When governments “borrow” they do this in the form of selling bonds, which are in essence IOUs of various durations that pay a given rate of interest each year, with the principal paid back at the end of the term. Like all borrowing, this is a way of having cash today that will be paid from the earnings — tax receipts — of tomorrow. In the US these bonds are known as T Bills, in Germany as Bunds, and in Britain as Gilts. Unlike people, governments don’t die, so the terms on these bonds can be very long, and because it’s the government doing the borrowing, which is very unlikely to go bust, the interest rate is much lower than most of us would get at a bank if we wanted a loan. And because governments don’t retire and die, they can, and do, roll over their debts again and again. Better still, inflation erodes the real value of the debt, meaning that the huge sum borrowed at the outset of the term looks much more modest by the time the principal has to be repaid. (As an aside, this is why governments run in terror of deflation — an economic state in which the real value of debt increases over time.)
But governments can only sell so many bonds. After a certain point the markets won’t buy any more. The US and German governments can sell more bonds than most governments because they have the safest and most desirable debt, but even they have limits. So where else can a government turn if it needs to raise a lot of money fast (and it dare not raid people’s bank accounts)?
Welcome to money printing.
After the crash of 2008, when a lot of money had to be found in a hurry to stop a domino-fall of the banks, most money printing was done behind the fig leaf of “QE” (quantitative easing) — the quaint notion that all this new cash is temporary and will, one sunny day, be withdrawn from circulation. The idea goes like this: the central bank (henceforth CB) prints the money, then buys debt with it (which then shows as an asset on the CB balance sheet), thus freeing up the government to sell more bonds and in theory making capital available to the wider economy. Then, when the debt matures, in 10, 20, or 30 years’ time, the CB gets repaid and burns the cash. Of course no one really believes this will happen, but we all pretend to. The effect of this after 2008 was to keep equity and real estate prices high, which prevented a lot of layoffs, but at the cost of raising asset prices and making the rich very much richer.
Once the QE charade has been wrung dry, the next step is what Milton Friedman famously called “helicopter money” — in which the government simply prints money and gives it to people to spend. Today we call this a “stimulus measure”. By giving money to those people who will actually spend it, some of the cash will immediately return to the government in the form of taxes, so it isn’t quite as problematic as it may appear. It does risk inflation though — more money suddenly chasing the same amount of goods and services can only mean higher prices.
And if QE is exhausted, and helicopter money hasn’t worked, there is the nuclear option of “monetary financing”— a desperate measure in which the CB prints money, but rather than buying assets with it, or giving it to people to spend, it just gets dumps into the government’s account to run the country with. This has never gone well whenever it has been tried, even if the government solemnly swears it regards the money as a giant “overdraft”. By this point no one will believe a word the government says, and investors will sell the currency. Needless to say, political leaders that have a record of lying and cheating will obviously find this policy even more problematic than those who are broadly trusted.
If governments across the world start down the road of monetary financing, whether for political gain, or for reasons of idealism, or out of desperation, the inevitable result will be a flight of capital to safety (governments know this, so they will put capital controls in place before announcing the policy. Keep your wits about you). In the first instance, anxious capital will be put into dollars. But what if the US is one of the governments that is being monetarily reckless? How about stashing some wealth in Swiss Francs? Certainly. Gold? Yes. Land? Sure thing. Fine art? Why not?
What else?
Bitcoin, at least for a few percent of your wealth. Given the built-in deflationary nature of Bitcoin, we can be sure that for as long as it endures, it must be an appreciating asset (against devaluing fiats). It is hard to imagine circumstances in which Bitcoin is both a live system and has no market value. No one really cares that Bitcoin is a public blockchain, or that it is “decentralized”, or “trustless”, or “permissionless”. What matters is that no one owns it, and that the system cannot be gamed, either by someone who runs the code, or by criminals, or even by a government. What matters is that Bitcoin enjoys market confidence. Mathematical proof backs Bitcoin, not a country or a commodity. You don’t have to take anyone’s word for it with Bitcoin. The architecture is simple and the operation transparent. Everyone can see everything.
Bitcoin is terrible for hiding illicit wealth or conducting criminal enterprise (much easier and cheaper to use the traditional financial system for that), and thanks to bandwidth issues and transaction costs it is still a long way from being an actual currency (i.e. an everyday means of exchange). But Bitcoin is excellent as a low-friction store of value — probably the best long-term savings instrument ever invented. Even if your government enacts capital controls, they can’t touch your Bitcoin. If you haven’t looked into it yet, you should.
