The people who control our money, control the world.
Central banks have been at the top of the pyramid for generations. A necessary mean to establish trust in a market economy, until now.
With the invention of Bitcoinand blockchain– a direct response to the 2008 financial meltdown from the so called Cypherpunkers– trust does not need a powerful intermediary keeping a closed ledger of who owns what. The identity of Satoshi Nakamoto remains unknown, but the open ledger revolution was set in motion.
Albert Einstein famously stated: “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it”. It is clear that central banks, governments, and “too big to fail” financial institutions have been profiting heavily from this centralised ledger system. It is time that people profit from their own storage of value, and that is why the mission of Blockbasis is to shift trust in the financial system from a series of closed, centralised and insecure ledgers, to fewer open, decentralised and secure ledgers, also known as cryptocurrencies built on blockchains.
What is trust in a market economy?
Before the internet, authority was held in high regard. Few decisions were questioned by our politicians, managers or even our own doctors.
With the internet came an information explosion, which also meant that everything underwent public scrutiny with demand for transparency. As the world become more transparent, mistrust to closed ledgers and records has taken the world by storm.
Ask former employees at Lehman Brothers if they trust their chief executives.
Ask England if they trust their fellow citizens to decide on foreign policy.
Ask Americans if they trust their president.
Ask Zimbabwe if they trust their government to issue money.
Trust is the bedrock of a well-functioning market economy where participants can trade without having to barter. The question is what trustworthy medium of exchange participants use to trade with each other. The solution in most countries has been trust-dependent fiat currency issued by central banks with a monopoly to print money, using the government’s authority to collect taxes as backing.
Historically, trust-dependent fiat currencies with governments and powerful financial institutions creating these monopolistic central banks, seem to have served its purpose while lacking better alternatives. Nobel Laureate, F. A. Hayek, puts it well in his classic, “Denationalization of money – the argument refined”, where he clearly explained that there is no more reason for the government to have a monopoly on production of money, more than there is for government to have a monopoly on the production of toasters.
Treasury, taxpayers and the awesome power of central banks
Have you ever wondered what happened to the tax money you pay every month? They go directly to all the public services we all share, right?
Wrong. Most governments on the planet today have accumulated so much debt that all tax income collected across the globe goes directly to pay interest. Who receives these interest payments?
To understand this, it is important to understand the relationship between the government treasury and the central bank as illustrated below:
By giving central banks the exclusive power to issue money, a vicious circle is created. Let us use the example of building new public roads, hospitals and schools, classic public investment in most countries:
- The treasury takes a loan in the central bank to cover the expenses of building new roads, hospitals and schools
- The central bank prints the money required to cover the loan, creates a bond with an agreed interest rate and sells to the treasury
- The treasury collects taxes to repay principal and interest on the loan
The process above can be infinitely more refined and complex in reality, but at the end of the day the central bank prints money and earns an interest.
You might ask: So, what? If the government owns the central bank, interest payments end up in the hands of the taxpayer, right? Correct, only problem is, the government does not own the central bank. Taking the largest central bank as example, the Federal Reserve consists of 12 banks that are set up as private corporations, where member banks hold stock in the Federal Reserve Banks and earn dividends. In other words, interest paid by the Treasury are covered by taxpayer money, which goes to banks that typically consists of powerful too-big-to-fail financial institutions.
The global financial system running on fiat currencies are clearly disconnecting powerful bankers from the real world, where money is created out of thin air, and the disconnect is becoming more and more extreme every day. Why?
Because the value of everyone’s money is decreasing, known as inflation, due to central banks printing money. At the same time, more debt is taken up by national governments, which means more interest payments are received to bankers. It’s a vicious circle running out of control.
Inflation, debt and why the awesome power of central banks only become more awesome
The world has been plagued with persistent and highly volatile rates of inflation ever since economies around the world began to erode the gold standard during the twentieth century. Leaving the gold standard was a direct result of having to finance war. Yes, war.
Military expenditure made it difficult for central banks to issue new debt and hence print more money at the same intrinsic value during times of financing major world wars. We’ve established in the section above that central banks have monopoly on printing money, and are not owned by the government. Meaning the interest paid to finance major world wars flow to banks when governments take on more debt.
The problem doesn’t stop there, as war between nations ended, the war on fiat currencies’ intrinsic value had just begun. Central banks keep printing money, causing inflation and national debt to explode:
How long can this go on for?
The figure above looks like the fiat system is on the brink of collapse. This would be a false claim not accounting for all the variables in the equation.
Think of the public budget as your own private budget. If your income rises it’s ok that your debt level rises. More income basically unlocks the opportunity for more debt to accumulate. That is how increasing levels of debt is not a problem per se, as long as there is sufficient income growth to support it.
On a national level the numbers just get bigger. By throwing the central bank into the mix, more economic growth means more money can be printed, and more money means internet payments and seignorage.
All that sounds safe and sound. There is a problem though. A gap is starting to show between debt and economic growth, and it’s getting bigger:
How do we stop this vicious circle?
It takes no genius to see that the fiat system is spiraling out of control. The people at the top will do not admit so easily. Why? Because it’s easy to win a game where the cards have already been dealt, by yourself.
The pyramid with the central bank at the top, trickling down money to participants through commercial banks, simply does not work very well. We need a better system. And finally, there is an alternative that can disrupt this vicious circle. That system is based on decentralised open ledgers.
This is why Blockbasis wants to make public ledgers and decentralisation the basis of society, making trust an irrelevant ingredient in a healthy and well-functioning market economy.