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Could Bitcoin crash the economy?

Wall Street is in for a bumpy ride. Credit: Getty

March 12, 2024 - 7:00am

Billionaire hedge fund manager Bill Ackman generated some buzz over the weekend when he suggested that Bitcoin could tank the economy. This idea is not new — indeed that may be its raison d’être — but the possibility is now receiving serious attention in the financial sector. JP Morgan strategist Marko Kolanovic had already chimed in last week that Bitcoin’s stratospheric ascent could lead the Federal Reserve to postpone interest-rate cuts.

Frothy prices create a “wealth effect”, as asset-owners who feel richer spend more, pumping demand. Further, the owners can leave the job force when near to retirement, reducing labour supply. These two responses to the recent run-up on Wall Street have begun to complicate the Federal Reserve’s efforts to bring down inflation.

Ackman adds another possible dimension. Demand for Bitcoin causes new mining, which consumes energy. Demand for energy drives up energy prices, which in turn raises inflation. Then, “Bitcoin goes to infinity, energy prices skyrocket, and the economy collapses.” That’s even more true of AI, the other bubble blowing on Wall Street. Although the technology may open infinite possibilities, it too demands an awful lot of energy, and its continued ascent could well drag up inflation.

Back in 1987, when then-Fed Chairman Alan Greenspan initiated the so-called “Greenspan Put”, assuring investors that the central bank would underwrite asset values whenever they fell sharply by printing new currency, he launched the era of unlimited money. Ever since, central bankers in developed economies have repeatedly assured asset-owners they’d do “whatever it takes”, in the memorable words of former European Central Bank head Mario Draghi. With the advent of quantitative easing after the 2008 crisis, they turbocharged the printing presses. Global money supply hasn’t literally become infinite, but investors have been assured that more can always be created.

Bitcoin’s architects spotted this vulnerability. By fixing the digital currency’s supply at its creation, they designed an asset which could only ever go up: infinite demand had met finite supply. When the pandemic unleashed the latest burst of money-printing in early 2020, Bitcoin was unbound, rising tenfold over the next year alone.

Ever since, central banks have been waging a running battle with the cryptocurrency. Whenever they say they’re going to restrict money supply, thereby protecting its value, Bitcoin falls — it’s no accident that it crashed after central banks began raising interest rates late in 2021. Whenever central bankers say they’re going to ease up again, Bitcoin surges, as happened after Jerome Powell announced the “Powell pivot” late last year.

Now, though, we’re seeing a new dimension to this syndrome of limited supply meeting endless demand. Even if fans of AI and crypto are correct — that they open up a future of endless horizons — both ultimately depend on a finite resource. Even if we built the economy entirely on renewable energy, whose supply is infinite, the infrastructure needed to harness it depends on resources which are not — the minerals powering the windmills and solar panels and battery storage it requires.

The imaginations of central bankers and tech bros alike seem to have no limits. But nature apparently does, and it’s proving recalcitrant in yielding up the resources at the rate they can print money and create new assets. Unless this imbalance is resolved, Wall Street bubbles will prevent inflation from falling.

Central bankers thus face a tricky dilemma: either debase the currency endlessly, or end the cheap-money era, letting asset-owners take the hit. Once seen as heroes for making people rich, they may yet become the villains of this drama.


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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Dennis Roberts
Dennis Roberts
4 months ago

“Back in 1987, when then-Fed Chairman Alan Greenspan initiated the so-called “Greenspan Put”, assuring investors that the central bank would underwrite asset values whenever they fell sharply by printing new currency, he launched the era of unlimited money. Ever since, central bankers in developed economies have repeatedly assured asset-owners they’d do “whatever it takes”, in the memorable words of former European Central Bank head Mario Draghi. With the advent of quantitative easing after the 2008 crisis, they turbocharged the printing presses. Global money supply hasn’t literally become infinite, but investors have been assured that more can always be created”

House prices unaffordable? Productive labour not worth what it was? Ever increasing wealth divide? Seems to me the above is a bigger issue than Bitcoin.

Pedro the Exile
Pedro the Exile
4 months ago
Reply to  Dennis Roberts

Bitcoin is the b*****d son of QE and will exacerbate its effects-its not binary.

Mark V
Mark V
4 months ago

Nonsense.

Will Crozier
Will Crozier
4 months ago
Reply to  Dennis Roberts

My understanding is that Bitcoin was designed to deal with this problem, at least for the people who own/will own it (a MASSIVE caveat I know)

Martin M
Martin M
4 months ago
Reply to  Will Crozier

How do we know that? We have no idea who “designed” it. My view is that Bitcoin was created by disreputable people for nefarious purposes.

Mark V
Mark V
3 months ago
Reply to  Martin M

The code is public

Martin M
Martin M
3 months ago
Reply to  Mark V

So?

