Bitcoin and endless inflation

The fiat system is a Ponzi scheme that requires perpetual (and thus impossible) growth of physical flows. We are heading towards a painful inflation conducive to bitcoin.

Ponzi and Growth

All euros, dollars, yuans, or francs in circulation come from debts. In the fiat system, money is entirely created from debts.

There wouldn’t be a single cent in circulation if all bank loans were repaid overnight. Truth be told, the coins and banknotes would remain. However, cash only represents a very small portion of the monetary supply, about 5%.

The fiat system operates on a fractional reserve basis. Meaning that money is created ex nihilo by banks. It is lended into existence. Money comes from loans (mostly mortgages) and is drained out of the economy as repayments are made. Except the interest that rewards the bankers.

We are continuously paying interest on the entire money supply. Because of this, we must continuously increase the money supply for everything to add up from an accounting perspective.

This mathematical imperative stems from the fact that “money doesn’t make money”, as the saying goes. The money needed to pay interest is never initially in circulation in the economy.

To put it even more clearly, if some people manage to repay debt AND interest, mathematically, others won’t even be able to repay the principal.

In short, the flow of new loans must exceed the flow of repayments for the system to hold together. Otherwise, some economic players would not be able to find enough money in the magma of the economy to honor their loans in full. Defaults would become an integral part of the system, which is not efficient.

This is why banks maintain a ponzi scheme…

[A ponzi scheme exacerbated by the fact that governments “roll over” their debt. Accumulating interest on interest is an exponential mathematical process (“compounding interest effect”)]

Is this good or bad? History teaches us that humanity always embraces the most efficient systems. However, this nice Ponzian mechanism now faces a stumbling block : more and more energy and raw materials are needed to match this ever-increasing money supply if wages are to keep up !

But we live on a finite planet…

Banking and Renaissance

The oldest bank still in operation is the Monte dei Paschi. This italian bank was founded during the Renaissance, a pivotal era of civilization.

The Italian city-states such as Florence, Venice, and Genoa laid the foundations for modern banking. This includes the Medici family’s bank from Florence, established in the 14th century, known for its innovative financial practices.

It was the mathematician Luca Pacioli who introduced the concept of double-entry bookkeeping in his work “Summa de Arithmetica, Geometria, Proportioni et Proportionalita” (1494). This revolutionary system involves recording both the debits and credits of financial transactions. Letters of credit were also crucial to the development of trade and banking.

It was both the rise of banks and merchant navies that drove economic activity and prosperity. The Renaissance truly marked the beginning of a new era of exploration in search of untapped resources. Emblematic figures such as Christopher Columbus, Vasco da Gama (first sea route to India) and Ferdinand Magellan (first circumnavigation of the globe) laid the foundations for globalization.

All this to say that wind power combined with credit and marine insurance from Italian banks were the driving forces behind the economic boom. And let’s not forget the crucial technological breakthroughs like the compass and the rudder!

Transportation (and the energy it requires) is the keystone of economic development. Without it, economic growth would be non-existent, as would the ability to lend money. You can’t have one without the other.

Oil and Containers

The industrial revolution in the 18th century significantly enhanced the merchant navy’s transportation capacities. Steamships replaced sailboats and catalyzed another tremendous growth in global trade.

The advent of steam made maritime transport more reliable and shortened distances by connecting continents in a way previously unimaginable. This time, the Great Leap Forward came from coal energy. Then came oil, which today powers container ships weighing 100,000 times more than Christopher Columbus’s caravel.

Nowadays, the merchant navy transports almost all non-food products available in commerce. With its two billion tons of capacity (compared to a few tens of millions two centuries ago), it accounts for 80% of international freight.

As Jean-Marc Jancovici says, “without it, you and I could say goodbye to our purchasing power. […] This merchant navy consumes as much oil as global aviation, that is nearly 10% of global oil production. In addition, Trucks, which are also an essential link in the economy, consume twice what the merchant navy does.”

The great challenge of the coming decades will be to propel sea giants of 300,000 tons as well as the 278 millions of trucks despite declining oil production. In this regard, keep a close eye on the United States :

🍿 pic.twitter.com/ZkmbJ3wZae

— Nicolas Teterel (@NTeterel) May 7, 2024

Without oil, international trade will be substantially reduced and deglobalization will become a reality. This will result in shortages of certain products and the inability to make loans without causing inflation.

Without abundant energy, we can’t physically put growth in front of the monetary ponzi. A ponzi which, once again, is neither good nor bad. It simply needs perpetual growth, which, unfortunately (or fortunately, depending…), tends to slow down decade after decade.

Bitcoin and the Physical Limits to Growth

Oil is not infinite. We will make electric trucks, but even then, there are limits. Demand for the key element of all-electricity – copper – will increase by 4-6% per year over the next eight years. Production should therefore double by 2035…

All this knowing that extraction consumes a lot of oil and the discoveries of new copper deposits are meager. And that’s not to mention the fact that installing small nuclear reactors on the 60,000 cargo ships is an impossibility.

The amount of goods transported will inevitably decrease, in turn preventing the growth of physical flows that underpin economic growth.

And by the way, since half of the trucks transport food, it is predetermined that their prices will rise and erode households’ borrowing capacity. This will result in a burst of the real estate bubble.

All of this to say that inflation will not stop. Absent an energy miracle and immense discoveries of copper, lithium, etc., growth will continue to wane. Will AI be the compass of the 21st century? Yours truly doubts it.

Here is the trend for the Old continent :

-Maximum energy import : 2007
-Maximum weight loaded in trucks : 2007
-Maximum number of m2 built per year : 2007
-Maximum disposable income : 2010

What happened in 2007? The peak of conventional oil. The lack of growth will translate into more inflation. As they say, the glory days are over. Any good father should now think about protecting the family savings.

And what better way for the average person than to simply choose the only asset that exists in an absolutely finite quantity : Bitcoin.