The Greek Crisis, Money, and, Bitcoin

Over the past week or two, there has been a nontrivial amount of commentary on Bitcoin and Greece. Many commenters seem to think it is a prime opportunity for Bitcoin to go mainstream, or even go as far as being adopted as an official Greek currency. Others are much more skeptical, or downright derisive of the idea. I’ve discussed Bitcoin before (here, here, and here for instance). If you’ve read those posts, you’ll have a fair idea where I’m going to fall on this particular issue.

Now, let me tackle a few points before giving my opinion on whether Bitcoin is even relevant to the Greek crisis.

First, the cause of the Greek crisis is not runaway national debt. The cause is the Euro and bullying by the other members of the Euro. Sure, there are fundamental political, cultural, and economic issues in Greece.  But those are not the actual cause of the crisis, no matter what the experts, economists, politicians, bankers, etc., want us to believe. The cause of the crisis was the fact that Greece had no options available to deal with their economic issues other than borrowing extensively.

Let’s contrast that with simialr economic straits in the United States and the United Kingdom. Both countries have their own sovereign currency. Both countries embarked on a program of “quantitative easing” (QE). Whether you agree with the way it was handled (there are multiple schools of thought on whether it was as effective as it should have been), QE essentially amounts to printing money to restore liquidity to the economy. They also lowered various central bank interest rates to encourage commercial banks to resume lending (that’s a whole other kettle of fish), which also has the net effect of increasing the money supply. This had the overall effect of devaluing their respective currencies in the short term. There is evidence that both QE and crazy low central bank interest rates had a substantial impact on the economic situations in both countries.

Now consider that Greece had neither option available. First, because they do not control their own currency, they can’t simply print more under any mechanism. They have to borrow from somewhere. Also, because they don’t control the central bank (which issues the Euro), they have no control over the interest rates. That means that neither option used by the United States or United Kingdom were available and there was no independent currency to devalue either. In other words, Greece had no options available to deal with the crisis they found themselves in regardless of its cause.

Now here’s the thing. Under the modern monetary system, paying back a debt shrinks the money supply because money isn’t actually lent when a loan is made. It’s simply manufactured by the “lender”. Thus, when you pay back a debt, there is less money in circulation. If your problem is liquidity – that is, you don’t have enough actual money to cover your obligations, regardless whether you have other assets to back it or not, paying back debts is clearly not going to solve the problem because there is now even less money available. This is a case of what is good for an individual (paying off your credit card is good for you) is bad for the overall economy because it reduces overall liquidity.

So, when Greece’s cost of borrowing went up and they could no longer service their debt, their creditors insisted on “austerity” measures and paying down the accumulated debt. In other words, they forced the Greek economy, already facing liquidity issues, deeper into trouble and somehow expected the Greek government to be able to make good on its obligations. When that failed, they imposed harsher measures and the cycle repeats. Eventually, the Greeks will have to say “Fuck you very much” to their creditors and just default or they will be relegated to perpetual debt slavery to the rest of Europe, at least until the rest of Europe implodes. I should point out that “austerity” is exactly the opposite of QE. In other words, Greece’s creditors imposed the very opposite to the thing that so far has allowed other major economies hit hard to keep limping along without having to max out their credit cards to the point they can’t pay.

Now, don’t get me wrong. I am aware that there are systemic problems in Greece that have contributed to the overall situation. It is clear that they have beein living beyond their means for a while and there seems to be a cultural propensity for tax evasion and other such frauds. However, it was inevitable that it would happen to some member of the Euro eventually. It is, perhaps, good that it is happening sooner rather than later.

So if you’re Greece, what are you to do about this? Well, you need options. If you default, you’re likely going to be kicked out of the Euro and you’re going to need a national currency. Fortunately, that’s easy enough. Just resurrect the Drachma. And here’s the thing. Even if you implement it in the same broken way that all current national currencies are implemented, you now have control of your own destiny. You have a central bank that can do QE and manage interest rates. You can now devalue your currency if you need to, and if your economy is export or tourism based, that can actually increase government revenue and thus ability to repay debts. I won’t get into the details of how that works, but it does, in fact, work, as long as the currency isn’t devalued too much.

Some commentators have suggest that Bitcoin should be adopted as the replacement currency. That is, however, just as ludicrous as adopting gold (or a gold backed currency). In both cases, you have even less control than you have under the Euro because now you’re fighting the entire world for a limited supply of some commodity, whether it be a precious metal or an imaginary thing like Bitcoin. In both cases, there is no central authority that can magically create more or the commodity to ease global liquidity. In other words, Bitcoin as a national currency falls in the “fucking stupid” category. So does gold. And a return to the Gold Standard is also in that category.

Others have suggested Bitcoin as an inflation hedge or safe haven. That idea has some merit for the same reason commodities such as gold make sense in such contexts. For Greek citizens who have the werewithal to partake of such things, it may be a valid proposition. There is some evidence that this is occurring to an extent and the fact that Bitcoin is easier to hold than gold makes it fairly attractive. Add to the fact that Bitcoin is relatively easy to trade means it can act as a stopgap de facto currency. However, as a long term solution, it simply will not work.

I should mention that a lot of commentators come down against adopting Bitcoin as a national currency, either solely or as a parallel currency, mostly for the reasons I’ve stated. Some even say that Bitcoin as an inflation hedge or safe haven is a really bad idea. And, sure, it is a risk, and possibly more of a risk than gold or US Dollars or whatever. But every commodity of any kind is a risk, no matter how stable they may have been in the past.

You’ve probably worked out by now that I think Bitcoin is not the solution to the Greek crisis. In fact, if it were to be adopted in any official capacity, it would almost certainly¬† make the crisis worse. Bitcoin, on the other hand, is useful as a conversion intermediary while moving money assets into other currencies or as a very temporary hedge against a currency crash or inflation, in much the same way as gold. Instead, Greece should simply declare unilaterally that they are bringing back the Drachma as their official currency and that it is up to their citizens whether they continue to accept Euros or not. Either that or simply default and refuse to be bullied further.

I’ll finish this by stating that I am aware that significant domino effects might be triggered by a full on Greek default and possibly even by them simply pulling out of the Euro. But that is a symptom of a much greater game being played at the expense of the world population – something which resembles a house of cards built on a shaker table and which would be illegal if any individual tried it – which is bound to collapse eventually. The sooner it does, the sooner we can figure out a solution and pick up the pieces.

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