Mark V
Mark V
3 months ago
Reply to  Martin M

You can check for yourself what it does. It’s irrelevant who made it if what it does is clear. You might have a point if it had some hidden functionality.

Martin M
Martin M
4 months ago

I think governments should just ban Bitcoin. It really doesn’t serve any useful (legal) purpose, and sooner or later, everyone is going to realise that it’s just “smoke and mirrors”.

Warren Trees
Warren Trees
4 months ago
Reply to  Martin M

Should be the other way around. Governments should stop endlessly printing money.

Martin M
Martin M
4 months ago
Reply to  Warren Trees

Governments have to manage the economy. One of the tools they have is controlling the money supply.

Mark V
Mark V
4 months ago
Reply to  Martin M

The less they do the better.

Martin M
Martin M
3 months ago
Reply to  Mark V

That was probably true in the Neolithic Age.

Mark V
Mark V
3 months ago
Reply to  Martin M

Nothing new under the sun.

Mark V
Mark V
4 months ago
Reply to  Martin M

People should opt out of fiat currency. It doesn’t serve any useful purpose, and sooner or later, everyone is going to realise that it’s just ‘smoke and mirrors’.

Martin M
Martin M
3 months ago
Reply to  Mark V

Gee, I just had a nice lunch. I used fiat currency to pay for it. Guess what? My payment was accepted.

Mark V
Mark V
3 months ago
Reply to  Martin M

Gee, I just had a nice lunch. I used Bitcoin to pay for it. Guess what, my payment was accepted.

Martin M
Martin M
3 months ago
Reply to  Mark V

It wouldn’t have been anywhere I have ever eaten.

Mark V
Mark V
3 months ago
Reply to  Martin M

Ok so you’re beginning to understand value is subjective

John Riordan
John Riordan
4 months ago

The only way Bitcoin could crash the economy is if its limited supply exposes the technically infinite supply of silly money for what it really is. Or, to put it another way, the collective confidence in fiat currencies disappears, never to return.

How much that’d be Bitcoin’s fault is questionable.

Warren Trees
Warren Trees
4 months ago
Reply to  John Riordan

It used be gold that people flocked to. But you can still mine more.

Martin M
Martin M
4 months ago
Reply to  John Riordan

The flip-side is that people will come to understand Bitcoin for what it truly is – a fake “asset” created by crooked computer geeks to scam the gullible.

Mark V
Mark V
3 months ago
Reply to  Martin M

People will come to understand fiat for what it is – a fake asset created by government to scam the gullible

Martin M
Martin M
3 months ago
Reply to  Mark V

And yet we can use it to buy anything, anywhere in the world.

Mark V
Mark V
3 months ago
Reply to  Martin M

USD came to prominence on a gold standard.

Stephen Walsh
Stephen Walsh
4 months ago

Given a choice between letting asset owners take the hit, or chronic price inflation for the peasants, guess which one will be more attractive for Central Bankers. AI requires huge volumes of reliable 24/7 baseload electricity. There just won’t be enough renewable electricity to support all that, so Carbon emitting thermal generation will be required more than ever.

UnHerd Reader
UnHerd Reader
4 months ago
Reply to  Stephen Walsh

Nuclear?
I think I read an article recently about data centres having their own small nuclear reactors.

Stephen Walsh
Stephen Walsh
4 months ago
Reply to  UnHerd Reader

Diesel generators are an awful lot cheaper and vastly easier to get planning permission for.

Dennis Roberts
Dennis Roberts
4 months ago

“Back in 1987, when then-Fed Chairman Alan Greenspan initiated the so-called “Greenspan Put”, assuring investors that the central bank would underwrite asset values whenever they fell sharply by printing new currency, he launched the era of unlimited money. Ever since, central bankers in developed economies have repeatedly assured asset-owners they’d do “whatever it takes”, in the memorable words of former European Central Bank head Mario Draghi. With the advent of quantitative easing after the 2008 crisis, they turbocharged the printing presses. Global money supply hasn’t literally become infinite, but investors have been assured that more can always be created”

This is more of an issue than Bitcoin if you ask me. House prices too high, value of productive labour falling, rampant consumerism…

Dennis Roberts
Dennis Roberts
4 months ago
Reply to  Dennis Roberts

Apologies for the double post. I’m blaming UnHerd.

Peter B
Peter B
4 months ago
Reply to  Dennis Roberts

It needs repeating though ! A terrible, terrible policy mistake that still isn’t acknowledged. Financial investors are supposed to bear the risk in return for the rewards. Not get taxpayer funded handouts and insurance.

