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Workers have lost faith in money Bitcoin has the power to blow up banking

Bitcoin is a popular revolt. (Credit:Joe Raedle/Getty)

Bitcoin is a popular revolt. (Credit:Joe Raedle/Getty)


April 27, 2023   6 mins

Ten years ago, I was in a basement bar in Shoreditch, the fashionable part of London that had adopted the moniker “Silicon Roundabout” thanks to the confluence of tech firms there. I was speaking to one of the many salons that had popped up in the wake of the 2008 crash, before an audience of 30-something creatives and digital entrepreneurs. The topic of the day: the still-new technology of cryptocurrency. When I finished, I added that if anyone had a few quid to spare, they might consider taking a punt on this thing called Bitcoin. Then trading at about $100, I expected it to surge in price over the coming years — though it would be a wild ride, because it might eventually crash to oblivion. “Get in to get out,” I advised.

We knew little about Bitcoin’s creators, other than that they were angry at how the 2008 crash had been managed and wanted to create an alternative form of money to liberate people from banks. Set up using blockchain technology — a decentralised, digital record on a peer-to-peer network — Bitcoin transactions could take place without the need for a central clearing authority. Yet despite all the excited chatter that evening about the new businesses that could take payments or process transaction in cryptocurrencies, few of them went far. That’s because Bitcoin, with its volatile pricing and high transaction costs, wasn’t really behaving like money. But I also suspected that didn’t matter. Because built into its design was a limit to how many Bitcoins could be produced, a feature that would enable it to exploit a design flaw in central bankers’ monetary policy — and ultimately reveal the façade of so much “wealth-creation” in the past decade.

At the time of the 2008 crash, a strict theology governed economic policy-making in Western countries. It held that monetary policy, determined by an independent central bank, should dominate economic management and should support the private banking system to the best of its ability. For obvious reasons, the crash spurred demand for change to this model across the political spectrum. But the economic policy establishment scarcely noticed. Instead, it faithfully applied its doctrine. The banks were bailed out and, to ensure asset prices quickly bounced back, central banks flushed the financial system with cheap money, and not just with its traditional method of cutting interest rates.

Starting at the US Federal Reserve and then following on in 2009 at its British and European counterparts, central bankers adopted a bold new policy that had been pioneered in Japan: essentially handing money to banks by buying their bonds at near-zero interest, something they called quantitative easing. The theory, derived from studies of the Great Depression, was that by pouring money into the corporate sector, the central bank could get businesses to invest and thereby create new jobs. But economies had changed a great deal over the intervening century, and rather than kickstart a recovery, the money flowed into existing assets, producing big bull runs in stocks, bonds and real estate. Still, central banks were happy, saying the resulting wealth effect — asset-owners feeling richer — spurred consumption, and supported economic growth.

But that’s not necessarily how ordinary folk saw matters. Real wages remained stagnant, even as house prices and rents on homes or new business premises were all rising by the month. And not coincidentally, these were the years of populist rage against elites and “experts”. But while some took to the streets, a secondary revolt took place: infiltration of the financial system. Enter Bitcoin, which offered a means to hack the regime of quantitative easing. Since its supply was fixed, any portion of the wave of money that central banks pumped into markets which was used to buy Bitcoin would drive up its price, inflating a bubble.

That’s just what happened. By 2021, that $100-a-pop trade I’d touted back in 2013 had soared past $60,000. And on its vertiginous journey, as others saw the easy money to be made off gaming monetary policy, spin-offs multiplied, from non-fungible tokens to meme stocks on trading boards. Such innovations took on a sharp political edge on Reddit boards such as r/wallstreetbets, where traders organised short squeezes that caused losses at big funds, and then celebrated those victories. “We have a once in a lifetime opportunity to punish the sort of people who caused so much pain and stress a decade ago,” wrote one user in 2021, “and we’re taking that opportunity.” But though such victories were usually fleeting, and the new inventions not only ethereal but often utterly ultimately meaningless, they succeeded in making their point. What amounted to currency debasement by monetary authorities had meant that what was worthless could become priceless.

The fact that cryptocurrency was more or less imaginary, that it had no physical reality, that it was nothing more than a sort of elaborate confidence act, was beside the point. That’s true of all money. Although we rational moderns claim to believe only in “facts”, and thus impart the language of cold empiricism to any talk of money — hard cash, real money, solid gold — in reality few things are less concrete. We think of money as cash, but cash is insignificant in the money supply (when was the last time you used it?). We think the government prints it, when we actually create it ourselves from thin air via bank-borrowing. The government can’t even be sure how much money exists.

