History is the best of teachers. If you want to learn something about Bitcoin’s future, it might be instructive to study our economic past – especially interest rates.
It may not be the most exciting topic, but it’s easy to understate the importance of loan interest. We live in a debt-focused society that depends on borrowing in order to function.
Readers of a certain age might recall the economic devastation caused by usurious interest rates on everything from car loans to mortgages, back in the 1980’s. It was not unusual for someone to walk into the bank, drop their keys on the counter, and leave their homes behind, along with their debts.
Many homeowners did precisely that, causing home prices to plummet rapidly. With nobody left to borrow from the banks at such high rates, the entire economy slowed to a crawl:
“…inflation was running rampant, usually thought to be the result of the oil crisis of that era, government overspending, and the self-fulfilling prophecy of higher prices leading to higher wages leading to higher prices. The Fed was resolved to stop inflation. So, Chairman Paul Volcker… kept raising rates in 1980 and ’81, eventually bringing both the economy and inflation to a standstill.Paul Solman, PBS NewsHour Correspondent
In response to the severe economic stall, the Federal Reserve reversed course. Interest rates were peeled back, stimulating the economy and encouraging consumers to borrow and spend. Housing prices climbed upward in response to the willingness of buyers to once again take on debt and part with their money, now that it was safer to do so.
Low interest rates for the win! Right? Riiiight?
So, low interest rates are the way to go then, right? Why would we ever want to see higher interest rates if they just slow down the economy?
It’s really a simple problem. The lower interest rates are, the more people are willing to borrow. The more people are willing to spend from their borrowed funds, the higher the market price of everything from food to cars to real estate will climb. Essentially, low interest rates contribute directly to inflation.
But if people get too accustomed to taking on debt, they can become highly vulnerable; unable to pay off mortgages or other loans. So, the Fed performs a balancing act, keeping interest rates in a “Goldilocks zone.” Not too hot, not too cold, just right.
The trouble is, the exact whereabouts of this Goldilocks zone are imprecise. And as the world’s consumers continue to accrue more debt, it edges closer and closer to zero, and in some cases, goes negative.
Negative interest rates
A few European countries have already established negative interest rates. Sweden, Switzerland, and Denmark are good examples, and the International Monetary Fund has recently proposed a mechanism that would “make deeply negative interest rates a feasible option.”
When interest rates are negative, you get to pay for the privilege of storing your money in the bank. That doesn’t just mean bank fees, but also interest charged on the money you hold in your account. Your savings gradually dwindle as you are forced to pay to save your money.
For the average person, the only alternative is to borrow money and spend it. After all, it’s cheap to borrow. What’s the point of saving it?
And everything on the planet that can be bought gets more expensive because everyone would rather spend money than save it.
If you’re feeling bold, you might be tempted to take cash out of the bank, stuff it into a safe and protect your wealth that way.
There are a couple of problems with this. First, your cash is gradually diminishing in value as it sits there, as everything around you grows more expensive. Secondly, the countries with negative interest rates are also halting the printing of paper cash altogether, going completely digital.
You can’t store digital money in a safe. Or anywhere, for that matter, except in your bank account. You know, the one where your money continuously dwindles due to negative interest rates.
This is the killer combo: Negative interest rates and cashless economies.
Switzerland, Denmark, and Sweden, which have negative interest rates, are also among those leading the way toward a cashless society.
In these economies, you can’t save your money in a bank because it’s gradually confiscated by the bank, yet you can’t withdraw your funds as cash because there is no such thing as cash.
Inflation is inevitable and can only accelerate in this scenario, especially when combined with the “quantitative easing” that countries use to print ever-greater amounts of money. This continuous addition of more money further dilutes the value of every single dollar bill.
Quoted from Forbes:
“The War on Cash and negative interest rates are huge threats to your financial security. Central planners are playing with fire and inviting a currency catastrophe.”
The wealthiest among us already know how to avoid this problem: accumulation of assets.
Real estate. Gold. Silver. And, for the past decade, cryptocurrency.
Bitcoin and other cryptocurrencies are the perfect antidotes to this killer combo. Being easy to acquire and exchange, these digital assets offer a nearly-frictionless escape from both negative interest rates and the resulting inflation. Cryptocurrencies also enjoy the added advantage of being highly portable compared to just about any other asset, but especially market-resistant assets like real estate and gold.
While the current cryptocurrency market is fraught with volatility and uncertainty, it is growing steadily. As legacy money continues to dwindle in value and savings are slowly picked away by central banks, cryptocurrencies can serve as a sort of protection of value.
Like all other assets, Bitcoin could see long-term growth in value as a shelter from the storm of negative interest rates.