This is opinion editor Ansel Lindner, a bitcoin and financial markets researcher and host of the Bitcoin & Markets and Fed Watch podcasts.
For the past 75 years, two forces have dominated the world economically and politically: globalization and trust-based money. But time has passed for both of these forces, and their decline will lead to a major restructuring of the global order.
But this is not the global, Marxist Great Reconstruction preached by Klaus Schwab and those in Davos. It is an extraordinary, market-based reset characterized by a multipolar world and a new monetary system.
Globalization Is Ending
The first reaction I usually get to my claim that the era of hyper-globalization is over is disbelief. People have so completely integrated the environment of a dying global order into their economic understanding that they cannot imagine a world where the cost-benefit analysis of globalization is different. After COVID-19 exposed the fragility of complex supply chains, such as when the US ran out of surgical masks and essential medicines, or when the world struggled to obtain semiconductors, people have yet to grasp the shift.
Is it so hard to imagine that the businessmen who designed such fragile, overly complex production processes did not properly weigh the risks?
All it takes to break globalization is for risk-adjusted costs to change by a few percentage points and outweigh the benefits. The pennies saved by outsourcing multiple tasks to multiple jurisdictions will no longer outweigh the possibility of a complete collapse of supply chains.
These concerns about fragile supply chains have not gone away as the dire COVID-19 policies have ended. Now they have moved on to worries about trade wars and real wars. U.S. trade sanctions against China, Russia’s conflict with NATO proxy Ukraine and subsequent sanctions, the seemingly unstable U.S. stance on Taiwan, the coronation of Xi Jinping and his Marxist resurgence, the Nord Stream provocation, the apparent collapse of international consensus disintegration of the image. The arming of the UN and even these international organizations and finally Turkey’s ground offensive against the Kurds – all this should be interpreted as an increase in costs.
Gone are the days when complex supply chains were resilient to typical risks. Today, risks are more systemic. Of course, there were skirmishes and disagreements between parliaments all over the world, but the great powers did not openly threaten each other’s spheres of influence. Risk-adjusted costs and benefits have changed radically due to globalization.
Credit Doesn’t Like Conflict
Closely related to the globalization of supply chains is the deglobalization of credit markets. Bankers experience the same factors that affect businessmen’s physical, risk-adjusted costs and benefits.
Banks don’t want to risk war or sanctions wiping out their borrowers. In the presence of globalization and increased risks for international trade, banks will naturally refuse to lend to those related activities. Instead, banks will finance safer projects, possibly fully local or friendly opportunities. The natural reaction of banks to this risky global environment will be to reduce lending.
Globalization of supply chains and credit will be as closely intertwined on the way down as they are on the way up. It will start slowly but will pick up speed. A feedback loop of increased risk leading to shorter supply chains and less credit creation.
Credit-based US Dollar
The world’s dominant form of money is the credit-based US dollar. Every dollar is created through debt, every dollar becomes someone else’s debt. In the lending process, money is printed out of thin air.
This is different from pure fiat money. When fiat money is printed, the printer’s balance sheet only adds assets. However, in a credit-based system, when money is printed on credit, the printer creates an asset and obligation. After that, the balance sheet of the borrower has a liability and an asset that are offset accordingly. Therefore, every dollar (or euro or yen) is an asset and a liability, and the loan that creates that dollar is both an asset and a liability.
This system works best when there are two factors. First, there is a highly productive use of new loans, and second, the relative absence of exogenous shocks to the global economy. Change any of these and a crash will occur.
This dual nature of credit-based money is at the root of both the spectacular rise of the dollar in the 20th century and the coming monetary reset. As global trust and supply chains falter, it becomes riskier for assets to come to banks. Russia learned this the hard way when the West confiscated its dollar reserves in foreign banks. How is trust possible in such an environment? When credit-based money creation is based on trust… Houston, we have a problem.
Bitcoin’s Role in the Future
Fortunately, we have experience with an insecure world – that is, the entire history of man up to 1945. Back then we were on the gold standard (gold points) for all the reasons bitcoiners know all too well. high money-making properties), but also because it minimizes trust between the great powers.
Gold lost its mantle for a reason — and you probably haven’t heard it anywhere before: because the post-World War II global economic, political, and innovation environment created extremely fertile ground for credit. Trust was easy, the great powers were humbled, and all joined new international institutions under the US security umbrella. The Iron Curtain created a strict separation between the economic zones of trust, but it was about a 20-year period after it fell. the world sang “kumbaya” because new credit was still very productive in the old Soviet bloc and in China.
Today, we face the opposite scenario: Global confidence is faltering and credit has exploited all the high-hanging fruit, forcing us into a neutral money-demanding period.
The world will soon be divided between regions/alliances of influence. A British bank will trust a US bank, a Chinese bank will not. Bridging this gap requires money that everyone can hold and respect.
Gold Vs. Bitcoin
Without Bitcoin, gold would be the first choice here. This is because gold has several disadvantages. First, gold is mostly owned by groups that have lost confidence in each other, namely the governments of the world. Most of the gold is stored in the United States. Therefore, gold is unevenly distributed.
Second, the physical nature of gold, once an asset that kept governments in check, is now a weakness because it cannot be transported or verified as efficiently as bitcoin.
Finally, gold cannot be programmed. Bitcoin is a neutral, decentralized protocol that can be used for any number of innovations. The Lightning Network and sidechains are two examples of how Bitcoin can be programmed to increase its utility.
As the globalization of both trade and credit breaks down, the economic environment favors a return to a form of money that does not depend on trust between major powers. Bitcoin is the modern answer.
This is a guest post by Ansel Lindner. The views expressed are entirely their own and do not necessarily reflect the views of BTC Inc or Bitcoin Magazine.