Gold News

Magic Beans, You Say?

Bubblin' up on the flood of cheap money...

HALF-a-billion Dollar paintings. IOUs that charge you to hold them. Stocks at unprecedented highs.

We're living in the "everything bubble", writes John Stepek, editor of MoneyWeek magazine.

And the logical result of this bubble?

$10,000 Bitcoin.

At the time of writing, Bitcoin hasn't hit $10,000 yet. But it's really not far off it.

My colleague Dominic will be writing more about the king of the cryptocurrencies specifically in tomorrow's Money Morning, but I just want to consider what it says about today's monetary environment.

I that it's fair to say that low interest rates, and quantitative easing (QE) in particular, paved the way for Bitcoin to take off.

Of course, Bitcoin is far from unique in this.

Let's say, for sake of argument, that a Leonardo da Vinci of shaky provenance is the most valuable painting available for sale in the world. What do you pay for the most valuable painting in the world?

Well, I guess you pay whatever you can afford. When that adds up to nearly half a billion Dollars, well, that says a lot more about the perceived value of those Dollars than it does about the painting.

And if you're willing to buy a "risk-free" government bond at a price that will guarantee you a loss in nominal (ie before inflation) terms, then what does that mean for the value of everything else?

If your minimum required return is negative, then the price you will pay for every other asset is going to be driven higher. If you'll pay up for a money-losing asset, what will you pay for one whose expected return is positive?

Loose monetary policy has affected asset prices across the board.

But when it comes to Bitcoin, I'm not really thinking about the financial impact (although we'll get to that in a moment). I'm thinking about the philosophical impact.

There's no doubt that the events of 2008 changed the way that people view money. I'm going out on a limb here (in that I can't point to any statistics that would prove this), but I suspect that most of us didn't spend a lot of time agonising about the true nature of money before the entire financial system imploded.

But then, suddenly, it mattered. The financial economy and the real economy collided disastrously. And then the financial side came out with a whole load of solutions that made the real economy wonder what was actually going on behind the curtain.

I'm not saying that everyone understands how money creation works – economists still argue with each other over exactly what money is and what role it plays. But I do think it's fair to argue that most people today have a much more abstract view of money. Even if they don't know a great deal about it, they do know that it's a lot more complicated than it might look.

And when you have central banks around the world almost literally printing money (it's only not literally, because they do it electronically), you can hardly blame the rest of us for seeing money as far less tangible than it once was.

Before 2008, if someone had told you that there was a currency that could be "mined" by computers doing very hard sums indeed, and that it would be worth something, even though it had slightly less chance of being accepted in your local Tesco's than an ingot of gold, you would probably have been sceptical.

After 2008, the idea of mining something out of thin air sounds like honest hard work, compared to the idea of printing something out of thin air. You might be sceptical – but it wasn't much crazier than everything else that was going on.

So when Bitcoin launched in 2009, it was falling on fertile ground.

Magic beans, you say? Sounds plausible.

The public was both angry at the establishment and suddenly distrustful of a financial system whose pipes had burst and flooded the whole economy. If ever an idea like Bitcoin was going to thrive, that was the right place and the right time.

To be clear, I'm not dismissing Bitcoin. I think there's something there (though I'm not invested in it, and I do think that this current phase will end in tears). But it could only have taken off in today's world.

Bitcoin is just the logical conclusion of today's monetary policy. What happens when you can't trust money? You find an asset that has a lot of the trappings of money (it can be moved digitally and swapped for other currencies), but which apparently removes the need for trust from the equation.

No wonder it's rocketing.

Launched alongside the UK's highly popular The Week digest of global and national news in 2001, MoneyWeek magazine mixes a concise reading of the latest financial events with expert comment and investment ideas.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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