Have you purchased any Bitcoins yet? If not, you should really think about it.

Bitcoin has the potential to revolutionise the global banking world just like Uber did with the taxi industry. In the 1970’s people heard of a new technology called the “computer.” It was complicated and left most investors disinterested. Likewise, in the early 1990’s, a new technology called “the Internet” appeared on the scene. Many conventional investors held back.

Bitcoin as a currency and banking platform is potentially in the same phase as those early world-changing technologies, although it is fast becoming more mainstream. The October cover story of the Economist featured Bitcoin and most news agencies have covered it in detail. Numerous online retailers are now accepting Bitcoins including Ebay, Microsoft, Dell, Expedia, WordPress and others.

Even US Federal Reserve Chairwoman Janet Yellen has been talking about it: she is quoted as saying …”this is a payment innovation that is taking place entirely outside the banking industry” … “It’s not so easy to regulate Bitcoin because there’s no central issuer or network operator. This is a decentralized, global [entity]”

And therein lies the beauty of Bitcoin. It acts like an online bank account with a unique type of money in it, but it operates completely outside of the global banking and currency system, with no government being able to control it.

What is Bitcoin?
Bitcoin is a computer program. It allows people to trade divisible digits – called Bitcoins – which can be sent to other people seamlessly. It fulfils most functions of a modern day currency and banking system.

However, there are three major benefits to Bitcoin that catapult it into the global payments scene. The first is that Bitcoins cannot be increased in number, beyond what they have been programed to do. Secondly, Bitcoin transactions are decentralised on computers around the world, making it virtually impossible for any particular government (or grouping of governments) to shut it down. The third is that if you receive a Bitcoin as payment, you actually have a claim to that Bitcoin – unlike currency in the conventional banking system. Let’s look at each of these in turn:

Fixed Amount of Money
Firstly, the number of bitcoins are fixed based on the most advanced encryption available. In particular, the system uses a technology known as Public Key Infrastructure – or specifically, the “Block Chain”. While the detail here can get complex, the concept is fairly simple. The Bitcoin program is publically available for everyone to inspect and there is a public record of all bitcoins available. Each owner has a unique and anonymous password to access their bitcoins. It is similar in a way to a Post Office Box system. We all can see how many Post Office Boxes there are. But each owner would have a key to access their unique box.

In other words, there is no way that anyone would be able to increase the number of bitcoins in circulation. The number is fixed and is publically known.

Decentralised Banking
Secondly, the Bitcoin system is virtually impossible to shut down. There have historically been many e-currencies before. However, shortly after they gained traction, the authorities in the country concerned quickly arrested the individuals and went to the underlying server to shut it down. E-gold was a typical example. This is simply transaction control by governments, who have a vested interest in keeping people using their national currencies.

But with Bitcoin it isn’t that simple. Bitcoin uses what is known as “peer-to-peer” technology to facilitate payments. You cannot simply shut it down, since there is no server that operates the Bitcoin program – rather, hundreds of thousands of computers around the world are available to facilitate payments. The combined internet is the Bitcoin server. Even if the authorities did stop all Bitcoin transactions from computers in, say, the United States, computers in other countries would be available to facilitate payments.

The Bitcoin “banking payments system” is one of the hardest for governments to stop or control. They can provide some level of regulation within each country. But they practically would not be able to stop the Bitcoin system from operating.

Bitcoins vs Bank credit

The third arrow in Bitcoin’s quiver is that each bitcoin on the Bitcoin system is a direct claim to a bitcoin. This seems a rather odd benefit to emphasise. However, contrast this with the current global banking system, and it becomes much more apparent why.
Few people realise that their deposits at banks aren’t actually a claim to cash vaulted in a bank. Banks typically hold less than 3% of their customer’s deposits on hand in cash. There really is very little actual cash in the banks that are supposed to be looking after your cash.

When you receive an online payment, all you have is a loan claim to a bank which has very little money. Most central banks will look to supply newly printed money to the banks to bail them out if necessary – however, in the case of a panic and run on the bank, your so-called deposits are vulnerable.

