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Hidden Forces of Economics

Waiting for the Flood

We have noticed a proliferation of pundits, newsletter hawkers, and even mainstream market analysts focusing on one aspect of the bitcoin market. Big money, institutional money, public markets money, is soon to flood into bitcoin. Or so they say.

A weekly chart of bitcoin – it actually looks pretty “flooded” to us already. [PT] – click to enlarge.

We will not offer our guess as to whether this is true. Instead, we want to point out something that should be self-evident. If big money is soon to come in, and presumably drive the price up to whatever new height — perhaps even the magic $1,000,000 — what comes after?

In the restless churn that has overgrown our capital markets, investors speculators are always seeking to get into whatever asset is bubbling up. Big money leaving will follow big money entering, as surely as a rock thrown into the air will fall back down.

In last week’s Supply and Demand Report, we excerpted a quote from economist John Maynard Keynes. He cited Vladimir Lenin discussing how to destroy Western civilization. Here is the full quote (from The Economic Consequences of the Peace):

“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

J.M. Keynes at a relatively young age. In his 1919 book The Economic Consequences of the Peace, Keynes sounded quite sane for the most part, both in terms of his political and economic analysis (although his interventionist leanings were already shining through. For reasons  unknown he went completely off the rails in the 1930s). He wrote the book after attending the Paris Peace conference, where he argued for much more generous peace terms than the victorious allied nations were prepared to grant. While no-one will ever be able to prove it, there is a reasonable chance that a less vindictive peace treaty may have helped avert the German hyperinflation catastrophe and further down the road, perhaps the rise of Hitler as well. After all, Hitler’s influence grew on the fertile soil of Germany’s impoverished, antagonized and increasingly radicalized former middle class – and the event that arguably contributed to this state of affairs like no other was the collapse of the currency after the war. [PT]     Photo credit: Bettmann / Corbis

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Olduvai IV: Courage
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