There is a world of difference between saving Bitcoin and investing in financial assets, and individuals do not need to worry about increasing their money.
The original text of this article was published in two parts. For the first part, please read: ” Escape from the “Hamster Cage” of Inflation: Bitcoin Makes Savings Savings “
Original title: “View | Bitcoin: Let Saving Become Saving (Part 2)”
Written by: Parker Lewis
Translation: Ajian
Forcing everyone to live in a world where the value of money is constantly diluting, creating a deteriorating and intensifying feedback loop; when savings money cannot be a winner anyway, all the results become more negative overall. When currencies continue to lose value, simply holding currencies becomes an unreliable strategy. People are still doing this, but they are definitely losers by doing so. This is why perpetual risk-taking becomes a (reluctant) substitute for savings. Essentially, when no one can win by saving money, everyone is a loser. Because everyone has taken the risk when they want to get currency. Positive incentives for saving are not the same as rewarding people who are unwilling to take risks, but the opposite. This is to reward those who have already taken the risk, so that they can only hold currency, because there will be no promise that the purchasing power of currency will depreciate in the future.
In a free market, the value of currency may rise or fall within a certain period of time, but _clear promise_ currency will depreciate creates an extremely negative result, that is, most participants in the economy will lose Savings. Because the currency will shrink, that opportunity cost makes people’s behavior a one-way street. Spend the money now, because tomorrow it can buy fewer things. The idea of holding cash (also known as “savings”) has been regarded as an almost crazy stance in the mainstream financial world, because everyone knows that currencies will depreciate. But who is crazy? Although currency is used for the value of savings, there is no willingness to hold it now, because the mainstream currencies that everyone uses today behave just the opposite! If you can’t find a better currency, everyone can only use investment instead!
“I still believe that compared to other alternatives, especially those that can maintain value or even appreciate in the period of reinflation, cash is rubbish.”
——Ray Dalio (April 2020)
Even the most qualified Wall Street investor may get confused and act like a fool. Taking risks because of inflation is not much better than buying a lottery ticket, but this is the result of curbing the motivation to save. When monetary economic incentives are broken, opportunity costs are difficult to measure and estimate. But today, people have learned well. Investment decisions and purchases of financial assets are made only because the dollar is expected to depreciate. The result will not just stop at saving and investment. Every economic decision will be affected, because money can no longer achieve its original goal of storing value. All spending and saving decisions, including daily consumption, will be affected.
If a more obvious opportunity cost is reintroduced to the spending currency (that is, if there is an incentive to save), everyone’s risk calculation will inevitably change. Economic decision-making will become more sensitive, because currency can satisfy the function of value preservation. As long as the value of the monetary medium has reliable expectations and can at least maintain the value (not to mention appreciation), every expenditure-saving decision will become more precise, and ultimately can be guided by a better, incentive-compatible structure .
“The biggest mistake in evaluating a policy is to just look at whether it is out of good intentions, and not what results it produces.”
—— Milton Friedman
Keynesian economists often worry that if there is an incentive to save, there will be no investment. This leaky theory says that if people have incentives to “hoard” money, no one will be willing to spend money, so even “necessary” investments will not happen. If no one spends money and no one is willing to make risky investments, the unemployment rate will rise! This is completely a theory that was imaginary in the classroom; the reality is the opposite of what the Keynesians thought. In a world where savings are incentivized, risks will also be taken.
Not only that, but the quality of investment will be higher, because both consumption and investment can benefit from undistorted price signals, and in a free market, the opportunity cost of spending money can be priced more clearly. When all spending decisions are considered under the expectation that the purchasing power of the currency may rise in the future, investment will be directed to the most productive activities, and daily consumption will undergo more stringent consideration.
On the contrary, if investment decisions are made without wanting to hold U.S. dollars, the result is financialization. Similarly, when consumer preferences are affected by expectations of currency devaluation, investment will also be directed to cater to these distorted preferences. In the end, short-term incentives will defeat long-term incentives, people who have already entered the circle will be more popular than newcomers, the economy will stagnate, and the same will promote financialization, centralization and financial engineering instead of productive investment. This is the cause and effect; intentional behavior produces unexpected but predictable results.