If you hold bitcoins by comparison, you actually have a unique ownership claim to those bitcoins. There is no bank credit or market exposure. Even if banks went bankrupt on a large scale, it wouldn’t stop your ability to hold, transfer and receive bitcoins as payment.

The Greece Example
The above three benefits of Bitcoin were illustrated well in the recent Greek crisis. For a period, the banking system stopped all withdrawals or international payments from occurring. Greeks had very limited and restricted access to their Euro bank deposits.

During this time, the Euro was being printed en masse – eroding the value of the currency. Greek deposits were at the mercy of those who controlled the banks and the money printing process. However, those Greeks that owned bitcoins didn’t have a problem. They could make international payments with ease, and they could rest secure in the fact that they owned bitcoins that weren’t going to disappear or inflate away.
In a world where most major currencies are being printed on a grand scale, bitcoins are fixed in number providing currency stability. With increasing transaction control from governments, Bitcoin provides transaction freedom. And in a hollow banking world, Bitcoin provides security from financial collapse.

As with all disruptive technologies, there is risk. While Bitcoin has lasted five years of interrogation by governments and hackers alike, the technology is complex and may yet still be exposed in some way – in which case its price may fall to zero. However, that seems very unlikely at this stage and certainly no more likely than the value of “money in the bank” falling to zero. Bitcoin is an innovative technology that may just undermine the global payments system and provide a solution to the financial and economic malaise the world finds itself in.

We are investigating a way to make Bitcoins accessible on the ground in point of sale payments systems in Zimbabwe. What Bitcoin opportunities are you going after?

Philip’s Desk:

Zimbabwe

Since our last newsletter, Zimbabwe has had a flurry of activity.

The Reserve Bank of Zimbabwe has attempted to reintroduce Zimbabwe’s currency through the backdoor, by issuing US dollar-backed “bond-notes”, with predictable consequences. This article provides useful information around the bond-note issue.

Zimbabweans have seen it all before, and are en-masse trying to withdraw money in a bank run that is revealing these banks have, in fact, no money! The ensuing cash crunch is causing a crippling crisis, with bank withdrawal limits being established, civil servants going unpaid (including police), planned government retrenchments and a general shut-down of local demand. This article here by Cathy Buckle describes it well (as do the other articles on her blog).

This is all a reflection of the typical boom and bust of money printing – while the country has been using US dollars, its banks have been lending out far more than they actually have on hand. This is a surreptitious form of money printing. These Zimbabwean banks have been “creating” US dollars.

But Zimbabweans are now finding out that their banks actually don’t have this money. While the banks were increasing the money supply, there was a relative boom (or, said better, a less severe economic downturn). But now the pain of a bank credit bust are being felt.

The cash crisis has caused countrywide outrage and an atmosphere of revolution is in the air with #ThisFlag protests across the country. In an attempt to quell the unrest, the government has resorted to the usual: tear gas, arrests, social media-shutdown and general intimidation.

Zimbabwe is in a state of great change right now.

Venezuela

Venezuela is the latest in a long list of countries to experience the devastating pain of money printing. Inflation rates are souring in the This article describes the current Venezuelan nightmare with great empathy and is well worth the read.

With such great food shortages 35 000 Venezuelans poured across the border in search of food in Columbia, in a brief 12-hour open border window. This isn’t the norm, however. The border keeps strict controls, locking people into the deteriorating country.

Murder and kidnapping have become common place. I considered flying to Venezuela to interview locals but kidnapping gangs around the airports have become a major problem. With food in such short supply, the country has become quite unsafe – alarming enough for me to avoid going there and is typical of how hyperinflation destroys a nation.

Money printing is the primary cause of shortages in Venezuela and let no-one forget it.

