Recently, I took a trip to Greece. Surprisingly, things were more affordable than their equivalent in the United States. Greece recently went through a substantial recession that was started by hefty debt loads going into the global recession in 2009. The government continued to add debt, receive bailouts, increase taxes, and engage in austerity measures until the situation was so dire that the Greek government defaulted on its debt in 2015.
Many citizens were thrust into poverty due to the government reducing state retirement benefits ten times over the decade-long crisis. The government raised taxes dramatically, effectively doubling them during that period.
Unemployment had risen to over 25% in 2015. Homelessness increased dramatically, and over 20% of the population was cited as lacking enough resources to purchase food. Rates of suicide or attempted suicide increased 36% over the levels before the recession.
Why was Greece’s recession so bad?
Greece became a member of the Eurozone in 2001 and, as such, couldn’t “inflate away” its debt. Had they operated off of their individual currency, they would have been able to reduce debt burdens by inflating their currency – albeit at the cost of their people’s purchasing power – and would have avoided severe shocks to their economy. As a member of the Eurozone, they did receive multiple bailouts from the IMF, but at the cost of severe austerity measures that brought on many protests from their citizens due to the harsh effects within the economy.
So, how does the Greek financial crisis relate to the United States?
The United States of America is on a path that has been followed for hundreds of years by developed nations. The debt loads increase from wars, crises, and the desire to buy votes. Then, the debt is handled by the Central Bank to increase inflation and, consequently, reduce the cost of the debt to the country.
Inflation has been highly evident recently, as we have seen a surging amount of inflation during the post-COVID pandemic. However, it shouldn’t come as a shock to anyone, since we watched the government hand out checks to every citizen (to the tune of $814 billion), dump trillions of dollars into the economy with quantitative easing (the Fed Balance Sheet currently sits at $7.3 trillion), and pass out huge checks to businesses via the Employee Retention Credits (an estimated cost of $230 billion that is still rising) and PPP loans (which cost $757 billion).
As a matter of perspective – the United States GDP was estimated at $27.36 trillion in 2023. This means that the Fed Balance Sheet equals 26% of our GDP.
If all of that isn’t enough, additional spending will be happening soon, now that the Inflation Reduction Act was passed and will add $800 billion to government spending over the next 10 years.
Additionally, the most recent version of President Biden’s student loan forgiveness program is estimated to cost taxpayers somewhere between $870 billion to $1.4 trillion. This is the most recent program put in place as of April 2024, as a way to move his program forward after the Supreme Court ruled the previous loan bailout program unconstitutional in June 2023.
Is anyone surprised, with all of this government spending, that we had crazy inflation over the past few years?
Sadly, the people hurt most by the ballooning cost of living are the people who can afford it the least.
Over time, this is why real estate has been an enduring means of building and preserving wealth, as the value of real estate is indexed to inflation indicators (housing cost is 1/3 of the CPI) and helps to build a wall as a physical asset against the eroding of value at the whims of government policies.
What does all of this have to do with cryptocurrency?
In theory, it would make so much sense for the world to adopt a global digital currency system. Cryptocurrencies, particularly those like Bitcoin, are designed to be deflationary or to have controlled inflation mechanisms. For example, Bitcoin has a capped supply of 21 million coins. This scarcity contrasts sharply with fiat currencies, which can be printed in unlimited quantities by central banks. The decentralized and transparent nature of cryptocurrencies prevents arbitrary increases in supply, thereby inhibiting inflation.
It is just this principle, though, that will prevent the adoption of a consistent worldwide currency. The power to manipulate the economy by pulling on the purse strings of a central bank has been too great a temptation for politicians throughout the ages to resist.
Why don’t national governments want to accept cryptocurrency?
Cryptocurrencies have surged in popularity over the past decade, promising a decentralized financial future and challenging traditional financial systems. Despite their growing acceptance among individuals and businesses, governments worldwide remain hesitant to fully embrace these digital currencies. One key reason for this reluctance is the potential loss of their ability to inflate away the national debt.
1. The Role of Inflation in National Debt Management
Governments manage their economies through various tools, with inflation playing a pivotal role. Inflation reduces the real value of money over time, which can be advantageous for governments with substantial debt. When inflation rates are moderate, the real value of government debt decreases, making it easier for governments to manage and repay their obligations. This process allows countries to essentially reduce their debt burden without reducing the nominal amount owed.
For instance, if a government owes $1 trillion, and inflation increases by 5% annually (thereby reducing the value of their currency by 5% annually), the real value of that debt diminishes significantly over time. This mechanism provides governments with a subtle and less politically risky means of managing national debt, rather than raising taxes or cutting public spending.
2. Sovereignty and Monetary Policy Control
Another fundamental issue is sovereignty. Control over the national currency is a cornerstone of a country’s economic independence. Central banks use monetary policy to stabilize the economy, control inflation, and influence employment. Cryptocurrency, being decentralized, undermines this control.
For instance, during economic crises, central banks often resort to quantitative easing – sound familiar? – injecting liquidity into the economy by purchasing government securities or other financial assets. This increases the money supply and lowers interest rates to stimulate economic activity. With cryptocurrencies, such measures would be ineffective or impossible, as governments and central banks would not be able to control the currency supply or influence its distribution.
If Greece could manipulate its economy in this manner, the recession it faced would have been far less severe.
Conclusion
Because countries throughout the world rely on their ability to manipulate the economy for political pull in the name of stability and benefits for their citizens, the adoption of cryptocurrency worldwide would be a monumental undertaking. The results in Greece would be an example of how a decentralized currency would affect an economy.
Would it be good for the countries to operate within their means and have a limited currency? Sure it would.
Do you think that will happen anytime soon – all countries learning to live within their means? Exactly. That’s why I don’t believe cryptocurrency will be adopted across the large nations of the world.
If you’re a large investor in cryptocurrency, I have a suggestion for you to consider: the IRS allows you to deduct crypto losses against other gains. This means you can sell your real estate for a capital gain, and use the losses from selling your cryptocurrency to offset the gain. Learn more about the process here.
And, of course, if you want to invest in the great inflation-adjusted returns of real estate – call me today.
