Bitcoin: Firewall Against Purchasing Power Hacking
Imagine a silent, invisible thief slowly draining the value from your bank account. No masked figures or alarm bells – your balance remains the same, but each dollar buys a little less every month. This isn't the work of cybercriminals; it's a carefully engineered feature of our global financial system.
Over the last decade, central banks worldwide have embarked on an unprecedented experiment. From the Federal Reserve in the U.S. to the European Central Bank, powerful financial institutions have worked in a loosely coordinated fashion to suppress interest rates and flood the economy with newly created money. Their stated goal is to stimulate economic growth.
However, the consequence of these coordinated policies is inflation – the steady erosion of your money's purchasing power. The intentionality behind this inflation is not mere economic stimulation, but a deliberate tool of wealth redistribution. This system subtly but steadily siphons wealth away from those who diligently save and enriches those already holding substantial assets.
Now, you might say: "I understand finance. Inflation is simply a side effect of economic policy, not some grand conspiracy."
And you'd be partially right.
My background is in investment banking and as the founder of both a hedge fund and a technology company, I'm no stranger to economic theory. However, the scale and coordination of central bank actions in recent years demand a deeper look.
Let's dissect how this inflationary wealth transfer operates. We'll examine the mechanics behind central bank policies, the stark divide between winners and losers in this system, and finally, introduce an unexpectedly powerful form of defense: Bitcoin.
The Mechanics of the Inflation Machine
While the ultimate source of disorder dates back to 1913 and the creation of the Federal Reserve, the roots of our current inflationary environment stretch back to the 2008 financial crisis. In its aftermath, central banks embarked on a synchronized mission seemingly designed to avoid a repeat of the Great Depression. The Fed, European Central Bank, Bank of Japan, and others slashed interest rates to near-zero, transforming borrowing money into an incredibly cheap endeavor.
But it didn't stop there. To further stimulate the economy, these same central banks began a series of programs known as Quantitative Easing — it is often referred to as QE.
The "Money on the Sidelines" Problem
From a central banker's perspective, there's a nagging issue with traditional interest rate adjustments. When you lower rates, people and businesses theoretically borrow more to spend or invest. However, in times of deep economic uncertainty like post-2008, lowering interest rates alone wasn't enough. Banks were hoarding cash, businesses were reluctant to expand, and consumers remained scarred from the crash.
You can PAY people to take risks in those environments, and they won’t deploy their capital.
Central banks viewed this vast pool of money sitting idly in savings accounts and low-risk investments as a problem. Their solution was unprecedented in scope: directly inject massive amounts of new money into the economy.
Look at this graph — we can see the M2 (money velocity) fly upward as the money printers activated post-08.
Imagine a central bank as a cosmic printing press.
Traditionally, it controls the money supply by tweaking interest rates. QE is like hitting the turbo boost on that printing press.
Here's how it works in simplified terms:
The Purchase: The central bank creates new digital money out of thin air. It uses this to buy bonds (primarily government debt) on the open market.
The Flood: This injects newly created money directly into the financial system, inflating the central bank's balance sheet.
The Consequence: By purchasing bonds, the central bank drives up bond prices and pushes yields down – making it even cheaper to borrow.
The goal of QE is two-fold: to push sitting money off the sidelines and to encourage risk-taking by making borrowing incredibly cheap.
Did it work?
The jury is still out on the economic efficacy of QE… but one consequence is undeniable: inflation.
To fully answer that question, you need to know for sure what all the objectives of QE really were.
What if it wasn’t just about accelerating money velocity + supply to “save the economy” but instead to steal the purchasing power from savings tucked away, supposedly safely?
Purchasing Power vs. Nominal Value
Let's make this abstract concept tangible. Say you diligently save $100 every month. In a low-inflation environment, the purchasing power of that $100 remains relatively stable over time. Think back to what you could buy at the grocery store 2 years ago versus today. The same basket of goods likely costs significantly more now.
According to today’s inflation data, food is 21% more expensive since Joe Biden took office.
This is inflation in action.
While your bank balance may show a growing nominal value (the raw number), the real value of your savings is shrinking. Those dollars are still dollars, but they buy you less. Imagine a treadmill where you're putting in effort, yet getting nowhere.
Over the last decade, relentless rounds of interest rate suppression and QE by central banks worldwide have accelerated this inflationary erosion. The "low and stable" 2% inflation target touted by policymakers belies the fact that your savings are subjected to constant, cumulative devaluation.
In the next section, we'll examine who really loses in this inflationary game, and perhaps more importantly, who stands to benefit from the insidious wealth transfer it creates.