Nevertheless, we’re willing to transact business with millions of people we’ll never meet, using a medium of exchange we don’t understand, simply because we trust in its fungibility and solidity. Those figures in our banking apps may be nothing more than code on a server, but we trust them to still be there tomorrow, to have essentially the same value today as they did then, and to be available as a universally accepted means of payment. The whole system is backed by an elaborate financial and legal architecture, mediated by a central bank, and is ultimately grounded in our faith. And that faith has enabled us to do miraculous things, from developing new technologies to lifting billions from poverty.

But faith is also fragile and easily broken. When we lose it, when people begin to doubt the solidity of money, inflation results. So when central banks waved off surging asset-prices as not real inflation, many took it as a betrayal, for it was plain to see that asset-price inflation benefited some more than others. It looked suspiciously like central banks were increasing the value of money used by owners while debasing the money used by workers. The modern priesthood revealed itself to be manipulating our faith to serve the ruling class, and the temple erupted in rebellion.

Mainstream economics claimed it “saved the world” in 2008. But they provided the material conditions for the crisis of political faith across the West since that fateful year, first in the way the economic models used at the banks helped cause the crash, and then through a recovery which generated wealth for owners and immiserated workers. And amid all the self-congratulation, central banks and economists took no heed of the multiplying signs of distress that their crisis produced: the explosion of street protests, the declining support for democracy, the epidemics of mental illness and “deaths of despair” in America. All such dysfunction was dismissed as outside the bounds of macroeconomic theory. So the vandals infiltrated the system and made the “experts” notice where it hurt, in the asset-markets.

After a decade of sucking up the cost of asset-price increases, workers recently started to claim back some of their losses with stronger wage gains, changes in labour markets having improved their bargaining power. But rather than cut the record profit-margins attained during the pandemic to absorb the cost, firms have simply passed the bill to consumers, leading to the consumer price inflation we now see. No longer able to pretend inflation isn’t a problem, central banks have had to tighten monetary policy aggressively. When that tightening began, when it appeared the era of cheap money had finally ended, Bitcoin crashed.

But when the ructions began spreading through the US banking system again recently, central banks eased up on the money brakes. Bitcoin rallied once more. And so it will continue. Investors are betting the days of cheap money will soon be back and have begun buying again and driving down interest rates. Central banks are insisting the pause is only temporary, and they are determined to stamp out inflation. So they now face a painful dilemma. They can prosecute their war on inflation and clamp down on the money supply, standing by while investors and fund managers wail over their losses. Or they revert to their old ways: heed the call of asset markets, keep prices rising, and allow inflation to linger, which would amount to a dereliction of their duty to the economy as a whole.

To know which way the wind is blowing, watch Bitcoin, the imagined currency that has become real, and is our most useful measure of faith in global finance. If central banks revive the neoliberal theology of 2008 — rescue the owners, forget workers — they will continue to lose their congregation as the apostates flock back to cryptocurrencies. But while a renewed bitcoin surge would indicate a deepening of the crisis of faith, there are signs that economists, and even some central banks, are noticing. New voices have begun pushing back on the dogma that generous social spending or rising wages cause inflation, and some central banks are even starting to admit that maybe, just maybe, it’s excess profits that are the inflation bugbear.

Bitcoin may still crash. But if along the way it shamed the priesthood into serving the people, it will have been no mean feat.


John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).

jarapley

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polidori redux
polidori redux
1 year ago

“We knew little about Bitcoin’s creators, other than that they were angry at how the 2008 crash had been managed and wanted to create an alternative form of money to liberate people from banks.”
No John, they just wanted to get rich quick. A degree in criminal psychology provides a better insight into the ways of the world than a degree in economics.

Last edited 1 year ago by polidori redux
Seb Dakin
Seb Dakin
1 year ago
Reply to  polidori redux

This may or may not be the case, but I remember when I first came across mention of bitcoin, back in something called the Daily Reckoning in 2010 or so, it was specifically being promoted as an antidote to fiat-money and corrupt central banking, so there may be more ideology and indeed anger behind its creation than you give it credit for.

polidori redux
polidori redux
1 year ago
Reply to  Seb Dakin

Whenever “ideology” is mentioned. I always respond with “follow the money – who’s made it?” Ideology is, almost invariably, a cover for greed.

polidori redux
polidori redux
1 year ago
Reply to  Seb Dakin

Whenever “ideology” is mentioned. I always respond with “follow the money – who’s made it?” Ideology is, almost invariably, a cover for greed.