Hugh Bryant
Hugh Bryant
4 months ago

When information is universally available everyone will have their own currency based on their asset profile. In the meantime the next step will be for major corporations to issue theirs. Which you choose to use will depend on whether you trust Elon more than Jeff or vice versa (Elon, obviously). Currencies will replace votes as the engine of democracy.

UnHerd Reader
UnHerd Reader
4 months ago
Reply to  Hugh Bryant

How do I pay taxes with Musky Money or Bezos Pesos? States will never let corporations use their own money. Facebook tried and received serious pushback.

Hugh Bryant
Hugh Bryant
4 months ago
Reply to  UnHerd Reader

You’ll pay your Land Value Tax in any currency you like and at the current exchange rate.

Jules Anjim
Jules Anjim
4 months ago
Reply to  Hugh Bryant

Horse hockey

Alan B
Alan B
4 months ago
Reply to  Hugh Bryant

Um…? George Soros is calling…

Martin M
Martin M
4 months ago
Reply to  Hugh Bryant

I doubt I will ever be likely to trust someone as creepy as Elon.

Mark V
Mark V
3 months ago
Reply to  Martin M

Bitcoin is built on the principle of ‘don’t trust, verify’

Martin M
Martin M
3 months ago
Reply to  Mark V

It is based on “Don’t trust, verify, and take endless amounts of time, and huge amounts of power doing so”.

Mark V
Mark V
3 months ago
Reply to  Martin M

You might want to look into the US military

Mark V
Mark V
4 months ago
Reply to  Hugh Bryant

What will be the medium of exchange?

Jake Raven
Jake Raven
4 months ago

I don’t know a great deal about crypo, but think it’s likely to crash the grid than the economy, but maybe that’s one and the same.

Jon Hawksley
Jon Hawksley
4 months ago

Odd to have an article on Bitcoins that does not address the pitfalls for purchasers. Bitcoins have no intrinsic value, they transfer wealth from buyers to sellers, a buyer can only spend their bitcoins if there is another buyer willing to transfer their wealth to him. Greed will encourage such buyers and the price is likely to rise quite rapidly. The early investors have large holdings that cost next to nothing. They will sell some to new buyers but carefully to keep the price going up. They will increae their holdings of Treasury bills. The dangers are:
Realisation that there is nothing at the end of the rainbow. Buyers dry up, price falls, panic selling, price to zero. The greedy who invested are left with nothing for heir retirement.
Banks foolishly take Bitcoins as collateral and go bust when it unravels
The transferred wealth to the pioneers is so large that they do not know what to do with it so it sits in treasury bills whilst the investors who lost their wealth cannot spend it. The increased propensity to save will be deflationary.

Mark V
Mark V
4 months ago
Reply to  Jon Hawksley

Value is subjective, not “iNtRiNsiC”.
If you disagree, I have an endless supply of bananas you can’t possible consume to sell you and you can’t refuse, because bananas have iNtRiNsiC vALuE, so you must value them as directed.

Martin M
Martin M
3 months ago
Reply to  Mark V

Bananas are a foodstuff, so they have an intrinsic value. Even if all the humans die out, animals will value bananas.

Mark V
Mark V
3 months ago
Reply to  Martin M

Dung beetles value dung

Martin M
Martin M
3 months ago
Reply to  Mark V

Sure, and if they ever evolve to becoming sentient, their futures exchange will probably list Dung Futures.

Mark V
Mark V
3 months ago
Reply to  Martin M

So you’ll take shipment of all this dung, since it has iNtriNsiC vALuE

UnHerd Reader
UnHerd Reader
4 months ago

Energy and human ingenuity are infinite. Bitcoin mining increases demand bit also incentivises supply so should stabilise the grid and mop up excess capacity. Fiat money possibly has some advantages but it depends on the ignorance of the masses who store value in it while the clued in buy assets on credit and this really can only go for some time. Bitcoin may save the economy by allowing a store of value for savers that people dont have now and restoring a stable middle class but we will have to see. Maybe it just forces the end of qt and higher onterest for savers and borrowers, maybe it takes over as fiat currencies hyper inflation

Richard Calhoun
Richard Calhoun
4 months ago

Fiat money debt is unsustainable … whichever way you look at it.
Currencies need to be backed by Gold?

Mark V
Mark V
4 months ago

Rather than ‘backed by’, you could simply use gold. And silver. Copper. etc….

Richard Calhoun
Richard Calhoun
4 months ago
Reply to  Mark V

clumsy though

Mark V
Mark V
4 months ago

It doesn’t travel over the internet very well, but for that you could use gold backed crypto.

Martin M
Martin M
3 months ago

A gold standard is incompatible with modern economics, but there is nothing to stop you buying actual gold if you want it. At least it is real, unlike Bitcoin.

