Bitcoin: The Robin Hood of Tomorrow
In a much earlier article (here) I explained about the concept of money and how organizations like Bitcoin seek to push existing monetary establishments to a dangerous corner through the whacky idea of a complete decentralized currency. Banks will go bust because nobody will need the services of intermediaries that charge fees. But what I did not elaborate, which I will now, is how a country and its government will be affected by this decentralization.
What do governments have to do with banks, you ask? Because they use banks as the most efficient and effective way to influence the direction a country's business cycle is headed. It is also used as the medium to influence demand and supply for the country's goods based on value versus cost.
The figure above depicts a typical business cycle of a country. The straight line drawn diagonally through from left to right shows the growth a country should undergo in theory. But things are very different in the real world because there is a lag time from the beginning of, for example, an inflation to the time when majority of businesses and consumer start adjusting to the trend. Simply said, by the time this trend goes mainstream it would already be too late.
Monetary Policy
Banks are used by the government to cushion the movement and minimize the gap of growth and drop between actual and desired figures. When they predict market will overheat in the next two year, they start implementing higher interest rates to encourage savings and discourage loans from banks. This will reduce the amount of expenditure by consumers and businesses because they will find saving money in the bank generating higher interest rate and taking up loans costing more.
The same goes to recessionary situations when spending is not enough to push the economy forward. Banks will be ordered to reduce interest rate to discourage savings and encourage bank loans from businesses and consumers. This is called the Monetary Policy
Fiscal Policy
So what will happen when this ability is taken away from the government? They would resort to Fiscal Policies by way of adjusting tax rates, buying and selling of bonds and deciding whether or not to move ahead with a government project.
Tax rates are used to either give out more or reduce the amount of disposable income the consumers have. But they can only be changed on a yearly basis because we usually pay our taxes once a year, and constant changing it will really piss us off.
Government projects will create employment and pump money into the economy. But projects like the MRT will take a long time to completely effect the economy, and cannot be reversed if economic trend starts overshooting the other way round. Also there aren't many kinds of projects a government can perform.
Bonds are essentially IOUs issued by the government to buyers. This piece of paper will promise, upon maturity of the bond, the government will pay back its face value plus interest. Because it's the government, people usually trust this practice. Problem with this policy is that it has a maturity date, and if the government recalls their bonds before the maturity too many times it will dramatically reduce the credibility of their bonds in the future.
The Preferred Choice
Clearly Monetary Policies are preferred over Fiscal ones because they can be implemented and changed almost spontaneously. They take a short time to affect the economy and they can be reverted any time. One of the reason for EU's instability for the past years is due to individual country's inability to control the currency and their monetary policies. One of the major milestone of the EU is the centralization of a single currency and therefore central bank. But individual countries still have separate economies with separate commodities. The inability for the governments to cushion inflation and recession rates via monetary policies made it all the more difficult to manage.
This is the same reason Thailand has recently banned Bitcoin. Bitcoin will stress the country's banking system, and it will reduce the government's monetary policy influence over the economy.
Why Are Countries So Afraid?
Imagine if decentralized currencies like Bitcoin becomes the primary currency, completely replacing conventional national currencies. Everyone would trade in this currency because they are interest-free so they will not be at the mercy of banks and other financial institutions. There will be no demand for national currencies, which means it will eliminate the government's control over a nation's monetary position.
Consumers and businesses will trade among each other via Bitcoin. In order to attract savers, Bitcoin traders will implement interest system like that used by current central banks to pool up enough funds for businesses to use as start up capital. But it will not go the same way as current national currencies because Bitcoin is not regulated by any government or central bank. The market will determine its interest rate based on global supply and demand.
Even better, the market will find alternative ways to generate funds by working with Venture Capitalists to invest into businesses. That way the money is working for someone else when it's not working for that consumer, and the interest and dividends generated are also better ( albeit with certain risks, but hey what's life without risks right).
The Future
The creation of Bitcoin is not something that happened all of a sudden and out of nowhere. The world has been fighting Corporatization and Crony Capitalism masked as Democracy for the longest time, and the anti-establish kept looking for better ways to break out of this 'caste'. So be sure to receive mixed feelings and reluctance from the world, Bitcoin. But rest assured that when the dust settles, the world will be in a far better place than it is now.
