The Mansion that Bitcoin Built

If you don’t yet, Bitcoin will make you understand property rights

The Problem Prosperity in Britain is at an all-time high, technological advances and falling prices have benefited the whole of society. And yet Anglo-Saxon economies are still struggling in one primary area, the rising cost of property, which is too expensive for many, and increasingly out of the financial reach of median income households, especially in London and the south east of England.

In this essay we will look at one reason behind this rising price trend in property, and a policy which can be implemented to increase property ownership, so that an average income household can afford to purchase a home.  The contention caused by rising property prices has not escaped the attention of the political classes, who want be seen to be taking steps to address the issue. This usually entails some kind of intervention. Yet it is questionable that politicians can positively influence a situation which they have helped create and sustain over the last four decades; first with the introduction of unsound money; next with schemes like right to buy 

— which reawakened in the mercantilist British a latent desire to turn a fast buck; to the more recent help to buy scheme, designed by British Chancellor George Osborne to sustain an overblown market and win a few more votes from the wealth effect of the country’s property owners. Over the four decades since the early 70’s, Brits have gone from being a nation of shopkeepers to being a nation of property developers, and some of the blame for this state of affairs can be laid squarely at the government’s feet.  Governments picking winners might seem like a good and noble cause, but housing policies tend to cause more harm than good, distorting the market mechanism to the benefit of a select few recipients. The government‘s primary aim should be to allow the housing market to function as a housing market, with as little heavy handed intervention as possible. If the people at the bottom of the property ladder cannot afford to buy property, then the solution is to allow the value of those properties to fall until they become affordable, not to subsidise sub-prime house purchases with taxpayers’ money.   The primary reason offered for the sharp rise in property prices over the last 40 years is that of shortage of supply of houses. The argument goes that deregulation and liberalisation of the sclerotic UK planning system would magically cure all ills. Whilst there is no doubt that a relative lack of property, through simple supply and demand pressure, has helped to push property prices out of the reach of ordinary households, house price inflation is also observed in countries which have no such shortage of land, like Australia, where planning laws are far more relaxed and land plentiful [ref: Australia house price rises].

In a freely operating market, when the price of something rises, an increase in the supply will tend to follow as suppliers respond to rising price signals, as they seek to benefit from rising prices. In the case of property, prices have been rising for decades, and new housing supply has been created, so why do prices continue to rise?   Supply and Demand of What?

Commentators are right that the problem with the housing market is one of supply and demand, but not just of property. House prices have risen substantially since the early 1970s[1]. This sharp uptick coincides precisely with a monetary policy shift which occurred at the same time; that of the introduction of government fiat currency, a government money substitute not backed by anything of value, and created in unlimited amounts at zero cost by private banks.  The United States left the Gold Standard in 1971[2], consigning 25 years of economic stability and prosperity under Bretton Woods to the dustbin, in favour of a new and exciting form of casino banking and Ponzi economics. Life had become too boring, it was time to print money and party.   There was debt before the 1970’s, but that debt had been backed by something of real value. The equity based financial system enjoyed up to that point was equitable, because it did not erode, via inflation, the property and wealth of the people. An equity based economy is an opportunity for all players to thrive should they choose to. If you got a job and contributed to society, you could raise a family on one income while the other parent stayed at home to raise up the children.

This was the American Dream of 1950’s and 1960’s America, which was eroded when the US abandoned sound money in the 1970’s. After opting for a debt based economy, not only did inflation start to erode individuals’ property and wealth, it also created a competitive environment which required participants to fight for the spoils of any newly created debt to pay off the interest on the debt which came before.  Under this competitive system, no longer was it enough for one parent to work, now families were competing with each other for the paradoxically short supplies of spare cash to service their debts, and both parents found themselves working full time, outsourcing their family to strangers to raise, in order to create and sustain the family home. By the late 1980’s the debt money was flowing like cheap wine, and if you were sitting in a chair in Wall Street or the City of London, you were going to get rich purely by virtue of your proximity to the digital printing presses. By the time this money filtered down to the rest of the country, its value had all but disappeared.  As the Anglo-Saxon economies started to print money with gay abandon, the bulk of this newly created debt money went into funding residential mortgages, pushing up real estate prices. Money is representative of economy. There needs to be enough money to lubricate the economic wheels of motion, but if too much is created, the value of that money is eroded. A sound money is limited in supply. In the early days of money printing, increased liquidity can benefit the economy, as liquidity begets liquidity; more liquidity helps to encourage more economic exchange.   At some point, however, the creation of excessive unbacked claims to the underlying asset (which once upon a time was gold) creates more claims to wealth than there is actual wealth and by the simple mechanism of supply and demand, that money‘s value starts to degrade. In the case of property price rises, what we have seen over the last 40 years is the effect of the inflation of the money supply, as it has entered housing.   The decision to purchase property has been the ultimate hedge against this inflation, and the inability to do so has led some to conclude they have been left behind economically. This factor cannot be discounted when considering the difference between the rich and poor in the UK and USA. Those close to the fountain of money, or holding assets into which that money has flowed (stock market valuations via QE being another recent example) have seen their wealth grow substantially, those who don’t own stocks or property haven’t.   Fiat currencies are beloved of governments as they allow them to spend above their means, creating the illusion of prosperity and the happy constituents who will encourage re-election. But people do not need economic help from governments. Governments do not create wealth, people do. Governments only take the peoples’ wealth and redistribute it as they see fit. What people really need from their governments is sound, equitable money. As governments seem unwilling to provide this, what the people need is the ability and right to choose other better forms of money, which better serve their needs.  What is to be Done?  Central banks have depressed the cost of money through lower and zero interest rate policy so that the world is now awash with cheap cash, and nobody has any idea any more what has value, and what is junk. There is too much liquidity. The number of unbacked claims to the underlying asset far exceed the tangible value.  The increasing divide between rich and poor is a direct consequence of monetary policy practiced by the UK (and US) since 1971 when we started cheating, by printing money with no value. I say no value, but there is an interesting mechanism which gives society the impression that debt has value, by the magic of compounding interest.

