Why they hate you

Wolfgang Münchau is a columnist for DL News. He is co-founder and director of Eurointelligence, and writes a column on European affairs for the New Statesman. Opinions are his own.

This is a new column, not about crypto but about a world that is reluctant to interact with it. The world of finance is interacting.

But the world of money, that of central banking and of economics, is not.

I have yet to meet my new readers. But there is something I do know about all of you: The world of money and of economics generally hates you.

One of the haters is Agustín Carstens, general manager of the Bank of International Settlements. He is an experienced central banker and a good economist.

Over the years, I have been noting a whole series of comments from him, in which he hyperventilated about crypto. He seemed personally offended by the very existence of Bitcoin, which he considered as a declaration of war against fiat money.

Earlier this year, he declared victory. Fiat had won, he wrote. And that was that.

Carstens was not the only one. The Spanish economist Luis Garicano tweeted a year ago: “RIP in 2022 the argument that #Crypto is a hedge against the debasement of our currencies through inflation. In sum: a bad means of payment, a terrible store of value; a useless unit of account.”

He was referring to the three widely accepted functions of money.

Christine Lagarde, president of the European Central Bank, once called Bitcoin funny money. If I had been missing my inflation target for more than two years, I would be a bit more careful with such expressions. At least she accords Bitcoin the status of money.

For the economists, the backlash against crypto is personal — and business. It’s business because cryptocurrencies go against a fundamental belief held by economists of otherwise different persuasions: that it is the job of macroeconomics to iron out fluctuations in the economy through fiscal or monetary policy.

They disagree on the details of how this should be done — but they agree that it needs to be done. They often cite the Great Depression as an example of what happens when you lock your currency to a supply-constrained asset, gold in this case, and throw away the key.

Economists are, of course, also full of contempt for gold, but they are not fuming about it as much these days. They already won that battle.

Crypto is more dangerous for them, because it is new, based on a technology they don’t fully understand, and one that gives rise to narratives other than their own.

And they will no doubt seize on the collapse of crypto exchange FTX and the recent conviction of its founder, Sam Bankman-Fried to justify their disdain.

It’s also personal. Economists have become powerful players over the years. They sit in the monetary policy committees of central banks. They are in charge of setting interest rates.

They run debt-management agencies and large international institutions like the IMF and the World Bank. There are also lots of lucrative consultancy jobs around.

We already live in a world in which artificial intelligence is on the verge of generating better economic forecasts than economists. Just imagine if you were to beam these people into a world in which one or more cryptocurrencies served as a global currency.

What would they do? Where would they go?

If they are lucky they might bump into another lost economist who may have been accidentally teleported into this world. Maybe they would go out in search of the monetary policy board of the cryptocurrency.

I am aware that the idea of Bitcoin as a world currency is a minority view even inside the crypto-community itself. The mainstream sees crypto as an asset class, or as productivity enhancing, middlemen-cutting fintech.

I get this. But the hateful economists could not care less about crypto as an asset class. What frightens the hell out of them is the fundamentalist viewpoint — that of crypto as money.

Mervyn King, a former Bank of England governor, once dared mention it. He said he was not sure that fiat money would make it to the end of the century.

I am asking myself the same question — though we should perhaps not set the egg timer just yet because it is always easier to spot a development than to time it.

People like King know something deep down about fiat money few people have reflected on: money is a social contract. Have you ever spotted this sentence on the British 10 pound banknote?

“I promise to pay the bearer on demand the sum of 10 pounds.”

The banknote is not money. It is a promise of money. And we all know what happens with promises.

The problem with money as a social and legal contract is that it is based on trust — on trust in the central bank, on lawmakers, in the state in general, and in the case of the UK, the monarch. Given the disruptions of history, it is possible that someday, someone, will not honour the contract.

Or if they do, the contract might not be worth what you think it is.

This is where Carstens and the other economists get it wrong. I trust that none of them personally favour debasement. But debasement is a perfect possible political scenario.

The original Bitcoin White Paper was published by the still-unknown Satoshi Nakamoto almost exactly 15 years ago, shortly after the collapse of Lehman Brothers triggered the global financial crisis.

Since then, central banks have loaded up their balance sheets with government debt. They kept on buying all the way through the pandemic.

In theory, the central banks can easily get rid of this debt, but in practice they will struggle to do that without creating a financial crisis. But if they don’t, they might end up monetising debt and creating inflation.

The Bitcoin white paper talked about the “the inherent weakness of the trust-based model”.

Even though it only talked about transactions, the sentence touches a raw nerve.

Even if economists have no clue about crypto — most don’t — they know a thing or two about the inherent weakness of the trust-base model that they so eagerly defend.

Money and bonds are different even though they are both bearer certificates. Crypto, too, has characteristics of money and of finance. But the two are fundamentally different beasts.

The odd thing is that those who hate crypto the most are not afraid of crypto for finance. They might worry about financial stability.

But this is not their nightmare.

Their nightmare is the end of fiat. And that there is something else out there.