Let me add a third point that everyone should take very seriously.
3. One of the key functions of a central bank (the Federal Reserve in the US) is to act as a ‘lender-of-last-resort’. This is a function that we take for granted now. However, it was a very big deal historically. In the past, there were ‘runs’ on banks and banks would run …
Let me add a third point that everyone should take very seriously.
3. One of the key functions of a central bank (the Federal Reserve in the US) is to act as a ‘lender-of-last-resort’. This is a function that we take for granted now. However, it was a very big deal historically. In the past, there were ‘runs’ on banks and banks would run out of cash. The consequences were grievous. That never happens now, because the Fed just provides as much cash as is needed to stop the ‘run’. Indeed, ‘runs’ don’t even really get started these days (a more complex point, if you include the shadow banking system).
However, Bitcoin could break this system. Right now, the Fed can conjure up any amount of money to stop a bank ‘run’ and indeed, the Fed can invent trillions of dollars to stop a major system event such as the GFC (of 2007/8/9).
If Bitcoin replaced the (paper) dollar, this would not be possible. Paper dollars can be invented by the trillion by the Fed. Bitcoins can not be created at will. Of course, this is (arguably) the key advantage of Bitcoin as well.
However, the bottom line is that the ‘bad old days’, were bad for many reasons. One of them was the lack of a ‘lender-of-last-resort’. Bitcoin might take us back to the ‘bad old days’ in ways were are not prepared for.
“Exactly five years ago, European Central Bank president Mario Draghi demonstrated the power of words. The euro zone was in the throes of crisis, with bailouts of debt-laden members pushing the currency union to the verge of collapse. But with a simple, seemingly off-the-cuff phrase, Draghi fundamentally changed the course of events: “whatever it takes.””
Of course, Draghi could not address the deeper problems of the Euro and indeed the deeper problems have gotten worse (in my opinion). However, his example shows how central banks can (and really do) use fiat (paper) currencies to solve real problems.
Now, the obvious counterargument is while Bitcoins can not be printed (quite true), they can be borrowed. The unknown is whether the Fed could/would borrow enough to deal with a financial crisis in the future.
Let me add a third point that everyone should take very seriously.
3. One of the key functions of a central bank (the Federal Reserve in the US) is to act as a ‘lender-of-last-resort’. This is a function that we take for granted now. However, it was a very big deal historically. In the past, there were ‘runs’ on banks and banks would run out of cash. The consequences were grievous. That never happens now, because the Fed just provides as much cash as is needed to stop the ‘run’. Indeed, ‘runs’ don’t even really get started these days (a more complex point, if you include the shadow banking system).
However, Bitcoin could break this system. Right now, the Fed can conjure up any amount of money to stop a bank ‘run’ and indeed, the Fed can invent trillions of dollars to stop a major system event such as the GFC (of 2007/8/9).
If Bitcoin replaced the (paper) dollar, this would not be possible. Paper dollars can be invented by the trillion by the Fed. Bitcoins can not be created at will. Of course, this is (arguably) the key advantage of Bitcoin as well.
However, the bottom line is that the ‘bad old days’, were bad for many reasons. One of them was the lack of a ‘lender-of-last-resort’. Bitcoin might take us back to the ‘bad old days’ in ways were are not prepared for.
Let me use an example (from https://qz.com/1038954/whatever-it-takes-five-years-ago-today-mario-draghi-saved-the-euro-with-a-momentous-speech/).
“Exactly five years ago, European Central Bank president Mario Draghi demonstrated the power of words. The euro zone was in the throes of crisis, with bailouts of debt-laden members pushing the currency union to the verge of collapse. But with a simple, seemingly off-the-cuff phrase, Draghi fundamentally changed the course of events: “whatever it takes.””
Of course, Draghi could not address the deeper problems of the Euro and indeed the deeper problems have gotten worse (in my opinion). However, his example shows how central banks can (and really do) use fiat (paper) currencies to solve real problems.
Now, the obvious counterargument is while Bitcoins can not be printed (quite true), they can be borrowed. The unknown is whether the Fed could/would borrow enough to deal with a financial crisis in the future.