How a bubble in bitcoin could lead to hyperinflation – MoneyWeek
The volume of central-bank warnings about the rise of private cryptocurrencies and the potential impact on the ability of central banks to conduct monetary policy has become ear-splitting. This criticism only serves further to convince libertarians that reducing the power of central banks and governments is desirable. Certainly, the hostility of Chinas authorities towards private cryptocurrencies can be presented as evidence that they are viewed by the state as a defence against intrusive social control. But whether that point of view is correct, or where it concerns monetary control rather than social control it is dangerously naive, there is another, undeniably serious problem with cryptocurrencies. Its a problem so far only hinted at by central banks, but about which libertarians should be the most worried. The problem is about bubbles.
There are now many bubbles in the world but they differ in nature and consequences. An equity bubble can be perfectly rational. The price of equities can keep rising without end, assuming that real (adjusted for inflation) interest rates do not go up and stay up. Assuming a growing global population, the supply of greater fools to sell to at a higher price is theoretically endless. The idea of a bond bubble is harder to rationalise. Unlike equities, virtually all bonds have a terminal date their maturity date. If you buy a bond with a negative interest rate (a negative yield), you know for sure that you will suffer a nominal loss if you still own it when it matures (the loss will be even worse in real terms). So if you are worried that other assets are overvalued and might crash, why not just hold cash?
Yet many professional investors currently own bonds trading on negative yields. This only makes sense if they expect rates to go even more negative, producing a capital gain (bond prices and bond yields move inversely to one another). But even then, the price of the bond must eventually go back to par (its face value), inflicting a capital loss on whoever had bought it at a price above par. Implicitly then, the expectation is that the ultimate greater fool will be the central banks, who are not motivated by returns and can expect to be re-capitalised by their governments albeit at considerable cost to their independence should capital losses threaten their solvency.
Bubbles both in bonds and in equities are symptoms of a deep-rooted disequilibrium in todays advanced economies. The downward trend in real long-term interest rates which has persisted throughout this millennium and has only been accentuated by the pandemic, fuelled the bubbles which have been needed to regain and maintain full employment and fend off deflation. Why has this happened?
Interest rates are intertemporal price signals they balance supply and demand for money across time. When these signals go awry, it results in the misallocation of resources across the economy. Our current disequilibrium stems from the second half of the 1990s. Then-Federal Reserve chairman Alan Greenspan failed to allow real long-term interest rates to rise at the right time in response to very buoyant entrepreneurial expectations in the internet-driven new economy.
As a result, not enough spending on consumption was deferred during this period. Indeed, the dotcom-era equity bubble boosted spending even further. As a result, when extra new economy supply came online, there was no pent-up demand from previously-deferred spending (ie, savings) to take it up. That error, combined with the far less innocent catastrophe of monetary union in Europe, ensured that intertemporal price signals ie, interest rates went badly wrong and have been wrong ever since. A secular trend to ever-lower rates and ever-bigger bubbles was put in place.
The equity bubble, in particular, has created the illusion of wealth. It is illusory for economies as a whole because it is not based on vastly increased future productive potential (if anything, estimates of such potential have persistently been cut). The political implications of the resulting wealth inequalities are disturbing, but have not so far produced serious trouble. Thats because they have not caused overheating in the economy: the extra spending generated by this illusory increase in wealth has offset the drag of the intertemporal disequilibrium (in which past bringing-forward of spending from the future leaves a hole in demand as the future becomes the present).
But if dangerously high levels of public investment spending produce inflation as many fear they might in the UK and, particularly, in the US some holders of equity wealth might think they should spend more of that wealth before its real value falls. But the only way they could do that without producing a spiral of ever-increasing inflation, is if everyone elses spending were to fall. Distributional concerns then really would become a major political issue.
