Bonds, Bondage, and Bitcoin

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Into the world of debt monetization.

Everything we do is a trade. Every action, conversation, and exchange of goods or services is a decision where we choose one path or outcome over another. The unfortunate reality of this freedom is that we are heavily impacted by tradeoffs not only created by those living around us today, but the trades made by our ancestors in the past. Prior generations in America, through the use of debt financing, lived lives of higher quality and luxury than they could actually afford under a fixed monetary standard. But there is no free lunch, and this decision to live through debt financing simply pushed the cost of things in the past into the future. The costs were pushed to us today, and that is the reckoning that we now have to deal with.

We all have some experience with debt. It is a cornerstone of our financial infrastructure within this society. Whether it is as small as paying for groceries with your credit card, or as big as financing your home with a massive mortgage loan, debt touches every corner of our lives. We even have complex systems which rate how reliable we are as borrowers of money, called credit scores. These scores have exploded in importance to our lives, and with a poor score many are not even able to rent a place to live. Debt has existed for almost all of recorded history, but its pervasive, dense, and sophisticated nature in our society today is an extreme never seen before. Remember, credit scores didn’t even exist before 1989.

Personal, household, and corporate debt have been increasing to new all time highs. This has become an incredible burden to those without easy access to credit. If goods are no longer purchased based on how much money you have, but instead based on how much money you can borrow, prices can explode upwards with little restrictions other than the risk tolerance of a bank. We can see this clearly in college tuition. Student loans are not subject to bankruptcy, and therefore have essentially zero possibility of being defaulted on. They tie down the borrower with ruthless rates and collection practices and are essentially risk free by law to those who issue them. This means that there is no real limit on what someone can spend on school, as banks do not have any real concern with lending out extreme amounts of money. Everyone wants the best, and in this case that means that many students will choose to take out much more debt than they can afford to repay to go to a more popular or competitive school. This drives up the price of tuition at those schools, makes smaller, lesser know schools much less competitive, and creates a spiral of increasing prices and more market dominance for larger institutions. If you are someone either sane enough to not want the burden of this debt, or someone from a poor economic background with low credit and no one in your life with sufficient wealth to support you, traditional education has become a product which is impossible for you to buy.

Now consider this. We can see clearly, all around us, what debt does to an individual on a small scale. Now what if there was a central institution that instead of spending what it can produce in revenue, has run a budget deficit for the past 50 years and is in over 30 Trillion dollars of debt? Enter the United States government.

Originally, governments did not carry this much debt, and actually spent what they made. However following innovations in technology in the 1800s, governments had lots of new weapons that they wanted to try out on each other. War is very expensive, especially a war on the scale of WWI, so the first U.S. Treasury bonds, which were named ‘Liberty Bonds’, were issued in 1917 to fund the war.

Bonds are essentially fixed-income financial instruments that represent a loan of money from an investor to a borrower. In the case of government debt, the government is the borrower, and the individual or group purchasing the bonds in the entity loaning the money. Bonds include details like an end date when the principle must be repaid to the lender, and a variable or fixed interest rate. Since most governments have the power to collect taxes or issue new currency, the bonds issued by them are typically considered safe investments with very low risk of default.

The bond market, which started humbly, has now expanded to being the biggest market in the world. These debt contracts are the basis for pensions, retirement funds, investment accounts, and foreign currency reserves of other central banks. As of 2021, the size of the bond market is estimated to be at $119 trillion worldwide and $46 trillion for the US market, according to Securities Industry and Financial Markets Association. The total national debt for the United States stands at 30.4 trillion dollars, not including future program liabilities which are yet to be funded, like promises made to social security earners and medicare users. These numbers can be hard to even wrap your head around, but lets try to find some perspective. The gross domestic product, or GDP, measures the final value of all the goods and services within a country. The GDP in the United States last quarter sat around 23.6 trillion dollars. Now while this is clearly impossible, that means if we sold every single good and service we own in this country, we would still owe almost 7 trillion dollars to our lenders. This is a huge market and bonds are the basis for most peoples wealth, but it is becoming clearer and clearer by the day that this debt will never be repaid. Just as high levels of debt financing are a problem for the individual, they are a big problem for the country.

So what is the end game? Will the United States default on its debt, collapse, and spark a war between itself and countries which have lent it money? Will the country become a slave to all others, just as the indebted individual becomes a slave to their lenders? How do we escape this bondage that the older generations have left us with?

The United States has one tool that the individual doesn’t. While you or I may be forced into debt and have to work and suffer to provide real goods or services to repay it, the government doesn’t have to. If the United States ever comes close to default, the Federal Reserve can step in and monetize the debt. This essentially means it will buy bonds off of the open market and exchange them for dollars. The dollars come into existence, and the debt goes onto the balance sheet of the Federal Reserve, but it never really needs to be repaid and can essentially be considered gone. This seems well and good, and is what we have done in the past whenever there is a contraction of the economy which makes people less capable of lending to the government and paying high tax bills. We did it in 2000, we did it in 2008, we did it in 2020, and we will do it in the future. Each time we monetize bad debt we go further than we went before. This process is called ‘Quantitative easing’.

The problem is that nothing has changed about the real state of the economy. No new wealth was actually created. The Fed simply bailed out those who had used too much debt financing, or the most irresponsible people in society, and reset the debt clock and pushed recession and deflation down the road. But the new money that was created has to go somewhere, and it works around the economy in unequal ways, and causes massive inflation. First, scarce and valuable assets experience inflation, then stocks, then housing and lifestyle items, then essential goods like food and oil. The suffering we are experiencing today is because of all the new money which has been created in the past 20 years to bailout bad debts.

This government debt that individuals, corporations, and foriegn countries own isn't even sound money. As we have seen during the Russian invasion of Ukraine, bonds and treasuries can be censored and confiscated if someone does something which goes against the will of the American government. That is not to say the actions of Russia are defensible, but is to say that other countries see this weaponization of money and become wary of holding U.S. debt themselves.

What we desperately need is to shift our monetary standard away from debt and into sound money. We need to reward saving, punish those who make poor investments, and protect the wealth of the workers. We need to also have this money be neutral, sound money which cannot be censored or confiscated by a central authority. Even gold can be taken away or stolen, and gold is also hard to use as a medium of exchange or long distance payments system.

Enter Bitcoin.

Bitcoin is a bearer asset. It is not a promise, it is not debt, and it cannot be taken away or prevented from being spent by anyone. It has a perfectly fixed supply, is infinitely divisible, and is easy to send and transact with. In a world where the supply of currency will continue expanding to service the irresponsible debts of the past, present, and future, it will become increasingly important for people to store their wealth outside of this system of bondage. On this journey down the rabbit hole, many find their perspectives on money management and what makes something truly valuable change as well. The present will be messy and chaotic, but the savers, producers, workers, and leaders of today will be the ones who build a beautiful future for our younger generations and allow humanity to escape the debt trap it has gotten itself into.

The debt will increase, the purchasing power of the dollar will decrease, and the reliance on government money will reach all time highs within this decade. But once more people see the inherent flaws with this system of loans and promises and have the courage to opt out themselves, we can start on making the world work better for everyone again.