Mark V
Mark V
3 months ago
Reply to  Martin M

“A gold standard is incompatible with modern economics”
There’s nothing especially modern about fraud

Martin M
Martin M
3 months ago
Reply to  Mark V

Well, how to you “pump prime” an economy if you are limited to a gold-backed currency?

Mark V
Mark V
3 months ago
Reply to  Martin M

You can still invest, the only difference is there aren’t unlimited units to throw around, debasing the currency.

Martin M
Martin M
3 months ago
Reply to  Mark V

In other words, you forego your main economic tool.

Mark V
Mark V
4 months ago

It could crash “the economy” if by “the economy” you mean the hall of mirrors, Potemkin village, managerialist-technocratic, hyperinterventionist, profligate, cronyist pseudo-economy we live in.
Back in reality however, “the economy” is a mess and Bitcoin is here to fix it.

Martin M
Martin M
3 months ago
Reply to  Mark V

It Bitcoin is here to fix that mess, we are all in trouble.

Mark V
Mark V
3 months ago
Reply to  Martin M

Fiat parasites are in trouble

Martin M
Martin M
3 months ago
Reply to  Mark V

So your solution is that we should embrace something put in place by a crook or crooks who are not even prepared to disclose their identity?

Mark V
Mark V
3 months ago
Reply to  Martin M

The source code is public, it doesn’t matter who wrote it.
You say they are crooks, I say fiat is crooked.

Stephen Abrahams
Stephen Abrahams
4 months ago

What is the reason for all forms of currency? Answer : to act as a medium of exchange for trade. All currencies have no intrinsic value. Value is inherently subjective. The value of everything is entirely dependent on what it is worth to the purchaser. All fiat currencies are backed by nothing but the labour of generations yet to be born, a problem being continually exacerbated by the creation of ever more digital ie valueless forms of mediums of exchange by banks, who then charge interest on that essentially valueless medium.
Now tell me what Bitcoin is. Answer : it’s a purely digital medium of exchange with no intrinsic value, but with the advantage that its creation is understood to be a finite supply. Transactions are completely private and have no connection to the national economies of those transacting the trade. That, of course, is an unsurmountable problem for global governance, hence the enthusiasm for Central Bank Digital Currencies which offer the ‘benefit’ of a supply which remains under the control of national governments, with the added advantage of being a system which can be utilised to promote, or prevent, the trade in specific products.
Finally, to return to the utterly corrupted system of fiat currencies, the author of the article raises the issue of QE having been utilised to underwrite the value of assets, which is, undoubtedly correct. The more obvious and dangerous problem has been the wholesale transfer of wealth, in the form of assets, to those who were preferred by the thoroughly ludicrous concept of QE, because the assets represent the only reason for a concept of value which, as ever, is based on supply and demand.

Martin M
Martin M
3 months ago

Fiat currencies are backed by the issuing country, and their value is measured having regard to the power of the government in question. The US is the greatest global power, which is why its currency is the “global currency”. 120 years ago, Sterling filled that role.

Mark V
Mark V
3 months ago
Reply to  Martin M

Empires fall

Martin M
Martin M
3 months ago
Reply to  Mark V

Yes, and another rises to fill its place. At that point, you just move to using the new empire’s currency.

Mark V
Mark V
3 months ago
Reply to  Martin M

If you’re not very bright you might

Fafa Fafa
Fafa Fafa
4 months ago

My guess is that Bitcoin was created simply because it could be done. There were a few trials for digital currencies but they all failed to take off for one reason or another. Bitcoin overcame all of those deficiencies and became increasingly accepted. The underlying philosophy of such systems was the declared need to remove money from social and governmental control.

There is something alluring in creating something governments can not control, therefore corrupt or weaponize, but of course it has the dark side, that whatever good governments do (preventing crime, treason, etc) can be circumvented by the use of such untraceable currencies.

This qualified “plus” is seriously counterbalanced by it being a vehicle of speculation. If speculation is what the result of having no government control is then really what was the point.

Add to that the fact that keeping the system running requires extraordinary amounts of energy and materials, which are both supplied by societies and governments, including real miners working in real mines, and so on, the parasitic nature of the enterprise comes to the forefront.

Martin M
Martin M
3 months ago
Reply to  Fafa Fafa

When it comes to its use as a “currency”, it is only useful as a means of facilitating illegal transactions. It is simply too cumbersome for general use. When comes to its use as a “store of value”, it depends entirely on the “greater fool principle”.

Mark V
Mark V
3 months ago
Reply to  Martin M

Fiat’s use as a currency is only useful as a means of impoverishing the public

Martin M
Martin M
3 months ago
Reply to  Mark V

And yet it has enabled us to construct quite a complex civilisation.

Mark V
Mark V
3 months ago
Reply to  Martin M

The gold standard did that, fiat is undermining it