Russell’s desk

Brexit

Undoubtedly the most significant event of the past few months was Brexit! 17.5 million Britons, a little over 50% of the electorate, voted to leave the regulatory structures of the European Union. The outcome elicited cries by pro-Remain voters of broken democracy and that too much power had been vested in the hands of a dumb, bigoted electorate. But these pro-Remain elites betrayed their own intolerance and small-mindedness. This hard-hitting article by John Gray of the New Statesman brilliantly sums up the political significance of Brexit and what it means for the decade ahead. In short, Brexit and similar surprising democratic uprisings are the result of deep-rooted discontent with the economic status quo, the result of decades of monetary and fiscal injustice that has saddled nations and households with immense and burdensome debts. We don’t yet know where this popular uprising will lead: to genuine systemic reform or more political pressure for money printing for the people? Either way, the political rollercoaster has only just begun – brace yourselves!

Helicopter Money

Speaking of money printing for the people, things like “Helicopter Money” and “QE for the people” continue to be mulled over by the world’s policy elites. Helicopter Money is like QE but instead of the central bank printing money and buying government debt securities (bonds) from banks, it prints money and “loans” it directly to the government. The central bank literally creates a special drawing account for government to spend on whatever it likes. Since the central is part of the state, this is nothing more than the government borrowing money from…itself, or more accurately, from thin air. It is different from ordinary QE because it bypasses the banks and so the printed money can get directly to households and businesses without getting thrown straight into financial speculation and asset bubble-blowing. Helicopter money is much closer, actually roughly the same, to how the Zimbabwean central bank printed money during its hyperinflation. David Stockman’s assessment of helicopter money is blisteringly scathing.

If one needed any more proof that gargantuan debts and money don’t create progress, one only needs to gloss over the latest survey by McKinsey which concludes that “Across 25 of the world’s advanced economies, about two-thirds of the population—more than half a billion people—earn the same as or less than their peers did a decade ago.” People are going sideways or backwards and this could be one of the first generations in general peacetime to be poorer than their parents. This is creating political upheaval in the West. Read McKinsey summary here.

General:

We have had a heart for reform money and banking and are in the process of establishing The Monetary Justice Project to this end. We want to provide input to both governments and corporates around what that looks like and we’ll be giving you more detail as this progresses.

The year has started off with a macro-economic bang.  The excesses of decades past are beginning to show. The world is languishing in debt and money printing will become an increasing theme. Zimbabwe’s money printing lessons are more applicable now than ever before.

2015: Macro-economic fireworks

The start of the year has been all about Europe: The Swiss ended its currency peg, the European Central Bank announced a massive round of QE (planning to print over €1.1 trillion to pay off government debt*) and the Greeks voted in a radical leftist party. These are three extremely important events in the context of the euro currency and the world economy. Very briefly, here is a bit of background.

Short History

In 1999, the European Union introduced the first currency of its kind. Hailed as a major breakthrough for the area, the Euro Project gave the entire region a single currency that allowed people from different countries to trade across borders without the problems that you typically get with multiple currencies. It made imports and exports very simple, transferring money became very easy and generally life improved for all countries in the Euro-zone.

Banks also found it beneficial. With one currency banks found it less risky to loan money across borders. Very quickly, they began to lend heavily to one another and the banking system as a whole became very integrated. Many countries that exported goods to the Eurozone began to save their surpluses in euros – it soon developed into the second largest reserve currency in the world. Money flowed into the region and consumption boomed. Life in Europe was good…

 Except for a single problem. The governments in these regions were going into debt far beyond what they had agreed to beforehand when they signed on to the single currency arrangement. Even Germany, the bastion of economic restraint, exceeded its debt commitments. It was so easy to borrow cheaply and governments in the area binged on their credit limits – particularly the nations known as the PIIGS (Portugal, Ireland, Italy, Greece and Spain).

The fattest of them all

Of these, Greece became plump with debt. European banks themselves had been lending heavily to the Greek government by buying Greek bonds. Few investors noticed the country’s burgeoning debts and to add to this, the government was falsifying its loan figures.

By 2009 ratings agencies progressively downgraded Greece’s credit rating. Its government was struggling to repay its debts on time. The various European authorities gave emergency loans to roll over debts that had become due, and in one instance negotiated a debt reduction. But only on condition that Greece reduce its government spending and increase taxes (known as austerity).

The financial crisis and austerity measures led to widespread unemployment and massive demonstrations in Greece. Even with the reduced spending, last year Greece’s government accounted for just over 59% of all trade in the country – it is a pseudo-austerity.

