Bitcoin Becomes a Life Raft as the Fiat System Breaks
In this article, I will explain to you, how the breaking of the fiat system as we were used to until now will soon push Bitcoin higher. Much higher.
I will cover the following points:
⚠️The 2 main factors causing the fiat crisis in western countries.
🧐 Why EUR, YEN, GPB, et al. are losing value.
💢Why Governments and Central Banks Will Need to Step In to Keep the System From Imploding.
💸Quantitative Easing Will Come Back Under Another Name.
🌊Why Bitcoin Will be a Life Raft When the Crisis Hits.
💡What we can Learn From Argentina, Lebanon, and Zimbabwe About Late Stage Fiat.
This is a highly complex topic and I tried breaking it down while using a simple language. If something is unclear, feel free to ask me questions. Because I believe it’s crucial for you to understand the implications of what I am saying here.
Alright, with this settled, let’s get down to business!
⚠️ The 2 Factors Causing the Fiat Crisis in Western Countries
For the last weeks, the Euro, British Pound, Japanese Yen, and most other currencies have been crashing hard vs. the US dollar.
But why is that?
There are various factors at play here.
- In general, the aggressive increase in interest rates by the FED is leading to a strengthening of the US dollar, as central banks in Europe and Japan are acting much more hesitantly.
- On top of that are specific reasons such as the ongoing energy crisis in Europe which destroys its competitiveness and with that the basis for the Euro’s (former) strength. Japan suffers from the same problems though not to such an extend as Europe.
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But how did we get here?
There are 2 main factors that caused this.
1. Energy Scarcity
Energy is needed to grow and maintain a country’s economy. Without enough — cheap — energy the economy stagnates and eventually shrinks.
Most western countries stopped being net energy producers sometime in the early 2000s. As a result, they have to import more energy from somewhere else making their energy bill higher.
This coincides with stagnating growth as we have seen in western countries for the last two decades. As the chart below shows, growth in western countries has been flat since the early 2000s. The spike is from the bounce back after the COVID crisis. Current numbers — which are catastrophic — are not included.
To maintain growth, western governments tried to stimulate the economy by injecting ever-increasing amounts of money into the system. This has been exacerbated as governments hand money to their citizens to compensate for soaring energy prices.
The problem with all of this: stagnating or shrinking economies can’t absorb all the newly created money. As a result, bubbles formed everywhere.
2. The End of Globalization as we Know it
Globalization peaked sometime in the middle 2010s. The promise of globalization was that by outsourcing production to cheaper countries, western countries could still have access to cheap goods which they bought with their hard currencies thus maintaining their standard of living.
The problem is that hyper globalization which made this possible is slowly unraveling. Put simply the world is now divided into three blocks:
- The western countries would like things to stay as they were and want to protect their turf.
- The Russia-China-Iran block wants to push back western power and influence over existing systems.
- Unaligned or loosely aligned countries such as India, Brazil, Indonesia, and Nigeria do business with the 2 others and who wait on the sidelines to see how things play out.
How we came to this point is a long story which I will summarize very briefly.
Access to cheap energy is power. When most western countries started to become net importers of energy in the early 2000s, they gradually lost the power they once had over other regions of the world. This resulted in the west’s claim to leadership being called into question by rising powers such as China. Conflicts arose that increased in intensity (see for example the RU-UA war and tensions in Taiwan).
We are now seeing clear efforts by the western bloc and its counterpart to distance themselves socially, politically, and economically from one another.
All of this is happening while the consequences of the COVID lockdowns on the global economy have not yet been fully eliminated.
⛓️Many supply chains are still disrupted.
🛢️Material shortages remain.
🏭Companies go bust.
Again, western governments tried to solve these problems by printing more money.
And all the money printing eventually led to the obvious consequence: inflation.
🧐 Why EUR, YEN, GBP, et al. are Losing Value While the US Dollar is the Last one Standing (for now)
Inflation is another word for currencies losing purchase power. Most countries have been affected by this. Notably exceptions are the Russian ruble and the US dollar.
- Russia is a net energy exporter with a (relatively) sound industrial base.
- The United States are the most powerful economy on the planet, the USD is the world currency reserve, and they still have plenty of cheap fossil energy reserves left.
But what changed for the Euro area, Japan, and Great Britain? Why are their currencies suddenly crashing at the same time?
One big factor is loss of trust.
When buyers lose confidence in the purchasing power of a currency they stop buying government and corporate bonds which are government and corporate debt. In fact, they stop buying bonds because they don’t trust that governments and corporations will pay back their debt.
After all, fiat currencies are backed by … nothing but good faith in the governments that issue them. At the same time, the economic outlook for many corporations has also deteriorated drastically.
Over the last decades, trust in governments and the belief, that the economy would simply grow forever, were enough to keep the system afloat. But we now reached a point where market participants realize that good faith alone will no longer be enough to prop up fiat currencies such as the EUR, YEN, and GBP while at the same time the economy is circling the drain.
- The Euro area (Germany) is in the process of de-industrialization due to a lack of cheap high density energy. German businesses are shutting down and leaving the country.