Bernard Hill
Bernard Hill
1 year ago
Reply to  polidori redux

…boy, you are really are self- immolating over Bitcoin Poli D. I suspect a lot of the negative sentiment on Unherd whenever cryptocurrency comes up, is from people who’ve worked in the City, and are invested in the status quo, or otherwise as conservatives, are naturally resistant to something which is radical capitalism.

Bernard Hill
Bernard Hill
1 year ago
Reply to  Bernard Hill

…and by the way, the people who created it are polymaths, not City midwits.

Peter B
Peter B
1 year ago
Reply to  Bernard Hill

But do we really know who the creators of Bitcoin were ? This seems far from certain. And if we do not, how can we know their real aims ?
Let’s give them the benefit of the doubt and assign them decent and honourable motives. But poli is still correct that subsequent waves of crypto “enterpreneurs” were – many still are active – criminals and shysters. There’s no getting away from the sheer madness and scale of fraud of the crypto exchanges.
One of the reasons that happens is that this is yet another so-called disruptive technology where one of the main “advantages” is that some new business model bypasses the regulators. Uber claimed not to be a taxi service. Crypto exchange get rich quick schemes claim not to be securities (investments). Tech companies claim that their IP (intellectual property) is worth huge amounts and claim it is “owned” in countries like Ireland which played almost no role in creating that IP.
Then there’s the massive energy waste involved in Bitcoin mining. Possibly reduced now for Ethereum. But not – I understand – for Bitcoin.
Back to the main poin about inflation. This economist (author) appears to be blaming inflation on companies making excess profits. Rather than central banks printing vast amounts of money. Doh !

Robbie K
Robbie K
1 year ago
Reply to  Peter B

And if we do not, how can we know their real aims ?

Bitcoin was created to be untrackable trading tokens for buying drugs on The Silk Road (dark web). It took a very long time before people realised it could be used as an asset in itself.

Bernard Hill
Bernard Hill
1 year ago
Reply to  Peter B

…exactly Peter, the CB’s created the paper which lead to ridiculously easy paper wealth for financial insiders. For an interesting analysis, see: https://www.lynalden.com/open-networks/

Simon S
Simon S
1 year ago
Reply to  Peter B

Then there’s the massive energy waste involved in Bitcoin mining.
Untrue – it uses less than computer video gaming, and even the WEF recently posted a YouTube video on Bitcoin miner Crusoe, expounding how it uses energy that otherwise would go wasted.

Robbie K
Robbie K
1 year ago
Reply to  Peter B

And if we do not, how can we know their real aims ?

Bitcoin was created to be untrackable trading tokens for buying drugs on The Silk Road (dark web). It took a very long time before people realised it could be used as an asset in itself.

Bernard Hill
Bernard Hill
1 year ago
Reply to  Peter B

…exactly Peter, the CB’s created the paper which lead to ridiculously easy paper wealth for financial insiders. For an interesting analysis, see: https://www.lynalden.com/open-networks/

Simon S
Simon S
1 year ago
Reply to  Peter B

Then there’s the massive energy waste involved in Bitcoin mining.
Untrue – it uses less than computer video gaming, and even the WEF recently posted a YouTube video on Bitcoin miner Crusoe, expounding how it uses energy that otherwise would go wasted.

polidori redux
polidori redux
1 year ago
Reply to  Bernard Hill

Last edited 1 year ago by polidori redux
Peter B
Peter B
1 year ago
Reply to  Bernard Hill

But do we really know who the creators of Bitcoin were ? This seems far from certain. And if we do not, how can we know their real aims ?
Let’s give them the benefit of the doubt and assign them decent and honourable motives. But poli is still correct that subsequent waves of crypto “enterpreneurs” were – many still are active – criminals and shysters. There’s no getting away from the sheer madness and scale of fraud of the crypto exchanges.
One of the reasons that happens is that this is yet another so-called disruptive technology where one of the main “advantages” is that some new business model bypasses the regulators. Uber claimed not to be a taxi service. Crypto exchange get rich quick schemes claim not to be securities (investments). Tech companies claim that their IP (intellectual property) is worth huge amounts and claim it is “owned” in countries like Ireland which played almost no role in creating that IP.
Then there’s the massive energy waste involved in Bitcoin mining. Possibly reduced now for Ethereum. But not – I understand – for Bitcoin.
Back to the main poin about inflation. This economist (author) appears to be blaming inflation on companies making excess profits. Rather than central banks printing vast amounts of money. Doh !

polidori redux
polidori redux
1 year ago
Reply to  Bernard Hill

Last edited 1 year ago by polidori redux
polidori redux
polidori redux
1 year ago
Reply to  Bernard Hill

“
boy, you are really are self- immolating over Bitcoin Poli D.”
But unlike you, I have a sense of humour. Dissing your sacred cow! – Oh dear.

