Funny Money: QE, Bitcoin, and the Limits of What Markets Can Fix

Book: Financial Cold War
Author: James A. Fok
ISBN: 9781119862765

Previous: Are Markets Efficient? Part 1

The second half of Chapter 7 is about debt, money printing, and the gap between what markets promise and what they deliver. Fok does not trash central banks for acting in crisis. He asks whether the cure is creating new diseases.

Four ways to deleverage

When debt gets too heavy, societies have four exits. Cut spending. Default and renegotiate. Redistribute wealth through taxes. Or print money to inflate debt away.

Spending cuts drag incomes down and make debt harder to service. Defaults hurt creditors and tighten credit. Tax hikes on the wealthy can fund productive investment if done right. US states slashed education spending in the 1980s. By the mid-2010s, only 20-30% of poor kids attended university versus 90% of rich kids. That feeds falling productivity.

Printing money is the easy button. Germany’s 1920s hyperinflation showed the danger. After Volcker killed inflation in the early 1980s, the US leaned on monetary policy. Greenspan’s 1987 response to Black Monday became the “Greenspan put”: ease when assets fall, ignore bubbles forming on the way up.

Bernanke and Yellen saved the system in 2008 but warned monetary policy has limits. Expanding money supply does not route cash to where it is needed. Balanced deleveraging needs fiscal policy too. Warnings went unheeded. QE boosted asset prices for the wealthy. Trump cut taxes for the rich in 2017. Share buybacks and offshore cash hoarding limited productive investment.

John Law and the Mississippi Bubble

Fok tells the story of John Law, a Scottish gambler and convicted murderer who convinced France’s regent to fix postwar debt with paper money and a trading company.

The Banque Générale issued notes. Taxes had to be paid in them. The Mississippi Company absorbed government bonds. Law ran monetary, trade, and fiscal policy while running a private company. He printed livres, offered 10% down payments on shares, and pumped propaganda. Shares went from 140 livres to over 10,000. Then gravity returned. Inflation doubled prices in Paris. The bust crippled French finances for generations and fed into revolution.

Fok draws a parallel, carefully. No Fed chair holds Law’s power. But post-GFC policy bailed out banks and investors while ruling out higher taxes on the rich. The system became dependent on QE. The Fed can buy assets. It cannot force lending or direct spending to productive ends. Low rates may even hurt bank profitability and push savers into risky assets.

The dollar anomaly

When money supply rises, exchange rates should fall. The dollar broke that logic. After the GFC, the dollar rose against major currencies despite massive monetary expansion. Demand as a global trade and finance utility blunts adjustment. Fok suggests we may be living inside a spectacular financial bubble. If it pops, the sound will travel worldwide.

Bitcoin, Libra, and central bank digital currencies

Bitcoin launched in 2009 with a Times headline about bank bailouts embedded in its genesis block. The market topped $2 trillion. El Salvador made it legal tender in 2021.

But Bitcoin processes 7 transactions per second versus Visa’s 1,700+. Price swung from $60,000 to half that in two months in 2021. Mining uses more electricity than the Netherlands. China banned it. The 21 million cap makes it less flexible than gold when the economy needs more money.

Ethereum and other coins may improve on design. Facebook’s Libra stablecoin scared governments about monetary sovereignty. Regulators pushed back. The project shrank into Diem.

Central banks responded. By January 2021, 86% were researching CBDCs. National currencies have tax-demand advantages private money lacks. CBDCs could cut payment costs and fight crime. Risks include surveillance of citizens, disintermediating banks, and cross-border currency displacement.

China launched e-CNY in 2019, the first major-economy digital currency. Trade settlement in digital renminbi could cut bank intermediation and dollar use. New messaging and settlement rails could challenge SWIFT and US sanctions power.

But the renminbi’s bigger obstacle is China itself. International adoption needs open capital flows, offshore renminbi credit, derivatives, and legal constraints on government power. Technology helps. Trust in courts matters more.

Modern Monetary Theory says deficits do not matter for fiat currency issuers until inflation spikes. Fok calls it a no-limit credit card whose bill never gets paid. Fiat money runs on confidence. There is a tipping point. MMT forgets money exists to organize real resources. No fiscal constraints lead to misallocation and decay.

Seven decades of dollar dominance assumed the US could match global productivity growth. That was always shaky. Flawed incentives created imbalances, more shocks, and rising inequality at home and abroad.

Market limitations

This is the thread running through the whole chapter. Markets are powerful organizers when incentives work. They fail on long horizons, unpriced externalities, and problems where costs and benefits fall on different people.

Monetary policy cannot replace fiscal choices. The Fed cannot tax the rich or fund education. Crypto cannot replace state money without state-scale trust and flexibility. CBDCs cannot solve governance fights. MMT cannot repeal the need for productive allocation.

Bernanke and Yellen said so openly. Policymakers and the public preferred asset inflation over hard tax and spending debates. That is a political limit, not a technical one.

We’re all in the same boat

Reagan once asked Gorbachev how the US and USSR would respond if Martians invaded Earth. The translator briefly thought he meant Martians had actually landed. The point stands. China and the US share a planet. Covid and climate change proved cooperation is not optional.

Financial markets are ecosystems like nature. They need equilibrium and competition. They allocate surplus capital and spread risk to enable big projects. But they are cyclical and interdependent. Distortions in one market spill everywhere.

America and China sit at the top of a deeply linked system. Friction is real. But both benefit from each other’s economic health. Escalation hurts both. Fok turns next to how they might rebalance the global financial system together.

That is Chapter 8. This chapter’s job is to show why markets alone will not get us there.

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