- Japan also suffers from energy shortages — though not to the same extent as the Europeans do. But the country has its own set of problems that contribute to the YEN going down.
- The UK lost its industrial base a long time ago due to globalization. So it has not much to back the GBP up. It is also a net importer of energy.
With the trust in many western currencies dropping at the same time, we are facing a new problem.
💢Why Govs and Central Banks Will Need to Step In to Keep the System From Imploding
Over the last few weeks, prices for Credit Default Swaps (CDSs) increased in many countries. This means bond holders and traders perceive a higher risk of default.
To give an example, when investors from the US sell UK bonds, they receive GBP in return. The investors then sell GBP for USD which puts more pressure on the GBP, causing it to fall.
What can the UK — or to be more specific the Bank of England do about that?
BoE: “Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.
In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses.
To achieve this, the Bank will carry out temporary purchases of long-dated UK government bonds from 28 September.”
In other words, the Bank of England stepped in as a buyer of last resort to buy UK bonds. At the same time, liquidity shortages are popping up everywhere due to quantitative tightening which central banks solve by pumping in more money.
These problems affect all western governments and central banks. That’s because the global financial sector is highly interconnected. Meaning that once things start to crash in one place, it also affects the system elsewhere. In fact, what happens now reminds a lot of investors of 2008, when the system started to unravel rapidly.
By the way, global financial assets or liabilities are estimated at a minimum of $587 trillion. So this is going to be a really big one. And that is why at some point, even the FED will have to step in to prop up the market.
💸Quantitative Easing Will Come Back Under Another Name
The process that is underway now is causing havoc in the financial markets. And it poses a major risk for the whole system. A decade ago the Great Financial Crisis brought the global financial system and the global economy at the brink of collapse. Governments are once more confronted with the same.
In order to keep the system running — and a major part of that is to prevent the end of their currencies — governments and central banks will pick the only option left: print more money. Better to devalue your currency than lose it entirely.
Yes, it’s ironic — but also quite obvious.
Because inflation is what enables them to pay back their debt. After all, it’s not their own money they are using.
But we are at 10% inflation and didn’t governments and central banks say they want to fight inflation?
Yes. But they’d rather live with elevated inflation than risking the implosion of the system.
That’s why soon we will see the return of quantitative easing under another name while inflation numbers are still high. Germany just introduced a 200 billion EUR ‘relief plan’ to combat inflation... This is just the beginning. They will have to use gargantuan amounts of money to keep the system from imploding this time.
And this is where Bitcoin enters the stage.
🌊Why Bitcoin Will be a Life Raft When the Crisis Hits
Many, myself included, have heralded Bitcoin as a hedge against inflation. And from March 2020 until late 2021 we were right as Bitcoin went from $4K to $69K while central banks around the globe flooded the world with fiat.
To bring inflation rates down, central banks increased interest rates and Bitcoin acted accordingly.
Very soon, when govs and central banks have to step in to save the system from imploding, the flood gates will open once again. And Bitcoin will soar.
Because something fundamental will change.
Markets take time to adjust their thinking, but once it happens there is no turning back. Once investors realize that central banks have no choice but to devalue currencies it will change the prevailing mindsets about investing.
For the last decades, bonds and stocks were the places for investors to put their money. But when you have a high-inflation environment and a shrinking economy (also called stagflation), bonds get crushed and stocks will perform much worse than they used to.
Instead, you need something that increases in value in this sort of environment. Something link Bitcoin.
Bitcoin’s fixed supply offers an alternative to desperate central banks that keep on devaluing fiat currencies. In other words: For many people in western countries, Bitcoin will become a life raft that keeps them financially afloat while everyone else drowns in cheap fiat.
And as it turns out, there are already numerous role models for this.
💡What Westerners can Learn From Argentina, Nigeria, and Indonesia About Late Stage Fiat
The above chart shows how much positive sentiment there is in various countries when it comes to crypto investments. Notice something?
Most of the countries in which there is a lot of positivity towards cryptocurrencies suffer from weak fiat currencies.
The people of Argentina, Nigeria, Indonesia, and other countries have decades-long experience with living with local currencies that are crap. And one way to deal with this is to buy Bitcoin. Because it has a finite supply, is divisible, and is digitally portable.
Life in an high-inflation environment will be hard. Last year, I wrote an article about what this will mean for the average western person. You should check it out! 👇👇
How Inflation Will Impact The 2020s & 2030s
Economic Macro Trends Of The Coming Decades And How They Shape My Investment Strategy.
Until very recently, these scenarios were unfathomable for most westerners. But when double digit inflation comes and won’t go away, those used to having a hard currency won’t know what hit them.
While the majority of westerners still has no clue about what is happening, we can see that some are taking steps to protect themselves.
The following chart from Messari show a sudden spike in people selling their EUR and GBP for Bitcoin.
While this is an encouraging development, it’s still happening on a small scale. Developing countries show much higher rates of Bitcoin purchases when compared to western countries.
TLDR: Central banks of western countries have no choice but to print their currencies into oblivion. Fiat purchasing power will crash and Bitcoin will soar.
Disclaimer: This article is only intended for informational and educational purposes, it should NOT be treated as investment advice.