The interest payment on the newly created debt is significant over the period of the loan for something like a 30 year mortgage. But while this principal is created as debt, to be repaid with interest, where does the money to service the interest payment come from? The answer is, more debt, created by private banks when they make loans.

A functioning debt based monetary system requires continually expanding the debt, and those engaged in the economy need to compete with each other to acquire this newly created debt money to service their loans, before other people repay theirs. When those loans are repaid, that money disappears from the economy. This competitive environment is an inherent function of a debt based monetary system.  As 97% of the money supply is created by private banks when they make loans [3] we can say that the UK money supply is created at zero cost by private banks. UK’s national money supply is on loan from private banks, who benefit from a seigniorage fee once enjoyed by the government for creating money. This helps to explain the growing divide in income between those who use the nation’s money supply as a means of exchange (the people) and those who create that money at effective zero cost (the banks). What would happen if the money supply had no interest payments attached; if there were no counter-party and for someone to be holding cash, nobody else need be holding an equivalent debt which needed paying off?   Equity Based Money  What the average individual needs in order to acquire property is an ability to set aside wealth, to effectively preserve their capital. This mechanism, as we have discussed, is currently fulfilled by housing — because this is the only way to hedge against rampant inflation in a world awash with funny money. But in an equity based money system, no such thing is necessary. Governments don’t aim to erode the value of their citizens’ property annually by 2%. The people need to be free to choose what they use as a store of value for their wealth. Otherwise they will never accrue capital and property.

Bitcoin, the cryptographic currency, invented in 2009 following the Global Financial Crisis, was designed as a digital gold for the 21st century and as a response to the effects of fiat money. Initially Bitcoin appealed most to classical liberals; those who value individual sovereignty and private property rights, and who disagree with government intervention of any form, but many others are waking up to the functional benefits.  The invention of a secure form of global internet money arrived with perfect timing. Our current debt based financial system is dying, interest rates cannot be raised without creating global financial Armageddon, when the financial system used up all of their ideas in 2008/9 to no positive effect.  Cryptocurrencies — Bitcoin primarily — have emerged as equity based answers to cure the ills of our debt based monetary system. This new magic internet money is what will help people to acquire property for themselves. Bitcoin is property. Immutable wealth recorded in the Bitcoin blockchain forever. No government can shut it down, it is a peer to peer currency with no central authority. Money by the people for the people.

Bitcoin will be purchased with debt money which has interest payments attached, and those holding the debt side will eventually default, but these new cryptocurrencies are equity based assets. Instead of needing to be spent ahead of inflation, or work done to chase money to pay off debts, bitcoin was designed as a deflationary currency, gradually increasing in value over time. This antithesis to 60 years of mainstream Keynesian economics will change people’s understanding of wealth and capital forever. The consumerism of the early 21st Century will be replaced with expenditure which seeks true value, as the unit being exchanged has true value. Given sound money, people will save their wealth, spend more carefully, and change their time/cost preferences as they see benefit in holding Bitcoin rather than spending them as soon as they arrive in the monthly pay packet.   As economies stabilise around sound, equity based money systems representative of real wealth, the notion of flipping houses will be left behind as a relic of the casino style housing markets and property developers of the early 21st Century, and historians will write entries for them on Wikipedia. Houses will once more be seen as homes for British families to live in. The value of land and property will not change substantially over the years, as there will not be rampant inflation of the money supply, and individuals will not view property as an investment opportunity, but a basic requirement.   The biggest impact of all will come from the lack of interest paid to the financial sector, whose rent seeking acts as a drag on the economy. The repayments on all of the debt in beholden on Society to pay off. An equity based monetary system removes this burdensome interest repayment. When households of the UK are not paying say a 4% charge on their turnover directly to the banking sector, and as a result have significantly more disposable income to spend on other things such as; education of their children; more interesting careers, more time for creative pursuits, quality of life also improves. Sound money has a plethora of benefits not experienced since the late 1960’s.

As to the question of appropriate government policy, governments can and should allow these alternatives to exist alongside the current system. As events unfold, cryptocurrencies will provide a buffer to the economic shocks created by the imploding debt based system. Events should be allowed to unfold, without any undue interference, policy or new legislation. Existing laws should be observed and enforced, removed or amended as appropriate to accommodate the transition to a equity based monetary system. Bitcoin which will provide an equitable means by which citizens can set aside and preserve their wealth and acquire property, for themselves and their children and their grandchildren and their great grandchildren and their unborn great-great grandchildren and their…..