What Is Happening To The American Dream?
You are a financially responsible person, and a hard working one, at that. You study and prepare for all of your youth, eventually graduating high school. This is very exciting, as you are the first in your family to get their diploma. After interviewing you land a position as a milk delivery driver, ferrying truckloads of milk to people’s doorsteps. You fall in love and get married, buy a large piece of land in the suburbs, and have a large family. Your family lives comfortably off of your salary alone, and through your hard work you’re able to put your kids through high school and eventually college. This is the American Dream.
This is no longer a reality in America.
For the last century, the United States of America has engaged in undisciplined monetary and fiscal policy - which has left the American citizen working harder than ever, while losing more of their wealth on a yearly basis than ever before. The Federal Reserve Board has become addicted to the money printer since its inception just before WWI. Conceived to have more central control over the country’s circulating money supply, they quickly found that debasing the currency to finance wartime efforts was easier than sticking to setting interest rates. This addiction became the match that would burn down the value of the United states dollar for over a century to come. In addition, the United States Congress has devolved into a group of people who decide what to throw money at, and how much they should throw.
As is evident above, I am clearly impassioned when it comes to this subject. Why is this? I simply cannot stand on the sidewalk, watching this burning building collapse - I first need to save as many people as I can from the inside. This analogy describes the United States dollar, and as its value becomes harder to stabilize while the government seems to have no vested interest in saving it, I need to help people understand what is going on so they can protect their wealth elsewhere.
Competitive Environment
Money has three properties: store of value, medium of exchange, and unit of account, which manifest in that order. Rai stones, marbles, and gold have all come and gone through these stages, leading to where the world currently stands with the United States dollar as the world reserve currency. The United States helms creation power over the USD, as there is limited competition at this time for a universally accepted form of money - limited only to China, which currently has the largest market capitalization of any fiat currency in the world.
The USD lacks any intrinsic value, however. After the Fed started increasing the money supply beyond our gold reserves during WWI, and ultimately leaving the gold standard in 1971, the only difference between the dollar and a piece of paper is the “good faith and credit” of the United States government. Hence, people only view the dollar as valuable because of the United States’ dominance as a nation. In an ever-globalizing world - whether that’s a good thing or not - the potential for USD capitulation to another currency like the Chinese yuan is becoming increasingly worrisome. The market for currencies is becoming staggeringly competitive; and while fiat currencies like the United States dollar are losing their real value at record levels, people are looking for a hard money alternative.
Bitcoin is the only hard money alternative. Bitcoin is a decentralized protocol, with open and immutable monetary policy. The network is protected through computer power around the globe, with network consensus required to change any of its rules - one of which being a fixed supply cap of 21 million bitcoin. This is a concept that is unheard of. Even colloquial stores of value like gold have an infinitely inflationary supply — if demand should increase then gold miners will increase the supply schedule by mining more — the value of the gold stabilizes nominally and you are back where you started. While I could discuss why the Bitcoin protocol is designed to resist attackers, and explain the anti-fragility of its value, that is not what this particular piece is about. So we will stick with the assumption that on its predetermined supply schedule and difficulty to create, bitcoin is the hardest monetary asset, thus the most resilient store of value - which I’ll happily opine about at a later date.
Ownership Structure
The United States monetary system has a simple ownership structure, the sole owner is the United States government. You could argue that through our election of representatives, the country's monetary system is really owned by its people. However, through irresponsible spending of tax dollars, and injection of the money supply with new dollars at a breakneck rate, the politicians we elect hardly have the interests of “the people” in mind - they are reduced to bad actors. As of now, the ownership structure is mostly concerned with physical assets - as many who are in charge of monetary policy are asset owners themselves, so USD debasement only serves to nominally benefit them.
Bitcoin however has a decentralized ownership structure. The network operates on millions of dedicated computers, called miners, that compete by solving cryptographic hash functions to create new bitcoin. An explanation of mining is better suited for the Incentives section below, but through the exertion of their computing power, they are making the network more secure. Additionally, the Bitcoin network is owned by what are called full nodes. These full nodes take the output of the hash functions from the miners and verify that they are the correct solution to the cryptography - which takes very little computing power. The decentralized nature of the transaction ledger, the minting of coins, and the verification of the processors on the network make Bitcoin the most fruitful monetary ownership structure the world has ever known. Nobody can change the Bitcoin protocol - applications can be built on top of it, but its immutable properties become more solidified as the network grows and becomes harder to break. This is the opposite of the ownership over the U.S. financial system - whereas there we are governed by the will of the few - Bitcoin will be governed by the many, forever.
Incentives
As discussed in the Ownership Structure section, the United States monetary constituents are incentivized to increase the circulating money supply. Not only does this tighten their vice grip over the nation's citizens, it causes the price of their assets to go up in nominal terms - so as long as the USD remains the unit of account, they are getting wealthier at the expense of the American citizen. They also do this through credit expansion, locking rates at zero serves to move people to keep on spending - a component of jogging a lagging economy that the Fed has come to love as a tool to manipulate the cost of capital more than anything else. Let’s face it, the government has no ability to create new value - only serving to improperly allocate resources while extracting value from its inhabitants.