Yet there is another, even more dangerous bubble that has developed in the past few years. This is one that, if unchecked, is bound to produce cataclysmic changes in wealth distribution. That bubble is in private cryptocurrencies. As with equities, cryptocurrencies have no terminal date. So a bubble can be rational in the same way. However, once the macroeconomic context is considered, it becomes clear that the bubble must pop.
Why? Either the market price of bitcoin, for example, can become infinite or it cannot. If it cannot, then at some point the only possible change in the market price of bitcoin is negative. At that point, all holders would want to sell (unless central banks as with bonds were expected to support the bitcoin price indefinitely!).
If instead the price can and does move towards infinity, then the use of an infinitesimal amount of a single persons bitcoin wealth would exhaust all the worlds productive potential; that is, each holder could command all the worlds resources by being the first to sell and spend. The rise in the general price level towards infinity as bitcoin holders competed for resources would impoverish everyone else.
It is clear that many governments most relevantly the US government now want to produce huge wealth transfers. Whether they are right or wrong is a matter for debate. The key questions are: how to distinguish in practice between what I have called acceptable wealth (wealth whose possession does not entail a reduction in lifetime consumption possibilities for everyone else) and unacceptable bubble wealth, whose possession does reduce lifetime consumption possibilities for everyone else?; and how to eliminate unacceptable wealth without crashing the economy.
But whatever your view, the wealth transfer that bitcoin threatens to produce is definitely not the one that the US government or any other wants to produce. When the bubble is growing, it does not create extra wealth in the form of future productive potential for an economy as a whole. It simply transfers wealth to existing holders of bitcoin from everyone else. That creates pressure on everyone else to join in.
To avoid serious social and political discontent, leading to unrest and ultimately sociopolitical breakdown, the authorities will have to burst the bitcoin bubble before its macroeconomic importance becomes much greater. The similarity with bank runs is rather clear. If none of, say, the ten biggest providers of liquidity to Lehman Brothers had withdrawn their funding, in all probability no-one else would have done so. If those ten withdrew their funding, in all probability everyone would do the same. Similarly, as the ratio of illusory-wealth-to-potential-income in the economy gets bigger and bigger, the temptation for someone to jump ship and be the first to use their assets to acquire real resources becomes greater and greater.
Indeed, one can view the inverse of this illusory-wealth-to-potential-income ratio as the equivalent to a banks capital ratio during a financial crisis. That ratio moves in the wrong direction as the illusory nature of many of the banks assets becomes apparent. In turn, the incentive for its debt-holders to withdraw grows ever greater. It is deeply ironic and tragic that while the reaction of central banks and regulators to the financial crisis (which they themselves created) was to insist on higher capital ratios for banks, monetary policies have operated, and continue to operate, to weaken the economys capital ratio. Barring a radical change in the policy framework, the likely result will be a devastating economic, financial, social and political crisis far worse than anything that might have been produced by the 2007-9 financial crisis. Marxists might rejoice in such a prediction. Libertarians should be anxious to prevent it from coming true.
The longer that central banks wait before taking action to prevent a swelling of cryptocurrency bubbles, the more difficult they will make their task. Bank of England governor Andrew Bailey has warned bitcoin investors that they risk losing all of their money. But if the bubble first gets much bigger, its bursting will have significant macroeconomic effects, as spending financed by borrowing against bitcoin wealth vanishes. Worse, devastating losses will be inflicted on speculators, among whom will be more and more ordinary households. The fact that they have been warned will not prevent potentially seismic reactions.
Central banks and regulators thus now have an unenviable choice. Presumably, they will not want to be blamed by crypto investors for a burst bubble. So they may hope that it subsides of its own accord, then regulate it out of existence. But if the bubble keeps growing, they must grasp the nettle and inflict losses now, or face a future sharp-elbowed scramble to convert crypto holdings into goods and services, which will produce hyperinflation and destroy society.