Rest of Europe

The same problem has been revealed in many other countries in Europe: the Emperor has no clothes. These countries can’t, in fact, pay their debts. Given that banks, pension funds and most investment houses are exposed to European government debts, the very solvency of the system is dependent on whether these loans can be repaid.

Swiss parachute

As the European debt crisis buckled in 2011, money flowed out of the region into Switzerland. To provide support, the Swiss National Bank began to print its own currency on a fantastic scale to buy euros, lending them to European governments.

This year starts with a bang

Fast forward to 2015, on January 15^th, the Swiss National Bank announced that it would stop buying euros with newly printed Swiss Francs. New lenders would need to be found elsewhere.

One week later on January 22^nd, the European Central Bank announced that it will be printing €1.1 trillion to buy government bonds (i.e. to lend money to them and to repay their debts). Initially Germany had resisted this move, but it has been persuaded to go with it since they are the primary beneficiary of this printed money (some commentators estimate that 25% of this new money will go to buying German bonds). None of this new money will go to finance Greece’s debts – which has prompted outcry and demonstrations in Greece.

January 25^th, the radical left-wing party Syriza was voted into power in Greece. As part of its election campaign, this party have openly decried austerity measures. They are looking to consume further in debt and are trying to renegotiate repayment terms. Without support, Greek debt is unpayable. Syriza is also open to exiting the euro and returning to a Greek currency. This would enable Greece to print money in response to debts and expenses.  With little opportunity left for Greece to repay its debts in euros, the European banking system is again at risk.

Greek Prime Minister Alexis Tsipras is defiant against austerity measures being imposed, and the government has reportedly been investigating whether it can use bank money for its expenses (which has ultimately come from the European Central Bank). A Greek default would rock the European banks.

Debt and money printing are very closely aligned. Europe’s debts will not easily be repaid without massive money printing schemes going forward – a move that the authorities are embracing with unreservedness. In the past, many governments have repaid their debts with newly printed money and it always leads to destruction in an economy. These events will play out in the coming months and years. Europe’s problems are only beginning.

When Money Destroys Nations news:

These lessons have been seen before and our book, When Money Destroys Nations discusses them in detail. We’ve had overwhelming feedback and support for the book and its selling at a pace.

At the end of February, we are launching it in Cape Town, South Africa, and then in March we’re running a formal launch in the United States.

You can get a copy of the book at our website, WhenMoneyDestroys.com.  Everywhere we go people are asking real questions about global money printing and how it affects them – help us spread the message.  If you haven’t signed up yet, you can do so here.

 

‘til next time

 

Philip Haslam

Lead author

 

 

 

* I refer to money creation as money printing which is, in effect, the same thing – likewise the purchase of government bonds as repayment of government debts.

Greetings!

Welcome to the When Money Destroys Nations newsletter covering money printing trends, hyperinflation storm warnings, monetary system transition, the decline of dollar supremacy, cryptocurrency, and precious metal trends.

We are coming off a great first two months of the launch of our book, When Money Destroys Nations. Globally, money printing is becoming a serious consideration for most countries that are indebted and Zimbabwe’s lesson has never been more applicable.

You’re part of a growing group of people steadily educating themselves about the real consequences of money printing and how the global monetary system is evolving with each passing day. We won’t spam you. If something big is happening that we think you should know about, we’ll let you know, but normally we’ll only send around one or two emails per month. We welcome your feedback and questions – tell us what you want to know about in the fascinating world of money printing and monetary systems. And remember, if you find it’s not for you, you can unsubscribe from the mailing list quickly and easily at the bottom of this email.

Japan goes over the money printing hill
In the last month, Japan announced an increase to its money program – printing money at a rate of ¥80 trillion per year. To put this into context, that is over ¥620 000 ($5 300) printed per person in Japan every year!  If only life were as simple as printing money whenever we needed it.

