World War II global economic, political and innovation environment created an extremely fertile ground for credit. Trust was easy, the great powers were humiliated and everyone joined the new international institutions under the US security umbrella. The Iron Curtain provided a strong separation between confidence zones economically, but after it fell, there was a period of about 20 years when the world sang “kumbaya” because new credit was still extremely productive in the old Soviet bloc and China.
Today we face the opposite kind of scenario: Global confidence is eroding and credit has exploited all the productive low-hanging fruit, forcing us into a period that calls for neutral money.
The world will soon find itself divided between regions/alliances of influence. A British bank will trust an American bank, where a Chinese bank will not. To bridge this gap, we need money that everyone can hold and respect.
Gold vs. Bitcoin
Gold would be the first choice here, if not for bitcoin. This is because gold has several disadvantages. First, gold is mainly owned by the groups that are losing trust in each other, namely the world governments. Much of the gold is held in the United States. Therefore, gold is unevenly distributed.
Second, the physical nature of gold, once a positive hold that kept corrupt governments in check, is now a weakness because it cannot be transported or analyzed nearly as efficiently as bitcoin.
Finally, gold is not programmable. Bitcoin is a neutral, decentralized protocol that can be used for a number of innovations. The Lightning Network and sidechains are just two examples of how Bitcoin can be programmed to increase utility.
As the globalization of both trade and credit breaks down, the economic environment favors a return to a form of money that does not rely on trust between major powers. Bitcoin is the modern answer.
This is a guest post by Ansel Lindner. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
