Bitcoin Is The Separation Of Money And State

The United States was founded on the principle of separation of church and state. This was a radical experiment at the time, codified in the First Amendment of the United States Constitution. However, this precept proved to be an enduring pillar for which the country could grow and prosper, allowing immigrants of all beliefs and backgrounds to join the giant melting pot without fear of persecution based on their beliefs.

Its application to US democracy was first attributed to Thomas Jefferson’s Virginia Statute for Religious Freedom in 1786. For centuries prior, monarchs ruled by divine right, wielding this right to justify religious wars and exercise control over their subjects.

Even in modern times, theocratic states conducting religious oppression are commonplace. Yemen, Sudan, Saudi Arabia, Mauritania, Iran, and Afghanistan are just a few examples of theocratic countries that exist today. Often, these countries possess high barriers of exit and their citizens do not have the option to flee, and instead are forced to endure tyranny. 

The Fight To Separate Money And State Is Just Beginning

An even bigger political fight that has yet to be won is the separation of money and state. Money is the lifeblood of the economy and is the tool we use daily to coordinate resources to meet our every material need and desire. Our transaction histories, investment decisions, and retail allegiances are reflections of our personal and communal values and livelihoods.

The type of money we rely on may have different properties that nudge us in one direction or another, prioritizing conspicuous consumption over long term investment. Fiat currencies, the current standard, are subject to the whims of Central Banks that have imperfect information. As a result, these currencies are susceptible to inflation and mismatches of resource allocation, undermining our purchasing power and affecting our quality of life.

Existing power structures are difficult to disrupt and the inertia of the status quo often leads to suboptimal outcomes. Money has the ultimate network effect; its value is tied to its acceptance by other participants in the market. To this point, the status quo has been for a select group of individuals to control the money supply and make monetary decisions, a group intimately interwoven with government policymakers.

Although the U.S. Federal Reserve was founded as a quasi-public, independent institution outside the three branches of government, we are seeing political machinations influence Fed decision making. This is acutely pernicious as the economic business cycle operates on much longer timeframes than four-year presidential terms, and the Fed pledges to conduct monetary policy for long term economic prosperity. For the health of the entire system, short term political maneuvers should have no bearing on monetary policy.  

In the US, the President hires the Chair to lead the Federal Reserve, an act that ensures the appointee is aligned with the President’s interests. In 2017, President Trump appointed Jerome Powell to be the 16th Chair of the Federal Reserve. Ludicrously, Trump famously pronounced Powell an “enemy of the state” akin to Chinese Paramount Leader Xi Jinping.

Even prior to the unprecedented fiscal and monetary policy undertaken as a defensive measure against the Coronavirus, the Fed was expanding its balance sheet and pinning interest rates near zero. In October 2019, Powell capitulated to Trump when he announced the Fed’s plan to buy Treasury Bills to the tune of $60 billion per month into the second quarter of 2020. From September 2019 up until the start of the pandemic, the Fed purchased treasuries and expanded its balance sheet by $500 billion from $3.7 trillion to $4.2 trillion. This was before the U.S. had its first reported positive case and before the Fed printed trillions of dollars of emergency stimulus in the following months.  

In order to carry out this asset purchase program, the Fed must “print” new dollars to inject into the financial system. Realistically, this is done with a few keyboard strokes and increasing the digital balances of the commercial banks that have accounts with the Fed.

In the wake of the Great Recession, the Fed stimulated the economy and sharply reduced the feds funds rate from ~5% to near zero from 2008 through 2015. Notably, the Fed’s balance sheet remained stable at ~$4.4 trillion over this period, suggesting the Fed was unwilling to unwind the toxic assets it purchased in the Recession’s aftermath. In 2016, the Fed briefly flirted with a tightening monetary policy by gradually increasing interest rates until the feds fund rate reached an apex of ~2.42% in April 2019.

The Fed has enormous power over the direction of the economy by pulling the levers of monetary policy. An entire industry has emerged reading the tea leaves, parsing, and interpreting every comment Powell utters with regards to the Fed’s future actions. As Covid-19 cases resurge and employment prospects continue to suffer, the Fed has indicated it will do “whatever it takes” to avoid economic disaster in the short term, regardless of future consequences.

Furthermore, Powell appears to be acquiescing to the President’s demands, perversely aligning the goals of the Fed with those of the election cycle. The markets can fight against gravity for only so long, and once the music stops, the Fed’s actions may prove to fuel a larger asset bubble burst than if it let the business cycle run its course.

Bitcoin Is An Alternate Financial System In The Making

Alternatively, Bitcoin has been operating exactly as designed and underwent “quantitative hardening” for the third time when its inflation rate was cut in half in May. Bitcoin is an experiment that represents society’s best shot at instantiating the division between money and state, an experiment so radical it may actually work. Instead of relying on a small group of bankers and politicians to hubristically set the course of monetary policy, Bitcoin’s monetary policy has been set in its software ever since the first block was mined in 2009. Its community of stakeholders, developers, miners, and validators regulate the integrity of the system and anyone can tap into the open source software to ensure the predefined parameters are being met.    

Whereas short term thinking dictates the course of our monetary and fiscal policy, Bitcoin forces participants to have low time preference and make longer term decisions. As the network grows in prominence and individuals opt for a “Bitcoin Standard”, it may put pressure on Central Banks to act more responsibly.

Source: https://www.forbes.com/sites/leeorshimron/2020/06/30/bitcoin-is-the-separation-of-money-and-state/