From Cryptocurrency to Cryptostate Part 1
The Inflation Story: Financial Hegemony and State Dominion
Anon
Many crypto hackers and enthusiasts have become disillusioned with the ecosystem’s direction because it appears to have abandoned the tenets that initially attracted them. One crucial tenet is the belief in monetary sovereignty. This abandonment occurs when its political implications are critical, especially with ever-expanding debt and inflationary crises impacting the United States and its people. This article is the first in a five-part series discussing the rise of the cryptostate and is based on a presentation given by Jarrad Hope at ETHBarcelona in 2022. Part 1 explores monetary capture and manipulation as a means of population control.
First Principles and Introduction to Cryptostates
The earliest enthusiasts embraced crypto to uphold the philosophies of counter-economics, agorism, and crypto-anarchy. Bitcoin showed everyone that it is possible to create monetary policy independent of the nation state and have it operate in a hostile environment. It works incredibly well, proven by almost fifteen years without censorship or capture. Then Ethereum came. It changed everything by introducing a way to build policies into networks. Theoretically, anyone can use smart contracts to assemble institutions and create contractual arrangements based on consent. This innovation clarified how combining these tools can form new social orders.
Decidedly, applying liquid markets to social orders is the best thing we can do to preserve the future freedom of humanity. Markets are voluntary and social, and thus non-coercive. They allow people to coordinate to create a new social order not based on a monopoly of violence but on voluntary actions and enforcing rights through protocols, i.e., liquid governance markets. These open, opt-in, and voluntary governance mechanisms are essential to blockchain development.
Voluntary governance is important because those systems may become centralised if we do not build them with an opt-in/opt-out component. Worse, they could transform into a scheme or scam without it. So, novel governance mechanisms create the foundation for developing a new 'nation' or 'state.'
We refer to these unique governance mechanisms on liquid markets as 'cryptostates.' Here is the definition: A cryptostate is a network of individuals using technology to discover each other and coordinate based on shared values, principles, mores, and rules. The technology is typically a blockchain or crypto stack that permits individuals to programmatically structure their values as rules for creating and ordering a given society. This technological ordering allows for the proliferation of non-territorially bound governance solutions — often hosted in a cloud-based directory.
We will explore these ideas in greater depth throughout the series, but first, we must examine the problems that led to our current predicament with monopolistic nation states. This piece looks at the financial status quo, including the debt crisis through inflation and its impact on the human condition, and sets the stage for the solutions in subsequent articles. Let us begin by understanding how financial servitude has manifested in the United States and impacted the world.
Inflation and Financial Servitude
The US Congress established a monocentric banking system with the 1913 Federal Reserve Act. This legal precedent allowed banks to print and lend money in unlimited supply. It was a dramatic change because moneylenders and the US banks previously had to assess and manage risk. Initial conditions arose because banks were locally managed, fully privatised, and detached from the locus of federal control. Therefore, bankers at the time maintained healthy fiscal discipline until they gained the equivalent of cheat codes to the monetary game. Under the Federal Reserve, the newly formed banking cartel learned to pass losses onto the people as a kind of 'soft theft' through inflation (money printing).
Once a government inflates the money supply, the supply sustains value only in the short term. Those who have immediate access to this new money are those in power, the elite, banks, and politically connected. That money eventually circulates through the economy and into the hands of ordinary folks. By the time they have it, inflation has sabotaged the dollar's purchasing power. The everyday person loses the value of their money. This barely perceptible theft represents how the politically connected use the system to secretly loot people through inflation, enslaving them to a dishonest monetary regime. Considering these insights, one can see how inflation is tantamount to financial servitude.
Let’s explore how monetary schemes gave rise to this unjust predicament.
The US dollar and the British pound sterling have lost more than 95% of their value versus gold.
Source: Elements
Great Depression: Austrian Business Cycle and Malinvestment
Savvy people know endless money printing results in a catastrophic economic meltdown. That is a given. However, the state and their banking partners print currency recklessly because they either believe they no longer need sound policies and fiscal discipline or don’t care. That is what has happened in the US ever since the establishment of the Federal Reserve System. Over the years, it rapidly inflated the currency, leading to several boom and bust cycles. For clarity, a boom is a time of economic prosperity, and a bust is a time of economic decline or a 'depression.' The Great Depression in 1929 represented one of many inflation-driven busts.
The Austrian school economists provide the keenest analysis of inflationary policy through their business cycle theory. The US government’s financial policies have led to what the Austrians call 'malinvestment,' which explains the underlying causes and triggers behind the Great Depression (and most other economic recessions/busts).
Malinvestment occurs when the market receives incorrect price signals, causing investors to become exuberant about a specific asset. Although faulty signals prop up these particular investments, investors driven by the fear of missing out (FOMO) leap into a buying frenzy.