The ridiculous aspect of these statistics are that the newly created money doesn’t go to the population. This money goes to special interest groups in the finance sector – but mostly, it goes to paying off the debts of the Japanese government. You and I work hard for every dollar, rand or yen we make and these guys go ahead and create it out of nothing. Tragically, the largest holder of Japanese debts are pensioners – people who have saved hard all their lives only to receive money created out of nothing in return. In Zimbabwe, pensioners who had saved lost everything. Interview after interview, I heard the most heart-breaking stories of how pensioners suffered.

Bank of Japan’s governor Haruhiko Kuroda has ominously said that he wants to double the amount of Japanese money in circulation in the next two years. I wonder what goes through his mind as he sleeps at night.  With newly printed money, the Bank of Japan and the Japanese government can purchase real goods and services whilst passing on the cost of this to the poor and to pensioners who diligently save all their lives.  The reality is that nothing comes for free. And someone has to pay for these huge scale money printing programs. Sensing the problems this will create, Japan’s government pension fund that manages the retirement money of millions of government employees, announced that it will begin selling hundreds of billions of yen worth of government bonds and buying stocks. When the government doesn’t trust its own bonds, you know debts are unrepayable.

Japan’s problems are only starting. With debts of over ¥1 100 000 000 000 000 (¥1.1 quadrillion), the Japanese government has few options available to it.  Add to that social security obligations of over ¥1 quadrillion, and the equivalent net amount owed per citizen is ¥15 million ($133,000) each, or nearly half a million US dollars’ worth of debt per family.

Japan is on a path very similar to what happened in Zimbabwe. Watch this space. The economics of money printing cannot be denied.

The Swiss and their Love of Sound Money: Why the “Save Our Swiss Gold” referendum is important
On the 30 November, the Swiss public are voting on a referendum known as the Save Our Swiss Gold initiative. The referendum is looking to require the Swiss National Bank to hold gold equivalent to a minimum of 20% of the base currency in circulation. The Swiss National Bank would also need to repatriate its gold holdings from other countries over five years and be restricted from selling its gold going forward. Here are three high level reasons why the Swiss referendum on gold is important.

Firstly, this signals a major shift in the global approach to reserve currencies. This is the first time in decades that a major economy is seriously investigating providing a gold backing to its currency, albeit only 20% of bank reserves.  It nonetheless would signal a move away from US dollars and euros as a reserve currencies, and provides an interesting insight into the potential movement of other currencies in this direction.

Secondly, the Swiss are concerned that other central banks may not be as reliable at keeping its gold compared to the Swiss National Bank and would look to repatriate about 300 tons of gold from foreign central banks. This past week, the Dutch central bank repatriated over 122 tons of gold from the vaults of the Fed in New York. Germany is in process of doing the same, repatriating up to 50 tons a year. On Monday, French opposition leader (and potential next president of the country), Marine le Pen demanded that France repatriate its gold as well. There is ample evidence to suggest that there is less gold in the major central bank vaults than is reported and mass redemptions of gold could cause others to do the same – sparking a similar gold run as was seen in 1971 with the collapse of the Bretton Woods financial system.

Third, for the Swiss National Bank to fulfil the mandate of the referendum, it would need to purchase at current prices over 1600 tons of gold. However the SNB would have 5 years to implement the gold target. Assuming 5% quarterly growth in the base money, and all other things held constant the central bank would need to purchase approximately 1000 tons per year for the next 5 years. This represents a major increase in demand for gold – about 25% of total annual global demand. This could cause an increase in the price of gold and may encourage other central banks to consider doing the same.

What could this mean for gold?
A yes-vote could cause an increase in the price of gold, whilst a no-vote would likely not impact the gold price significantly. For those who have appetite for exposure to the gold price, a yes-vote would be a welcome development.

Even if the referendum passed a yes-vote the central bank would still be able to print money to purchase its gold and euros – giving it the ability to maintain the currency peg and to maintain the requirements of the referendum. The referendum would therefore be unlikely to affect the exchange rate value of the Swiss franc.

The latest polls are leaning in the direction of a no-vote, but we are certainly not ruling out the possibility of a yes vote come Sunday 30 November.