Continued here:
How a bubble in bitcoin could lead to hyperinflation - MoneyWeek
- Bitfocus Buttons Enterprise Edition Unveiled at IBC2025 with Advanced Features - Digital Studio India - July 10th, 2025 [July 10th, 2025]
- Assembly Launches 'Assembly Control' to Elevate Brand Safety, Suitability, and Campaign Performance in Programmatic Media - Yahoo Finance - July 10th, 2025 [July 10th, 2025]
- Bluesky Gives Users More Control Over their Notifications - Social Media Today - July 8th, 2025 [July 8th, 2025]
- Spin Control: Media struggles after Trump swears with cameras rolling - The Spokesman-Review - July 8th, 2025 [July 8th, 2025]
- Beyond banks and brokers: All about decentralized finance (DeFi) - Britannica - July 8th, 2025 [July 8th, 2025]
- The Future of Crypto Payroll Security: Bitchat and Decentralized Messaging - OneSafe - July 8th, 2025 [July 8th, 2025]
- Paradigm leads $11.5 million funding round in Kuru Labs, a decentralized exchange blending CLOBs and AMMs - The Block - July 8th, 2025 [July 8th, 2025]
- Decentralized Payroll: The Future of Work - OneSafe - July 8th, 2025 [July 8th, 2025]
- Jack Dorsey tests Bitchat decentralized messaging without internet - Cointelegraph - July 8th, 2025 [July 8th, 2025]
- CrossFis Haley Cromer on Bridging Traditional Finance and Web3 for a Decentralized Future - BlockTelegraph - July 8th, 2025 [July 8th, 2025]
- India's Crypto Tax: Navigating New Norms with Decentralized Solutions - OneSafe - July 8th, 2025 [July 8th, 2025]
- Turkey Tightens Its Grip on Crypto: What It Means for Decentralized Exchanges - OneSafe - July 8th, 2025 [July 8th, 2025]
- Spheron and AIxBlock Unite to Democratize Decentralized AI - CoinTrust - July 8th, 2025 [July 8th, 2025]
- The Role of Web3 in Shaping NFT Marketplace Opportunities - Vocal - July 8th, 2025 [July 8th, 2025]
- BNB Adds Centralized Features, But Lightchain AI Adds Decentralized Incentives That Drive New Demand - Modern Diplomacy - July 8th, 2025 [July 8th, 2025]
- Taiko and Nethermind Partner to Enhance Ethereum Rollup Infrastructure - Blockchain News - July 8th, 2025 [July 8th, 2025]
- The Rise of Decentralized Stablecoins: Can They Replace Centralized Counterparts in 2025? - Vocal - July 8th, 2025 [July 8th, 2025]
- On MSNBC's Deadline: White House, Angelo Carusone highlights how Trump is losing control of narrative dominance due to "fractures" in... - July 8th, 2025 [July 8th, 2025]
- Assembly Control Transforms Programmatic Advertising with Revolutionary Brand Safety Platform - Stock Titan - July 4th, 2025 [July 4th, 2025]
- Now, United States Border Control Scrutinizes Social Media: For The Travelers To The United States from France, Spain, and Beyond, Here Is All You... - July 4th, 2025 [July 4th, 2025]
- Assembly Launches 'Assembly Control' to Elevate Brand Safety, Suitability, and Campaign Performance in Programmatic Media - Macau Business - July 4th, 2025 [July 4th, 2025]
- Breaking the Studio Social Media Blackout: Caylee Cowan Takes Creative Control and Financial Freedom with Fanfix - Silicon UK - June 28th, 2025 [June 28th, 2025]
- Aleema's control over PTI social media makes her all-powerful within Imran-founded party - Geo News - June 26th, 2025 [June 26th, 2025]
- Tuenti social media co-founder takes control of Puerto Bans bullring with plans to demolish it - Sur in English - June 20th, 2025 [June 20th, 2025]
- InMobi Advertising Unveils Mobile-First Curation Platform Empowering All Media Buyers with Precision, Transparency, and Control - Passionate In... - June 20th, 2025 [June 20th, 2025]
- Trump takes control of media cycle with travel ban, Harvard visa restriction, Biden investigation policy spree - Washington Examiner - June 7th, 2025 [June 7th, 2025]
