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Por: Elias Grandoli - Comité de Economía, Licenciado en Relaciones Internacionales
The Statist system
From the times when kings sought to consolidate their economic power and dominance through wars, alliances and taxes, until today, the task of raising funds to cover deep and large deficits of the Royal or National Treasury is a transversal and permanent need throughout history and in all types of regimes.
This means, historically, that this task, driven by Kings and modern States, is not so different from what comes to be lurked by cash problems.
We can summarize four (4) ways of how a State can solve a budget deficit.
i) Taxes; ii) Government debt (Internal and External); iii) Money printing[1] and iv) Reduce Government Spending.
From a political view, we can establish certain preferences about what governments may try. Depending on the size of the deficit, a government usually uses one of the first three options, or a combination of them, and never the last one. Why? This is because, from a political perspective, public spending (social security, income support programs, subsidies, unemployment compensation, retirement and disability programs and several national state departments) gets more votes and this means more possibilities for a politician to win elections or retain power. This situation seems very attractive for the politician itself, but maybe not for the society as a whole.
From an economic perspective, the story goes in the opposite direction. Most economists nowadays find that the logical way to resolve a budget deficit, regardless of political preferences, is to cut public spending. The reason for this is that public spending is the master in bringing calm in the present, but in actuality brings nothing more than problems in the future: an enormous pressure over wages that comes with a raising in taxes, defaults of all government debt and the immediate expulsion of the international credit markets, and the destruction of wages, savings and investments that comes with printing billions of fiat money to solve the budget deficit and also induce extreme volatility in the money market.
Nowadays, normal people cannot escape from i, ii and iii. But in the last decade there was a new form of digital system under development: the Blockchain System. This system may be the solution, or an initial solution, towards the problems that are related to the unlimited money printing and, in other terms, politicians being politicians.
The Blockchain System
To illustrate the goal of this system it is useful to provide an example.
Let's imagine that two regular peers want to exchange something between them, usually they could use fiat money such as USD, ARS, EUR, GBP or any other state currency. At first sight we may think that there is no problem with this being happening but, we should remember that money is a source of power and control The entity that manages and controls it is the same central bank paying the accounts of the same government with the problems already described, so we might feel a cold breeze running down our necks.
In short, using fiat money produced by any state ist a risk for any individual who wants to secure his assets and, in a more concrete way, gives the state power over individuals.
The creations builded on this system which are made to solve the problems of transactions between individuals are called ‘Cryptocurrencies’ such as Bitcoin, Ethereum and so many others. According to Ariel E. Scaliter the Blockchain system provides the “possibility of creating automatic mechanisms for records and verifications of transactions that do not require intermediaries, that are autonomous in their operation and distributed, that can be accessible by anyone and thus create immutable and incorruptible systems.”[2]
This implies a very strong sign of warning to all the Central Banks in the world and the States behind them.
There is, in actual time, a real alternative of paper money commonly known that exists and is being used by millions of people all over the world at this very moment.
Maybe the reader of this article have already found the ultimate link of the chain of events resulting from massive and universal adoption of this system, being with one or many cryptocurrencies.
If it is not, here it is. The total and absolute defunding of all states and the complete collapse of the state international system.
Let's examine this deductive scenario from a simple and plain view. States feed themselves and are maintained from wealth created by the private sector ergo decentralized multiple individual decisions and preferences: trade, savings and investments. If the sources of this wealth are trade, savings and investments then, the currency in which these activities are performed is crucial. If the states can control the currencies from which the wealth is created, they can induce certain effects on its creation.
In simple words, States end up controlling the platform of the wealth creation process and receive enormous benefits from it by taxing the world’s population with the most abusive tax that ever existed, a tax with no legislation, indirect and extremely nosive to the world economy: the inflation.
Then and only then after we have understood these previous reasonings, we can conclude that: if the currency in which trade, savings and investments is not fiat or state money, this not legislated tax will end, and the States behind it as well.
Of course, legitimate objections to this statement can be issued. The problem about cryptocurrencies is that they cannot be traded as easily as fiat money, also using this currency can be a real challenge for those who have no knowledge about technological features (the blockchain system) and, last but not least, the obvious volatility going on in the cryptocurrency exchange market has to be mentioned.
In the author’s view, the global interest in cryptocurrencies can be summed up into: financial instruments that give high returns or loss because of their extreme volatility. Yes, as the reader may suppose, cryptocurrencies nowadays are not considered and used as something destined to save value for further use (savings) nor as an exchange medium (the first quality for any currency), basically, is not used as money commonly known, period. Cryptocurrencies are viewed and used as an investment, a financial asset, something that a regular person can purchase and expect an intense increase or decrease of its market value on a daily, weekly or yearly basis, not as a currency. Money is used in the previous ways explained, as a medium that allows exchanges over goods and services and also capable of preserving its market price under very low or none volatility. This is the radical difference between a currency/money and investments.
Current Outlook
Until this point, the author presented two contrasted visions over cryptocurrencies. The first one visualises (almost with a religious accent) a close future where every person, enterprise and so on, will be using some type of cryptocurrency and the collapse of all states as they exist today. The second one remarks in a short brief, the most common problems about cryptocurrencies and how they are used today.
The final conclusion: in the short and medium term it is extremely difficult to see cryptocurrencies being used as their name claims, a currency. In the long term, however, nothing is carved in stone.
[1] To refer to the money issued by the States, it is used in the same way: Paper Money, Fiat Money and State Money. [2] Scaliter, A. E. (2020, Abril). Descentralización de compra y distribución de ayuda alimentaria utilizando blockchain, contratos inteligentes y múltiples tokens fungibles. UCEMA, 6-7. https://ucema.edu.ar/publicaciones/download/documentos/724.pdf