More to come
That’s all for this edition, but the global money printing news is coming on thick and fast these days so there will no doubt be a lot to talk about next time. We’ll cover other aspects of money printing in our next few emails – including what’s happening in the US, Europe, Venezuela and other countries.  Like I said earlier watch this space. As countries around the world are printing money, it will have very real consequences on you and I and we all need to be prepared for major shifts in economies and in how commerce is done.

One of the questions we get a lot is: how should we respond to money printing? It’s a great question since it personalises all these theories. We’ll look to answer these questions and more in forthcoming editions. We’d love to hear from you – let us know what other questions you have.

Visit our new and improved website whenmoneydestroys.com where you can sign up for our monthly newsletter and check out our latest articles, interviews, recommended reading and where to buy the book.  We as authors are passionate about the topic of money printing and what it means for you, and are available to speak with your companies, book clubs and societies. Let us know how we can engage with you on this.

Best regards

Philip Haslam
Author, When Money Destroys Nations

When the central bank meets to decide on the level of interest rates, most people care about only one thing: are my home loan, car and credit card repayments going up, down or staying the same? Although this is no trivial concern given the importance of managing a household budget, such a limited view does scant justice to the broad, critical and complex role interest rates play in an economy.

The usual narrative is that low rates are good and high rates are bad. But the real problem is not “high” interest rates, but wrong interest rates. You see, interest rates are prices. Like the price of a soda drink is agreed between seller and buyer, so interest rates are the price of loans agreed between lender and borrower.

Suppose the government forced the price of sodas to half their market level, jailing anyone caught selling them at any price above this new level. What happens? Soda lovers flock to the stores to buy soda. Soda makers, by contrast, make heavy losses and either close down or find some way to make cheap and nasty soda for half the original cost. The supply of soda plummets, while the quality of soda freefalls.

Paradoxically, setting a price artificially low makes a product easy to buy for a while, but eventually impossible to buy at all. Interest rates in most modern economies work the same way. The central bank forces this price to a desired level through extensive regulatory control over the banking system, relying on the fact that the money it creates is the only legally permissible money used in trade. When the central bank forces interest rates too low, borrowers think life is great. Houses, cars, and furniture seem cheap and starting a business with a loan is easy. Except that discerning lenders don’t see much point in lending any more, because they are no longer adequately compensated for their costs and risk. Not only do loans from these lenders dry up, but the quality of remaining loans falls.

How does the quality of loans fall? Just like the soda makers who sourced cheap and nasty materials, so credit providers (banks) move away from sourcing funds from discerning investors who would charge more, and rely instead on getting cheap money directly from the central bank, which prints it out of thin air and lends it to the bank at the cheap rate.

With this cheap funding, the banks don’t have to be nearly as careful who they lend to and can happily accept lower interest repayments from borrowers. Risky borrowers who were unable to pay the rate of interest discerning lenders demanded can now access cheap loans. Furthermore, because the loans created out of thin air look exactly like the money in the hands of discerning lenders, this poor quality is veiled and people are fooled into thinking that discerning lenders are supplying loans, when in fact they’re running for the hills.

This ends in disaster. Borrowers get into too much debt and the money loaned out of thin air floods into the economy. New money in  people’s hands causes the economy to consume more than it produces and the result is a gaping and unsustainable trade deficit. The new flood of money pushes prices up and causes the currency to weaken.

After initially feeling flush, people realise they are not as well off as they thought as price increases eat into their real living standards. Forced to rein in inflation before it destroys everyone’s living standards, the central bank hikes interest rates to entice the discerning lenders to do more lending. Businesses addicted to cheap loans find their input and funding costs rising unexpectedly, damaging profitability.

The return of discerning funding is critical for sustainable economic growth, because it funds productive capital investments that yield the highest return, creating jobs and quality, affordable products. Meanwhile, higher interest rates punish those who gorged on artificially cheap credit, restoring the economy to healthy reality and balance.

The next time the central bank meets to decide on the level of interest rates, don’t just ask how much your home loan payments are going to cost next month. Also ask: are interest rates at the right level to foster sustainable economic progress, and might I be living an illusion?