Let the currency depreciate and people will do stupid things, because the cost of doing stupid things is lower. People used to save, but now they have to take more risks, because savings will depreciate. In such a world, savings are also polluted by financialization. And when people are motivated not to save, not many people will save soon. Don’t be surprised. The empirical evidence just proves this point. Whether a professor of economics with a tenure faculty position will be surprised (completely predictable), the lack of savings caused by the absence of savings incentives is the main source of the inherent fragility of the traditional financial system.
The paradox of fixed monetary aggregates
Insufficient savings and economic instability come from the distorted incentives of the underlying currency, and this is the principle problem that Bitcoin wants to solve. After the possibility of currency depreciation is eliminated, the broken incentive measures will return to a compatible state; only the upper limit of the total amount is sufficient to reverse the trend of financialization. Although each bitcoin can be divided into 100 million units (that is, 8 digits after the decimal point), the upper limit of the nominal number of bitcoins is 21 million. Bitcoin can be divided into smaller and smaller units, allowing more and more people to accept it as a currency standard, but no one can arbitrarily issue additional Bitcoin.
Consider an extreme situation where all 21 million bitcoins are in circulation: technically, it is impossible for people to save more than 21 million bitcoins, but the result is 100% of all bitcoins are in savings-held bitcoins at that time Someone saver. Bitcoin (including scattered money) will continue to transfer between individuals, companies and companies, but the total supply is constant (and completely inelastic).
By creating a world with a fixed amount of money (the amount that can be saved will not be more or less), personal savings incentives and emotions will rise. This is a paradox: if there is no more money in total to save, the individual’s willingness to save will rise. On the surface, it seems to be just an answer to the old saying that people value scarce things. But in fact, a better explanation should be this: Only when saving is good, people will save, even if the amount that can be saved is capped. Moreover, when someone wants to save, someone else must be willing to spend their existing savings.
In any case, all consumption and investment come from savings; the incentive for savings creates savers, and in turn, more savers give people more tools to consume and invest. From an individual perspective, if a person expects the purchasing power of a currency unit to increase, the TA may rationally postpone his consumption and investment (please note that the key word is “postpone”). This is why the incentive to save creates savers. This does not eliminate consumption and investment; it only ensures that decisions will be scrutinized more closely (because the purchasing power is expected to rise in the future). You can compare the situation of everyone acting under this incentive mechanism with our situation today.
Although Keynesians worry that a currency that will appreciate will curb consumption and investment, will bias people toward hoarding currencies and deeply damage the economy, in fact, a free-running market is more efficient than the market when Keynesian theory is applied. Currency that will appreciate will participate in consumption and investment every day, because people have the incentive to save. Positive time preference will guide the demand for consumption and investment, and there will also be obvious savings motives; everyone will try to earn other people’s money, and everyone will consume goods every day.
The concept of “time preference” is described in detail in the book “Bitcoin Standard” by Saifedean Ammous. Although this book is a must-read, there are no simple sentences that can summarize all of its content; I will explain it a little bit: individuals may have a lower time preference (more value on future enjoyment, rather than present Enjoyment) or a higher time preference (more on the present than the future), but everyone’s time preference is positive. Money is just a tool used to coordinate the production activities of things that people consume daily. Given time itself is scarce and the future is uncertain, even those who plan and save for the future (people with low time preference) will think that the current enjoyment is more important than the future at the margin.
To put it more extreme, if you make money and really never spend a penny (or 1 satoshi, one billionth of a bitcoin), it won’t bring you any benefit. So even if the currency will gradually appreciate, (on average) current consumption and investment are always more important than future ones, because of the positive time preference and the need for survival (not to mention enjoyment).
Competition of 7 billion people + 21 million Bitcoins = rising currency + continuous spending
Now, imagine a world where there is a limit on the number of bitcoins, where everyone follows the same principles, what kind of world it will be like. With a population of more than 7 billion, only 21 million bitcoins. Everyone has both the incentive to save (because of the limited amount of money), but also a positive time preference and daily consumption needs. In such a world, fierce competition for currencies will arise. Everyone has to create something of sufficient value to attract the money earned by other people’s hard work; and the reason why he does this (want to make money) is because he knows that the role can be transferred, and the TA can buy good thing. This is the contract provided by Bitcoin.