- Pushed Out and Unfiltered: Joy Reid, Misogynoir, Media Control,and the Fear of a Black Womans Voice - Daily Kos - June 7th, 2025 [June 7th, 2025]
- GitGuardian urges shift to machine identity control - SC Media - May 11th, 2025 [May 11th, 2025]
- Opinion: Its time to lose control - Main Street Media of Tennessee - May 8th, 2025 [May 8th, 2025]
- Opinion | How a Professional Bully Is Winning Control of the Media - Common Dreams - April 30th, 2025 [April 30th, 2025]
- Social Media, Social Control, and the Politics of Public Shaming - - Political Science Now - April 21st, 2025 [April 21st, 2025]
- Tariff saga creates a meme war on social media, making it difficult for brands to 'control the message' - Digiday - April 21st, 2025 [April 21st, 2025]
- Conservatives are limiting media access to Poilievre. Is it helping or hurting him? - CBC - April 12th, 2025 [April 12th, 2025]
- Robert W. McChesney, who warned of corporate media control, dies at 72 - Editor and Publisher - April 10th, 2025 [April 10th, 2025]
- FCC Commissioner Anna Gomez Sounds Alarm Over Trump Administrations Absolute Pattern of Censorship and Control - Variety - April 10th, 2025 [April 10th, 2025]
- 'Attack lined up': Grenon says he offered compromise but believes NZME board has 'no interest' - NZ Herald - April 8th, 2025 [April 8th, 2025]
- Russia seeks full control of partially occupied Ukrainian regions in talks with US, media reports - Kyiv Independent - March 26th, 2025 [March 26th, 2025]
- Navigating the digital world without letting it control you. - Psychology Today - March 25th, 2025 [March 25th, 2025]
- ANZ Digital Padlock to give customers real-time control in fight against fraud and scams - ANZ - March 25th, 2025 [March 25th, 2025]
- Trump Handpicking Reporters and Bezos Partisan Shift: A Trend in Media Control - MSN - March 13th, 2025 [March 13th, 2025]
- Spains New Media Law Sparks Fears of Censorship and State Control - The European Conservative - March 5th, 2025 [March 5th, 2025]
- We dont feel we have control: How social media algorithms have warped our attention spans - MSNBC - March 3rd, 2025 [March 3rd, 2025]
- White House takes control of the press pool covering Trump - Reuters - March 3rd, 2025 [March 3rd, 2025]
- White House takes control of the press pool covering Trump - Reuters - March 3rd, 2025 [March 3rd, 2025]
- We dont feel we have control: How social media algorithms have warped our attention spans - MSNBC - March 3rd, 2025 [March 3rd, 2025]
- Reuters and Associated Press among outlets barred from Trumps first cabinet meeting - Semafor - March 3rd, 2025 [March 3rd, 2025]
- Reuters and Associated Press among outlets barred from Trumps first cabinet meeting - Semafor - March 3rd, 2025 [March 3rd, 2025]
- White House seizes control of press pool, will decide which outlets cover events with president - POLITICO - March 3rd, 2025 [March 3rd, 2025]
- White House seizes control of press pool, will decide which outlets cover events with president - POLITICO - March 3rd, 2025 [March 3rd, 2025]
- Epson And Show Sage At USITT 2025 Showcasing New 4K Projection With New Media Server And Control Tech - Live Design - March 3rd, 2025 [March 3rd, 2025]
- Epson And Show Sage At USITT 2025 Showcasing New 4K Projection With New Media Server And Control Tech - Live Design - March 3rd, 2025 [March 3rd, 2025]
- White House takes control of picking media who cover Trump - El Paso Inc. - March 3rd, 2025 [March 3rd, 2025]
- White House takes control of picking media who cover Trump - El Paso Inc. - March 3rd, 2025 [March 3rd, 2025]
- Trump administration to take control of media access at White House - New Straits Times - March 3rd, 2025 [March 3rd, 2025]
