Why bitcoin is imperative to people in the global economy.
The one aspect I find frustrating with financial pundits and most economists today, is: they are basing their theories and calculations on a centrally controlled system. When the global monetary system is essentially broken, it's difficult to predict market behavior. Although, there is a long line of economists opining the status quo. Rarely are they correct, yet they often editorialize and/or make policy for the rest of us.
You're asking the wrong questions.
The debt-based global monetary system and the policies therein, should be on the forefront of everyone's mind. It should be on the cover of Time Magazine, The Economist and on every news channel. The questions about stock market performance, the debt ceiling and various other main-stream-buzz-words, is only covering the symptom. There is nothing about the core problems.
The mention of the Federal Reserve is usually done in reference to interest rates. The discussion of QE (Quantitative Easing) is only done in terms of "how much and for how long". The real world definition of QE is lost on the majority of people. Sure, a few pundits & economists will briefly explain what it is. The unfortunate aspect is, these real-world definitions should be the preponderance of information flowing into the public.
It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning. ~Henry Ford
If we were to stop and think about how the monetary system works, after the shock wears off, we might start asking the correct questions.
- What is the total amount of debt the US gov owes (including unfunded liabilities)?
- What is the Federal Reserve Bank?
- What is debt-based currency?
- What are treasury bonds?
- What & who are primary dealers/brokers?
- Who gets the newly created money first?
- Why is every dollar created an instrument of debt (plus interest)?
- Who do we pay the interest to?
- What is fractional reserve banking?
- What is the US Dollar backed with?
- What is "mark to market" accounting?
- What is Quantitative Easing (QE)?
- What are financial derivatives?
- What is inflation?
- Why did the US go completely off the gold standard in 1971?
- Why does the national debt always increase?
- What does the "worlds reserve currency" mean?
What does it all mean?
This chart shows the US national debt from 1940 - 2012. Prior to 1971, the US was on a partial gold standard. After President Nixon removed the link to gold, the United States went on the 100% debt-based monetary system, which is what we are on today. By removing the US Dollar linkage to Gold, they removed the physical restraint of the government & bankers. This allowed them to borrow/print with reckless abandon, as the Federal Reserve created money out of thin air. Quite literally, they are making a few clicks of a mouse and entering in the amount of money they wish to create and viola; it's that easy.
Every treasury bond created represents dollars placed into existence, plus interest. Example: the government prints up a $50 billion treasury bond. The federal reserve bank creates $50 billion dollars, which is loaned to the US Treasury with interest. The treasury bonds are then sold into the open market. The bonds are purchased by various institutions, countries, and individuals. Please note, the money that is used to purchase these newly minted treasury bonds, is money that has already been cycled through the treasury bond/federal reserve debt machine. To put it simply: the government has to create treasury bonds (Federal Reserve prints money for bond), then they have to sell the treasury bond just to stay solvent. More on this later.
Two of the largest foreign holders of Treasury bonds is China ($1.277 trillion) and Japan ($1.135 trillion). The US government must repay China and Japan with interest. They are our lenders. An interesting fact is the involvement of the Social Security Trust Fund...you know; the government insurance program that is supposed to take care of us in our old age? The SS Trust Fund owns nearly $2.7 trillion dollars of Treasury bonds. The debt-created money that is supposedly set aside for Social Security, has been spent on the increased debt of the US.
One of the most shocking issues today, and one that is quite pertinent, is that the Federal Reserve owns $1.9 trillion dollars worth of Treasury Bonds. This is important. The Federal Reserve prints money for the US Treasury in exchange for a Treasury Bond, which is sold into the open market. The Federal Reserve is now printing the money for the issued Treasury Bonds, then they are printing more money to purchase those same Treasuries. This is what is referred to as QE (Quantitative Easing). It's also called "monetization of debt". Why is the Federal Reserve purchasing Treasuries? Because the US is in such financial turmoil and the debt spiral is accelerating too quickly. There are not enough buyers in the open market to fund the government spending habits. In a debt-based monetary system, the debt must increase in order to keep the system going.
Do you feel as if something isn't right with the economy? You're right.
The information is so ridiculous that it's almost unbelievable. There are some very large imbalances in the global economy right now. If history is our guide, then it's only a matter of time before it collapses. As of October 19, 2013 the US National debt is over $17 Trillion dollars. The estimated national debt, with unfunded liabilities included, is in the ballpark of $126 Trillion dollars. The total amount of financial derivatives sits around $1.2 Quadrillion dollars. That's an incomprehensible number. If you've felt as if something is afoot, you'd be right.
