I’m extremely optimistic about bitcoin and very annoyed with the present financial system of the world, which is made up of central banks, fiat currencies, and fractional reserve banks. However, recently I have become not just annoyed, but downright pessimistic about the world’s financial system. Problems across the world—in particular debt problems in the US and Europe—make it likely that the system will actually collapse. And unfortunately the bitcoin economy is not developing quickly enough that the transition will necessarily be orderly. It might be chaotic.

Consider the trajectory the US is on. The Federal Reserve creates new money, and banks pyramid further new money on top of this. Banks—both domestic and foreign—loan this newly counterfeited money to the US government so the government doesn’t have to raise taxes to pay for wars and welfare. This system is unsustainable because the US maintains a constant budget deficit every single year. Eventually, interest on its debt will require 100% of people’s incomes to pay. So there are a few ways this could end:

1. The US government becomes responsible and raises taxes and lowers spending and gradually pays of its debt.
2. The US government does not become responsible and defaults on its debt.
3. The US government “becomes responsible and pays off its debt” by printing money and greatly devaluing the dollar. This is effectively a default, because the debt is paid of with less value in real terms.

Unfortunately, all three of these options are terrible. The only non-terrible outcome would be if the US economy suddenly became far more productive so that Option #1, paying off the debt, became possible and not painful. That seems unlikely, because the US is so highly regulated that almost every new business entrepreneurs might want to start is illegal, and thus the economy is not likely to pick up until those regulations are removed. So it is probably going to be one of the other two options, both being an effective default. In most countries this would be a mess, but with the US it will be a global disaster, because the US dollar is the world reserve currency, meaning many central banks keep it as their reserves, and also it is the de facto currency for international trade.

Obviously, it can only be worse with the debt problems in Europe.

If the world financial system collapses, I think bitcoin is the only reasonable replacement. Gold doesn’t work for the simple reason that it cannot be sent over the internet. Bitcoin, the gold of the internet, solves this problem. But it will probably take a few years before all the infrastructure is in place for bitcoin to actually be able to replace all the fiat currency infrastructure. If the world financial system collapses before that, it’s going to be painful.

Information concerning the collapse of the world financial system:

• Jeff Berwick (the Dollar Vigilante) and Stefan Molyneux #1 and #2
• Doug Casey articles on LewRockwell.com: #1, #2, #3, #4, etc.
• Recession Imminent thread on the Bitcoin Forum
• Many articles on Zero Hedge

More articles in the archive.