As previously discussed in this blog, currency printing drives down each units relative value. However, due to the current down turn in the economy the negative impacts of the addition of new currency may not immediately be felt.

Longer term though, this, combined with low interest rates is bad news for savers. The inflation caused by this move will mean that the purchasing power of your bank balance will shrink faster than normal. There are ways in which you can mitigate this risk which we will discuss later in this article.

Deflation Before Inflation

It is likely that we will see asset prices drop considerably some time in the short to medium term before we see the type of uncontrolled inflation some are predicting. This is because we are coming to a peak in a bull market and many assets are already overvalued.

A good example of this is Hertz which was able to convince speculators to buy new shares while it was filing for bankruptcy. The company has since suspended the sale following discussions with the Securities and Exchange Commission.

It is likely that this deflationary period will create many buying opportunities for the right assets. However, some companies with weaker fundamentals may not survive the downturn. It may also be a good time to start a business with the likes of Airbnb, CNN and Uber all being started during economic downturns.

Limited Supply

Precious metals and cryptocurrencies like Bitcoin have limited supplies and therefore may be used as a store of value to protect against excessive money printing.

Bitcoin was created at a time of economic crisis partly for this very reason. A message was added to the first Bitcoin block about this exact subject, you can read more about that in an earlier blog post.

UK Property

With a limited amount of space and a growing population the long-term prospects for property in the UK look good. That said, areas like London which appear to be reaching a peak in valuations are likely to take a hit. Areas like Peterborough, Hull, Sheffield, Burnley and many others look more promising.

During any deflationary period demand for HMOs is likely to increase due to downsizing and family breakdown. This coupled with the increasing number of Councils implementing Article 4 (requiring planning permission to convert a residential house into an HMO) is likely to increase the value of licenced HMOs in time. Of course, this is dependant on area and where property is already overvalued decreases in price are likely to be seen.

Protecting Against Inflation

You can also protect against inflation by ensuring that your money earns enough interest to be able to withstand the loss in purchasing power. Unfortunately, it is no longer possible to do this with a savings account at a bank. However there are options such as peer-to-peer, cryptocurrency-backed and private lending. You can learn more about them in the blog post entitled Beat The Banks – Earn 8%+ PA On Your Savings!

Bitcoin came out of the 2008 financial crisis and the choice of headline was, seemingly, no accident.

Although no one knows who Satoshi Nakamoto really is, his writings reveal a little about his feelings on the financial system. For example, in one forum post he said of banks:

“Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.”

Bitcoin open source implementation of P2P currency 2009-02-11 22:27:00 UTC

In another forum post he talks about central banking saying:

“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”

Bitcoin open source implementation of P2P currency 2009-02-11 22:27:00 UTC

Bitcoin, it appears, was created as an alternative to the fiat currency system of continuous currency printing. With a fixed supply, Bitcoin comes into existence in reducing amounts over time until it reaches 21 million coins. Then it stops. It is in sharp contrast to Government created currency like dollars and pounds which seem to be printed at greater amounts over time and have no fixed cap.

Satoshi and the community of coders around him leaned heavily libertarian. He said of Bitcoin in an email:

“It’s very attractive to the libertarian viewpoint if we can explain it properly. I’m better with code than with words though.”

Bitcoin P2P e-cash paper 2008-11-14 18:55:35 UTC

The libertarian world-view very much blames the central banks currency printing for the boom and bust cycles of depression and expansion we see today. Hence the importance to Nakamoto of the headline “[c]hancellor on brink of second bailout for banks”.

Since the creation of Bitcoin, until recently, we have been in a boom period. But Bitcoin was created as an alternative currency which really comes into its own in the busts. In busts, central banks tend to go into massive currency printing drives, thereby reducing the value of their currency. This is a perfect environment for a currency with a limited supply such as Bitcoin.

As a number of factors were coming to a head, the COVID-19 crisis occurred, almost certainly bringing a new long-term bust cycle into being. This will be a test for Bitcoin. Will it act as a store of value that protects people from massive money printing as Satoshi Nakamoto cryptically predicted? Will Bitcoin be the foremost asset of the coming collapse?

Bitcoin has done very well in the boom cycle. It has risen out of nowhere to become a household name, traded on futures exchanges and discussed by global governments. Its limited supply should allow it to prosper during the bust cycle too. But perhaps in a recession people will prefer more familiar assets with less perceived risk. That’s why this Time’s headline is so important, it represents a key question about Bitcoin and the future of finance: will Bitcoin thrive, as it is meant to, during a financial crisis?

It’s a question I suspect we will soon have an answer to.

So what does this have to do with Pokemon cards?!

This Pokemon card sold for $195,000.

It is just a card, why does it have such a high value? Perhaps you think it doesn’t and someone simply paid much more than it’s worth. Okay, fair enough. But think back to when you were a kid, why did one Pokemon card have more value than another. It was, of course, the rarity of the cards that gave them their value.

Now imagine that Nintendo simply printed a huge number of the rarest cards. The value of those cards would drop fast!

The same applies to your pounds, dollars and other fiat currencies. The central banks sit there printing more currency over time. These days, they don’t even print it. They just type up numbers on a computer screen increasing currency supply, as if by magic. What do you think this does to the value of currency in your bank account? You guessed it, as it becomes less rare, it loses value. Just have a look at the purchasing power of your currency over time.

If Nintendo had printed huge amounts of the rarest cards, kids would have simply moved on to the next fad even quicker than they did. In the case of currency however, it is legally the means of settling debt and paying taxes. This is the reason demand will continue even though supply will cause the value to drop.

So why do they do it?

The printing of money is a stealth tax that lets governments take the value of the public’s savings while the public are none the wiser.

Printing currency allows the government to spend without the public realising that their money is being taken from them. While the public may not mind paying for essential services, many would object to massive taxation for wars, animal experimentation and other controversial practises. Having a currency supply backed by nothing means that the government can essentially borrow from the central bank indefinitely.

How can I avoid this stealth tax?

If you own assets that have a limited supply and have been shown to hold value over time, you may be able to avoid the impacts of this stealth tax. Examples of these type of assets include precious metals, property and Bitcoin. You should do your own research into these and other options as they all have their opportunities and risks. You should also look into how the purchasing power of your nations currency has gone down over time so you understand the risk of simply saving it in your bank account. Once you are informed on the subject, make the decision that is best for your individual circumstance.