Peter B
Peter B
1 year ago
Reply to  polidori redux

You’re correct. It shows some of the characteristics of a cult – non-believers being instantly shouted down for example.
That’s not to say there isn’t some value and useful innovation in Blockchain. I don’t think that’s in doubt.

Bernard Hill
Bernard Hill
1 year ago
Reply to  Peter B

…well if this thread is anything to go by, which it is, at least on Unherd, it is the ‘believers’ getting shouted at!

Last edited 1 year ago by Bernard Hill
Bernard Hill
Bernard Hill
1 year ago
Reply to  Peter B

…well if this thread is anything to go by, which it is, at least on Unherd, it is the ‘believers’ getting shouted at!

Last edited 1 year ago by Bernard Hill
Bernard Hill
Bernard Hill
1 year ago
Reply to  polidori redux

…my point was you’re dissing yourself Poli ! For an incidental analysis of where crypto sits in the current scheme of things, see: https://www.lynalden.com/open-networks/ as well as: https://www.lynalden.com/april-2023-newsletter/

Peter B
Peter B
1 year ago
Reply to  polidori redux

You’re correct. It shows some of the characteristics of a cult – non-believers being instantly shouted down for example.
That’s not to say there isn’t some value and useful innovation in Blockchain. I don’t think that’s in doubt.

Bernard Hill
Bernard Hill
1 year ago
Reply to  polidori redux

…my point was you’re dissing yourself Poli ! For an incidental analysis of where crypto sits in the current scheme of things, see: https://www.lynalden.com/open-networks/ as well as: https://www.lynalden.com/april-2023-newsletter/

Bernard Hill
Bernard Hill
1 year ago
Reply to  Bernard Hill

…and by the way, the people who created it are polymaths, not City midwits.

polidori redux
polidori redux
1 year ago
Reply to  Bernard Hill

“
boy, you are really are self- immolating over Bitcoin Poli D.”
But unlike you, I have a sense of humour. Dissing your sacred cow! – Oh dear.

R Wright
R Wright
1 year ago
Reply to  polidori redux

Your post undersells massively how much the early adopters of all of this did so for ideological reasons. Libertarianism had a brief renaissance around that time in the tech sphere.

mfx v
mfx v
1 year ago
Reply to  polidori redux

Pompous, erroneous twaddle. If you’re going to comment on a topic at least ensure you’ve done a tiny bit of investigation into the topic before you sound off like an ignorant farmyard animal.
Here’s a useful library: https://nakamotoinstitute.org/literature/

Seb Dakin
Seb Dakin
1 year ago
Reply to  polidori redux

This may or may not be the case, but I remember when I first came across mention of bitcoin, back in something called the Daily Reckoning in 2010 or so, it was specifically being promoted as an antidote to fiat-money and corrupt central banking, so there may be more ideology and indeed anger behind its creation than you give it credit for.

Bernard Hill
Bernard Hill
1 year ago
Reply to  polidori redux

…boy, you are really are self- immolating over Bitcoin Poli D. I suspect a lot of the negative sentiment on Unherd whenever cryptocurrency comes up, is from people who’ve worked in the City, and are invested in the status quo, or otherwise as conservatives, are naturally resistant to something which is radical capitalism.

R Wright
R Wright
1 year ago
Reply to  polidori redux

Your post undersells massively how much the early adopters of all of this did so for ideological reasons. Libertarianism had a brief renaissance around that time in the tech sphere.

mfx v
mfx v
1 year ago
Reply to  polidori redux

Pompous, erroneous twaddle. If you’re going to comment on a topic at least ensure you’ve done a tiny bit of investigation into the topic before you sound off like an ignorant farmyard animal.
Here’s a useful library: https://nakamotoinstitute.org/literature/

polidori redux
polidori redux
1 year ago

“We knew little about Bitcoin’s creators, other than that they were angry at how the 2008 crash had been managed and wanted to create an alternative form of money to liberate people from banks.”
No John, they just wanted to get rich quick. A degree in criminal psychology provides a better insight into the ways of the world than a degree in economics.