This surge of money creation over the last 40+ years is starting to become unstable. The devaluation of the currency is a hidden tax on every person that saves money. The inflationary practices have sown the seeds for a full systemic reset. Below are some charts showing price changes over time. Take special note of how the price trends rise dramatically after 1971.
What are some possible options?
With the debt based monetary system spiraling out of control, and the media parade of "debt ceiling" showdowns between Democrats and Republicans, one must finally realize that it's all for show. It's the modern day "bread and circuses", with the unfortunate result of the majority of people following in lock step. They can't lower the debt ceiling without defaulting on the debt. All money (federal reserve notes/dollars) is a representation of debt. If everyone paid back all of the debt, there would be no money in circulation, and we would still owe interest.
So, what do you do when the money you hold in your pocket is unsustainable? Hard assets, such as gold and silver offer possible solutions. What happens, however, if the government decides to confiscate gold, as they did in 1933? Will they confiscate silver as well? It's difficult to know for certain, but history rarely changes, only the players do.
Enter bitcoin, and alternative currencies.
Bitcoin is an exciting new option. It represents a global payment system and currency rolled into one. It's a digital currency that is based from military grade cryptography. It is not centrally controlled, it cannot be inflated. There is a set amount of 21 million bitcoin, that will ever be created. Anyone can own it, use it, distribute it and trade with it globally.
The data is stored on a decentralized, peer-to-peer network, over the current internet infrastructure. Bitcoin cannot be confiscated, unlike cash, gold, and silver. It is highly portable and can cross borders at will. It doesn't require a money belt or declaring it at customs. It resides on a global network.
As a potential replacement for a defunct currency, bitcoin holds some fantastic features. The recent events in Cyprus is a good example of just how far governments and banks will go to stay afloat. In the end, it's about protecting your financial future. Business owners in Cyprus had large percentages of their bank accounts confiscated, and there was nothing they could do about it. Individuals in Cyprus had upwards of 10%+ confiscated, this came after the banks froze their bank accounts for weeks. The trust has slipped by, and it's important to take to heart what happened in Cyprus. As I've pointed out above, the US is locked into a debt trap. The only way it will get out, is to default and/or inflate it's way out. Either way, it will destroy the majority of people's wealth.
There are many ways to approach Bitcoin and other alternative currencies such as Litecoin. The best is to purchase them at one of the online exchanges. You simply register for an account and place your orders. It is possible to store your money at these exchanges; however, it is recommended that you limit your Bitcoin there, keeping a large percentage in a different, more secure location. The preferred method is to transfer your Bitcoin to a Bitcoin wallet, stored on your computer. From there, a complex passphrase can be used to protect your wallet and can be backed up on USB drives and locked away in cold storage.
Bitcoin is naturally deflationary. This term has been unfairly vilified, because it's usually attached to a debt-based monetary system that requires inflation, and increased debt to survive. The result of deflation is stronger purchasing power of the currency. Meaning, the $1.00 in your pocket buys a gallon of gasoline, instead of $4.00. For people who save money, or are on a fixed income, this is a fantastic thing. If you had the choice of saving $10,000 in cash, or $10,000 Silver dollars in 1960, which would you choose? The cash would be worth $10,000 today. The Silver dollars would be worth approximately $220,000 today. Bitcoin has stronger properties than silver, because of the fixed amount that will ever be created (21M).
Will $10,000 in bitcoin be worth 220K in 50 years? It's a question that can't be answered; however, many have speculated if bitcoin continues it's rapid global adoption rate, the price per bitcoin could reach $10,000 - $1,000,000 in the next decade.
Without the influence of bankers, and government bureaucrats, the alternative digital currencies (bitcoin & litecoin) will have their opportunity to stabilize the economy for the people. Bitcoin has garnered a lot of attention world wide, and is becoming more commonplace. In the United States, Tyler & Cameron Winklevoss (of facebook fame) have filed paperwork with the SEC to create a bitcoin trust. This type of financial instrument opens up bitcoin to another class of investors. It's unknown if the US will approve their application; however, it's an important step in the right direction.
With all the uncertainty in the world, it's good to exercise your options. With bitcoin, it's considered to be the most world changing technology, since the internet itself.