We discussed in the Ownership structure section that there are two different owners of the Bitcoin network, miners and full nodes - both of which have incentives to run the protocol and secure the antifragility of the network. Bitcoin miners get paid through coinbase transactions and transaction fees. Coinbase transactions are the new issuance of bitcoin as a reward for processing transactions. Through correctly guessing the solution to a cryptographic hash function, a Bitcoin miner is issued a predetermined amount of bitcoin - currently 6.25 BTC - approximately every 10 minutes. Thus, Bitcoin miners are incentivized to run the network, as they will receive an economic reward. What happens when new bitcoin stops being minted in the year 2140? The economic incentive will shift entirely to transaction fees, which are rewarded to every miner on the network as an incentive to process transactions, even when they don’t correctly guess the hash function. Full nodes do not receive a monetary reward for their operation, but they are incentivized through the increased security of their personal transactions if they offer their computing power to verify the miners' solutions. In short, the U.S. financial system is incentivized to debase your real wealth held in USD, while the Bitcoin protocol incentivizes its users to contribute to the antifragility of the network with their computing power. As Max Keiser puts it, Bitcoin “monetizes love and demonetizes hate.”
Informational Environment
The United States government has an issue with asymmetric information. While it is formally illegal for members of Congress to privately own securities, the informal ownership through family members is widely accepted in those halls. Despite their voting on bills which can dictate the value of securities, over 52 congressmen that we know of have violated this statute. The informational environment at a governmental level is so lopsided that it has corrupted the USD as the safe haven asset it was in the 19th century. When we used to issue exactly how much legal tender as we had gold, the USD served as a convenience. Now that members of Congress can pass policy to make their portfolios go up, the USD serves only as a pawn in their game of gluttonous wealth generation - a pawn under their fully manipulative central control.
Bitcoin does not have the problem of asymmetric information. The protocol is completely open source code, you can look it up, and with basic understanding of C++ you know the monetary policy in its entirety. This is the first instance in history of a transparent public monetary policy - and as the network grows it becomes more resilient to efforts to change it, as discussed in the Incentives section. People who understand Bitcoin in the current year of 2022 hold the advantage of asymmetric information, though. Through understanding the properties of bitcoin that make it the hardest money to ever exist, you can capitalize on future gains by allocating your wealth to it. Whereas the U.S. Federal Reserve, Treasury, Congress, and Senate hold an informational advantage over the American people with the U.S. dollar, nobody has a leg-up over anybody else in Bitcoin - making it simply a race to accumulate as much as you can.
Institutions
The Federal Reserve was created to conduct monetary policy. The roles of monetary policy are as follows: maintain full employment, and ensure stable prices. They have failed miserably at both of these things. In 2022, we have more open roles than we have had in over 40 years, and we have experienced 6.8% annual inflation, the highest price increases we’ve experienced in over 40 years. If the Fed exists to do the very things that it has never succeeded at over long timeframes, it is little more than one half of the Ponzi scheme in which our financial system is entrenched. The Treasury issues bonds on the open market to keep the economy afloat, while the Fed prints money out of thin air to buy these bonds: rinse and repeat. This is just a formally recognized version of what Bernie Madoff did for over 17 years - except with the U.S., it’s been going on for over half of a century.
The undisciplined monetary policy conducted by the Fed means the USD will continue to depreciate in value for the foreseeable future. It is unlikely that we will return to a hard monetary standard, since the United States has become addicted to solving its problems by printing money, thereby debasing the currency of its residents. With bitcoin, you do not need to trust in an institution to be disciplined and not inflate its currency - in fact, bitcoin means you do not have to trust anybody. Bitcoin is a trustless system, it operates through verification. The computing power on the network is growing exponentially; as it does this, it becomes harder to process phony transactions through the ledger - they will be swiftly thrown out. Remember, the Bitcoin miners are economically incentivized to abide by the rules of the network, so this verification has no threat which can be believably posed to it. Even if somebody decided to attack the Bitcoin network and change the rules, they would need to assume 51% of the computing power to achieve consensus. Considering the network utilizes more computing power than countries like Norway, Sweden and Finland, at approximately 143 TWh annually, this is getting more physically impossible to hack by the day.
This trustless protocol means that your wealth is protected over time, as it’s very hard to argue with math - and at a boiled down level that is all bitcoin is. When you wonder to yourself why bitcoin is a harder store of value than the Fed-backed USD, remember this aphorism: “Don’t trust, verify” - and the Bitcoin network verifies everything.
Final Thoughts
If you understand Bitcoin and make a pledge to allocate to it in a meaningful way, you are taking a step into the direction of reviving the American Dream. Pulling your faith from the United States dollar - which has served as the vehicle for infinite wealth depletion at a government level - is the start. It could be the start of a monetary revolution that sees the world turn to a hard money standard, one where a low time preference is rewarded, and one where the American Dream returns to fact from fiction.
Thanks for reading - for more coherent nonsense about all things markets and BTC, check out my Twitter.
This is a guest post by Joe Consorti. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.