Last edited 1 year ago by polidori redux
Saul D
Saul D
1 year ago

Prior to 2008 the financial system had created an excess of debt that had become unsustainable and threatened to collapse the entire system. QE had the effect of a sponge, absorbing the debts with new money, leading to a surplus of money in the system which then drove up asset prices. This was then extra-inflated by the Covid payouts to cover a lack of economic output leading to too much money in the system for the level of economic production. Inflation was always going to follow, but it was made worse because of Russia-Ukraine and the squeeze on energy.
The value of money depends on what it allows you to buy. With prices rising visibly (ie from one month to the next) everyone is left chasing more money just to stay still and speculative assets like bitcoin stamp-collecting benefit from the panic of chasing income benefiting charlatans like FTX.
However, what’s really scary is how fragile the financial system is to movements in interest rates – from the pensions funds who would have been caught cold over Truss’s tax-cuts, to the collapse of SVB and Credit Suisse, with more banks at risk.
If the government can’t curtail inflation by tightening the money supply and raising interest rates it may well get worse as the spiral of wage claims redoubles the effect on prices. Unfortunately, this is coming at a time of low trust in political institutions, and with politicians adding regulatory costs and chasing policies like net-zero that in themselves would increase prices even in normal times. Now is the time to lighten the balloon by cutting costs and throwing out anything that restricts economic output. In the long run inflation is beaten by efficiency and surplus, not restriction. Simplify, streamline and ‘stick to the knitting’.

Saul D
Saul D
1 year ago

Prior to 2008 the financial system had created an excess of debt that had become unsustainable and threatened to collapse the entire system. QE had the effect of a sponge, absorbing the debts with new money, leading to a surplus of money in the system which then drove up asset prices. This was then extra-inflated by the Covid payouts to cover a lack of economic output leading to too much money in the system for the level of economic production. Inflation was always going to follow, but it was made worse because of Russia-Ukraine and the squeeze on energy.
The value of money depends on what it allows you to buy. With prices rising visibly (ie from one month to the next) everyone is left chasing more money just to stay still and speculative assets like bitcoin stamp-collecting benefit from the panic of chasing income benefiting charlatans like FTX.
However, what’s really scary is how fragile the financial system is to movements in interest rates – from the pensions funds who would have been caught cold over Truss’s tax-cuts, to the collapse of SVB and Credit Suisse, with more banks at risk.
If the government can’t curtail inflation by tightening the money supply and raising interest rates it may well get worse as the spiral of wage claims redoubles the effect on prices. Unfortunately, this is coming at a time of low trust in political institutions, and with politicians adding regulatory costs and chasing policies like net-zero that in themselves would increase prices even in normal times. Now is the time to lighten the balloon by cutting costs and throwing out anything that restricts economic output. In the long run inflation is beaten by efficiency and surplus, not restriction. Simplify, streamline and ‘stick to the knitting’.

Christopher Barclay
Christopher Barclay
1 year ago

Cash will be abolished, every transaction will be passed onto GCHQ and bank rescues will consist of electronically managed haircuts to the amount of money in the ‘wallet’ on your mobile phone. Will people still use banknotes and coins (illegally) in a parallel economy? Will local communities set up barter systems?

Christopher Barclay
Christopher Barclay
1 year ago

Cash will be abolished, every transaction will be passed onto GCHQ and bank rescues will consist of electronically managed haircuts to the amount of money in the ‘wallet’ on your mobile phone. Will people still use banknotes and coins (illegally) in a parallel economy? Will local communities set up barter systems?

Charles Stanhope
Charles Stanhope
1 year ago

“Beware the Greeks bearing gifts”.*

(As Laocoön is supposed to have said.)

Charles Stanhope
Charles Stanhope
1 year ago

“Beware the Greeks bearing gifts”.*

(As Laocoön is supposed to have said.)

Robbie K
Robbie K
1 year ago

To know which way the wind is blowing, watch Bitcoin, the imagined currency that has become real, and is our most useful measure of faith in global finance.

Some kind of sick joke. Bitcoin and the whole crypto market is like the wild west. There’s no rules, trust or obligation. It’s a tower built on ‘greater fool theory.’ I’d sooner measure faith in global finance at the local casino.

Robbie K
Robbie K
1 year ago

To know which way the wind is blowing, watch Bitcoin, the imagined currency that has become real, and is our most useful measure of faith in global finance.

Some kind of sick joke. Bitcoin and the whole crypto market is like the wild west. There’s no rules, trust or obligation. It’s a tower built on ‘greater fool theory.’ I’d sooner measure faith in global finance at the local casino.

Nicky Samengo-Turner
Nicky Samengo-Turner
1 year ago

Errr… no it does not.

Nicky Samengo-Turner
Nicky Samengo-Turner
1 year ago

Errr… no it does not.

Alan B
Alan B
1 year ago

Keynesians v goldbugs: The same ol’ metaphysical two-party system persists!