There is an incentive to save, but if you want to save, you must produce something that is valuable to others. If you are unsuccessful at first, you can continue to try. Between those who hold this currency and provide products and services, benefits and incentives are perfectly compatible, because in the exchange, the roles of buyers and sellers will continue to rotate. Counterintuitively, in a world where (technically speaking) money cannot become more, everyone has an incentive to “save more money.” Over time, on average, the nominal amount of currency held by each person will decrease, but the purchasing power of each currency unit will increase. The ability to delay consumption and investment will be rewarded (at least not be punished), which is the key to ensuring that all economic incentives are compatible.
Bitcoin and the great anti-financialization
The primary incentive for saving Bitcoin is that Bitcoin represents a right to have a constant proportion of a limited amount of world currency forever. There is no central bank to arbitrarily increase the supply of currency and devalue savings. By programming a set of rules that no one can change, Bitcoin will become a catalyst to reverse the trend of financialization. The degree of financialization of economies around the world is so excessive that it is a direct consequence of the incompatibility of monetary economic incentives, and Bitcoin will encourage savings by reintroducing appropriate incentives. More directly, currency depreciation has always been the fundamental driving force of financialization, and now it is completely drawn from the bottom of the pan. When the driving force for these phenomena is reversed, the reverse movement will naturally occur.
If currency devaluation led to financialization, then the logical inference is: returning to a sound currency standard will have the opposite effect. The wave of financialization has begun to fade, but because people have not seen the ominous signs, the tsunami is just beginning to take shape. The practice of using most of the money savings for investment has been prevalent for decades and cannot be changed overnight. But as the world slowly understands Bitcoin, global central banks have issued trillions of dollars in currency, and the existence of 17 trillion in negative interest rate debt, the correlation between these independent events has gradually surfaced.
“The market value of the Bloomberg Barclays Global Negative Interest Rate Debt Index rose to 17.05 trillion [November 2020], the highest point ever, and slightly higher than the 17.04 trillion in August 2019.”
—— Bloomberg News
More and more people are beginning to doubt the practice of investing pension funds in risky financial assets. Negative interest rate debt is unreasonable; it is unreasonable for the central bank to release several trillions of water within a few months. People all over the world are beginning to question the entire construction of the financial system. Adapting to such a system may have become conventional wisdom, but can the world not function otherwise? If what we need is actually a better currency, instead of everyone buying stocks, buying bonds, and using savings to bear the burden of financial risks, can we go back in time?
If everyone has a way to obtain a currency that is programmed to never dilute the value without having to take the endless risks, then this irrational world may return to normal, and the by-product is better economic stability . You use your brain: Is it rational for everyone to invest in the stocks, bonds and structured financial products of large companies? How many of these are caused by the destroyed monetary incentives? How many pensions are added to this risk-taking game because they want to preserve their value under currency inflation? Financialization is the fuse of the financial crisis, and its collapse is also the direct cause of the financial crisis.
Although not the only reason, the lack of incentives in the monetary system has caused the economy to become highly financialized. Few people will take precautions, and it is only when the liquidity crisis comes that people understand that there is a difference between monetary assets and financial assets. The same thing (liquidity crisis) will happen again in the first half of 2020. As the saying goes, fools should be condemned once, but if you are fooled twice, you should reflect on yourself.
The fundamental reason lies in the damage of the currency system and the moral hazard introduced by the financial system that was born from it. This is not a misunderstanding; the instability of the entire economy is the result of an imperfect monetary system; as more and more consequences emerge, more and more people will turn to find a better and more sustainable development path.
Now, as Bitcoin enters the center of the stage, the market mechanism will de-financialize and save our economy. When market participants increasingly prefer to hold a more reliable currency rather than a pile of risky assets, the value of financial assets will gradually transfer to Bitcoin. This process, in principle, can be manifested by the increasing acceptance of Bitcoin, the appreciation of Bitcoin relative to other assets, and the deleveraging of the entire financial system. With Bitcoin as the unit of valuation, almost everything will gradually lose purchasing power, because Bitcoin will be accepted as a currency standard by the world.