- USAID spent millions of dollars to promote media control through Internews which is linked to India based Factshala - Organiser - February 16th, 2025 [February 16th, 2025]
- Inaccurate reporting on foot and mouth disease controls - Defra in the media - February 16th, 2025 [February 16th, 2025]
- Russian forces take control of two settlements in eastern Ukraine, Media - APA - February 16th, 2025 [February 16th, 2025]
- TikTok's woes in the United States highlight the 'Godfather' battle to control social media - ABC News - February 5th, 2025 [February 5th, 2025]
- Jesse Watters: Air traffic control was "unable to meet their own DEI quotas, and thats what is leading to staffing shortages" - Media... - February 5th, 2025 [February 5th, 2025]
- Hive to launch Beeblade Nexus media control engine - Installation and AV Technology Europe - January 27th, 2025 [January 27th, 2025]
- Pakistan introduces law allowing government to block platforms, imprison users for spreading 'disinformat - The Times of India - January 27th, 2025 [January 27th, 2025]
- This little media control button is the gadget I can't live without - MSN - January 22nd, 2025 [January 22nd, 2025]
- Effective role of media is a must for tobacco control, experts say - bdnews24.com - January 22nd, 2025 [January 22nd, 2025]
- Effective media role vital for tobacco control: Experts - United News of Bangladesh - UNB - January 22nd, 2025 [January 22nd, 2025]
- How Government & Legacy Media CONTROL What We Think - iHeartRadio - January 9th, 2025 [January 9th, 2025]
- SNL kinda banned this 1998 'Schoolhouse Rock' parody warning about corporate media control - Upworthy - December 30th, 2024 [December 30th, 2024]
- Palestinian Authority: Jews Lied About Oct. 7 Because They Control the Media - Algemeiner - December 30th, 2024 [December 30th, 2024]
- NDCs control of major media houses gave them edge in 2024 polls Bawumia - Adomonline - December 22nd, 2024 [December 22nd, 2024]
- Hallmark Insights to Tackle the Debate on Social Media Management and Control in Organizations - PC Tech Magazine - December 14th, 2024 [December 14th, 2024]
- Rupert Murdochs bid to change familys trust over Fox News media empire control is rejected - Washington Times - December 10th, 2024 [December 10th, 2024]
- Rupert Murdoch loses battle to control succession to his media empire - The Guardian - December 10th, 2024 [December 10th, 2024]
- Journalist Abducted in Guinea Amid Military's Increasing Control Over Media - Oneindia - December 5th, 2024 [December 5th, 2024]
- Aleppo and Idlib Under Opposition Control, With Eyes on Hama - The Media Line - December 5th, 2024 [December 5th, 2024]
- Remilekun Dosumu takes the helm as Head of Media Buying & Control at PHD Nigeria - Marketing Edge - December 5th, 2024 [December 5th, 2024]
- Media reports US Republicans regaining control of House of Representatives - MENAFN.COM - November 14th, 2024 [November 14th, 2024]
- Social media misinformation is scaring women about birth control - STAT - November 5th, 2024 [November 5th, 2024]
- The (Lack Of) Science Behind Social Media Claims Of Weather Control - Forbes - October 14th, 2024 [October 14th, 2024]
- No, the government is not controlling the weather. "It's so stupid, it's got to stop," Biden says - CBS News - October 14th, 2024 [October 14th, 2024]
- Column: Media tries to control the narrative | Aiken Standard - The Post and Courier - October 12th, 2024 [October 12th, 2024]
- DoubleVerify To Introduce Pre-Screen Content Control On Meta, Strengthening Brand Safety, Suitability, Media Performance - Business - October 12th, 2024 [October 12th, 2024]