The frenzy erupted as rapid-fire stock trading that caused the stock market to crash spectacularly, inciting the Great Depression. Stock market pricing was overinflated due to artificially created prosperity driven by runaway money printing in the years prior. Unconstrained credit expansion also contributed to lowering interest rates. This monetary expansionism culminated in the spread of fraudulent market signals. In an article called 'The Great Depression,' Hans F. Sennholz, expressed the dilemma:
Austrian theory provides the insights necessary to recognise when 'malinvestment' ensues through faulty interest rates and inflation (and when a 'bubble' forms and when a probable market crash is about to occur). With these facts, we can now explore how the United States maintains fiat supremacy while tap-dancing around the full consequences of its inflationary and expansionary policies.
Monetary Cheat Codes: Bretton Woods, WWII, and Eurodollars
The US and its banking allies enjoy an opportunistic position. They have manoeuvred their way out of the consequences of decades-long inflation by exporting it onto other countries. The Bretton Woods conference in 1944 provided a timely advantage. This was when these powers decided that the US dollar would hold the World Reserve currency status. All other countries would have to adopt and hold the dollar in their reserves. At the time, the dollar also became tied to the value of gold, which would have further harmful downstream effects when the US decoupled the two.
The Nixon administration decoupled the dollar from gold in 1971, introducing the idea of 'fiat currency.' Fiat means 'by decree' or 'by government authority.' Hence, the dollar’s value became irrevocably tied to the power and influence of the US empire, and they no longer backed it with hard assets. All the consequences of losing the 'gold standard' are beyond the scope of this piece, but the point is that the gold standard only became untenable when the US government knew it could cheat the impact of inflation. Why have a gold-backed currency when you can have a might-backed, inflationary currency?
After the Great Depression, the US enjoyed artificially created inflationary booms due to wartime serendipity. Dollars that made their way overseas during World War II as part of the Allied effort never returned to US shores. Those EU countries had to hold those dollars in reserve due to the Bretton Woods agreement. Thus, European countries would have no choice but to maintain and trade these 'eurodollars' indefinitely. This fortuitous circumstance guided US monetary policy because bankers and Fed administrators knew they could nurture their inflationary practices while ramping up spending and borrowing. The situation created a death spiral of continuous money printing without the negative externality of dealing with hyperinflation. For example, 'eurodollars,' according to a Nedbank report, were valued at a staggering $13.83 trillion in 2016.
All these dollars sit in European reserves or are used to settle business trades via the SWIFT network; they never return to the US, at least not in whole or at once. In this way, the US has insulated itself against the worst inflationary calamity imaginable. The eurodollars inside overseas reserves do not allow the reality of hyperinflation to materialise; the situation artificially represses the full effects of inflation, which would mean the drastic devaluation of the dollar.
However, if the dollar loses its world reserve currency status, other nations have no reason to hold it. All that money would course back to the US, realising the total scope of the inflationary death spiral and precipitating a financial collapse that the world has never seen before. The dollar has depreciated substantially due to inflation, but that depreciation is kept in limbo by capital controls and interest manipulation. But the end of the dollar hegemony would spell trouble for the US empire and its 'exorbitant privilege.'
In the book 'The Dollar Endgame,' Peruvian Bull reminded us of the US’s 'exorbitant privilege':
The US will continue drinking to its heart's content until, eventually, decades of disastrous policy end, and the country loses its position of dominance. Even if it does not, everyone must acknowledge the systemic danger of giving a centralised state omnipotent control over monetary policy rather than having a free market of competing currencies.
Dollar Denouncement: Currency Competition and BRICS
A government monopoly over monetary policy allows it to hold whole populations in bondage. Such a loose monetary policy steered by the whims of government and central bankers is a problem, as Austrian economist Friedrich A. Hayek would famously observe:
Recognising that wrestling money from government control was unlikely to yield results beyond endless bloodshed, he added:
Hayek was right. He claimed we should introduce something akin to a free market of competing currencies. Other countries have started trying to compete with the US’s monetary monopoly via BRICS’ efforts to dethrone the dollar and install a new money as a global reserve currency. BRICS consists of nation states (Brazil, Russia, India, China, and South Africa) representing competitors to dollar dominance.
Even though this situation looks like 'currency competition,' these countries simply vie for power by trying to crown their monetary unit as king. In this way, BRICS’ ambitions could cripple and dethrone the US dollar hegemony, but it is not a solution to the overarching problem of inflation and undisciplined monetary policies. And why would it be? Nation states exist to incrementally grow their power, not spread freedom and economic prosperity, and the best way for them to do that is by controlling money.
Hayek preferred incorruptible money. He wanted economic liberation and argued for genuine market freedom in competing currencies. He meant that a free market, not a government or constabulary, should decide the types of currencies circulated, redeemed, traded, and stored. This economic openness prevents financial servitude and inflationary predation on the people. It also forces any kind of power centre or nation state to adopt economic policies that prevent the metastasis of warmongering and power overreach. Without an infinite supply of money, governments cannot engage in warmongering and overreach because they would run out of money to fund their nefarious exploits. Taxes alone aren’t the key to expanding an empire indefinitely; it is always unlimited access to the money printer.
The following articles in the series will explore the solutions to these problems via economic liberty, voluntaryism, and cryptostates. Through these ideas, we introduce real competing currencies and offer competing governance mechanisms that put the breaks on monopolistic nation states and their control over money.
Stay tuned for part two, where we discuss the world’s slide into authoritarianism.
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