In the short term, Bitcoin will eat up the market share of financial assets that are close to store of value; these long-term currency substitutes will slowly be exchanged for Bitcoin, which is the only result. In this process, the size of the financial system relative to the purchasing power of the Bitcoin network will gradually shrink. As a sound currency standard, Bitcoin will not only lead to the disappearance of financial assets, but also affect the future demand for similar products. If you can own the scarcest asset (and currency) ever, what sovereign debt (yield close to zero), corporate debt (liquidity), and stocks (with risk premium) should you buy?
The first to bear the brunt will be those financial assets that are obviously overvalued, such as sovereign debt with negative interest rates, but in fact, nothing else is different. Line up to see who finishes first. When the trend reverses, the prices of non-bitcoin assets will face downward pressure, and then the debt instruments supported by these assets will also face downward pressure. The demand for credit will fall sharply, causing the credit system to shrink. This in turn will accelerate the demand for quantitative easing (increase the base currency) to maintain and inflate the credit market, and then further promote the escape of value from financial assets to Bitcoin. The process of definancialization will self-sustain and accelerate because of the feedback loop composed of financial asset prices, credit systems and quantitative easing.
More importantly, with the passage of time and the spread of knowledge, individuals will increasingly prefer simple Bitcoin (and its hard cap of 21 million) rather than complex financial investments and structured financial risks. Financial assets need to bear operational risks and counterparty risks, while Bitcoin is an anonymous asset with a strictly fixed total amount and easy transfer. The role of money is very different from that of financial assets. A financial asset is just a claim on an income stream or a productive asset, and these claims must be priced in a specific form of currency. Holders of financial assets expect to receive more currency in the future, but they must bear risks. But owning and saving money is nothing more than saving, and its meaning is that it can be exchanged for goods and services in the future. In a nutshell, currency can be used to buy groceries for home use; but stocks, bonds, and national debt cannot. And there are reasons for it.
Michael Sylor: “Stocks, bonds, and real estate are all instruments of legal currency, and their value is the present value of future cash flow income at an interest rate that combines currency inflation and risk premium. None of them are good value storage tools. Unless its income stream grows faster than the Fed prints money.”
There is an unchanging fundamental difference between saving and investment; saving is the holding of assets in the form of money; and investment is saving to take risks. The boundaries have been blurred in a financial system, but Bitcoin will polish this boundary again. A currency with the correct incentive structure will overwhelm the demand for complex financial assets and debt instruments. Ordinary people will unhesitatingly choose the sense of security brought about by a fixed amount of money media. As individuals flee financial assets and embrace Bitcoin, economies will de-financialize. This will naturally weaken the power of Wall Street and return it to ordinary people.
Banks will no longer be the center of the economy, nor will they be a place for rent-seeking. On the contrary, they will compete harder for capital like other industries. Today, most monetary capital is attributed to the banking system, but this will no longer be the case in the Bitcoinized world. As part of the transformation, the flow of currency will also move away from the banking industry, and it will flow more directly and freely among participants who actually create value.
The functions of credit market, stock market and intermediary still exist, but their scale will return to an appropriate level. As the financial system consumes fewer resources and the monetary incentives between participants who create economic value will become more and more compatible, Bitcoin will reconstruct the economy. Dispel the incentive to save has caused a series of social consequences, but in the future, the bow will be headed in the right direction. In the future, the days when people scratch their heads every day for stocks and investment portfolios will be gone, and more energy will return to daily life and really important things.
There is a world of difference between saving Bitcoin (risk-free) and investing in financial assets (taking risk). Saving the currency you like (not hate) has a cathartic effect, just like unintentionally unloading a burden from your shoulders. It may not show up so quickly, but it will become clearer in the future: Saving a sound currency will ultimately make individuals less worried and not anxious about increasing their money.
If billions of people use the same currency, everyone can focus on creating value. No one knows what will happen in the future, but Bitcoin will de-finanize the economy and bring the world back to life.
Source link: nakamotoinstitute.org