The Wealth Transfer Exposed
Follow the Money
We've established how central banks create inflation.
Now, let's follow the trail of that freshly-created money.
The beneficiaries aren't just those who borrow cheaply – a much more insidious side effect is the inflation of asset prices. Remember, all that new money from QE needs to go somewhere.
Over the last decade, we've witnessed an extraordinary boom in stocks, real estate, and even speculative assets like fine art and some cryptocurrencies.
While multiple factors are at play, the torrent of "easy money" is a significant fuel to this fire. Those who already held significant assets have seen their net worth explode. The wealthy "1%", so often decried in economic inequality debates, got even wealthier.
Yet, the insidious nature of inflation means it's not just about who gains, but who loses disproportionately.
Knock, Knock Neo
Imagine a sophisticated hacker dials into your computer.
They are not after the contents of your bank account, but its core function - the ability to buy things. This hacker (called Inflation) is transferring your cash’s buying power to elite asset owners.
This is exactly what inflation does to savings, the value of your income and much else.
While your nominal bank balance might stay the same or even slowly increase due to meager interest, the true value of those dollars withers away.
It's a cruel paradox. Prudence is punished. The diligent saver, the person who follows conventional financial advice, steadily loses ground. Each year, the same amount buys a little less. The grocery store isn't raising prices out of malice; the money itself is simply worth less than it was before.
Who's Really Hurt
The short answer: everyone without a large asset-base with active rent payers yielding cash flow is punished here. The elite raise their asset rents (rent on properties, cost to access data, etc..) and capture the energy from inflation.
Everyone else is paying those surging monthly bills.
Retirees living on fixed incomes suffer immensely.
A pension that seemed adequate a decade ago buys significantly less now. Those struggling to save for the future find the goalposts constantly moving further away. Wage growth often lags behind inflation, creating a treadmill where people work harder just to maintain the same standard of living.
The irony is this: In an attempt to prevent an economic depression where people and businesses hoard cash, central banks created a system that punishes them for doing just that.
Ordinary people who play by the rules of the financial system, slowly and silently, have their purchasing power looted.
Calculated Redistribution
Is this all accidental?
A mere side effect of well-intentioned macroeconomic policies?
Growing skepticism towards that view is warranted. We can acknowledge that central bankers may sincerely believe their actions are necessary to support the economy. But the stark divide between winners and losers under their watch suggests a troubling degree of indifference, if not outright calculation.
The reality is that those benefiting from inflated asset prices tend to be a well-connected class. They have more influence on politicians and the financial elite. The current monetary system is arguably not broken from their perspective. For the average person struggling to build a secure future, however, it looks increasingly stacked against them.
The hacker and their friends appear able to rig the game.
The Hack and the Need for a Digital Fortress
The hacker’s first rule is avoid detection. Central banks aren't directly stealing your hard-earned dollars. But by relentlessly eroding their purchasing power, they're draining your financial lifeblood. Your account balance might look healthy, but its true value is subject to a sustained, invisible assault.
Is there a way to protect oneself from this sophisticated financial attack? The rise of a seemingly unrelated technology offers a surprising form of defense: Bitcoin.
In the next section, we'll examine Bitcoin's unique properties that make it a potential shield against the devaluation of traditional currencies.
Bitcoin: The Digital Fortress
Hacking the System (Not Your Wallet)
It's crucial to differentiate between two types of financial attacks. Imagine a brazen hacker who steals your bank credentials and drains your account – this is a direct attack on your assets. Inflation operates differently. Central banks won't directly seize your savings or tamper with your balance. Their weapon is far more subtle: they devalue the currency itself.
This makes inflation a "theft by another name" as the end result is the same - your purchasing power is diminished. The hacker in this scenario isn't after specific dollars, but the very function those dollars serve in the economy.
Immunity to Manipulation
Bitcoin offers a radical departure from this system. At its core, it's a decentralized digital currency.
Unlike fiat currencies, no single government, bank, or corporation controls Bitcoin. It exists as a vast computer network spread across the globe, maintained by thousands of independent participants.
The rules governing Bitcoin – how transactions are verified, how new coins are created – are embedded in unchangeable software protocols. No politician or CEO can decide on a whim to "print more Bitcoin" as is done with fiat currency.
Bitcoin’s code is the President. We control the code via legislation and we are each a distributed network of judges.
Because it's decentralized, Bitcoin is very difficult to shut down or manipulate. If one government tries to restrict it, the network as a whole keeps humming along.
This immunity to centralized manipulation is Bitcoin's first line of defense against the inflationary tactics that plague traditional money.
Scarce by Design
The total supply of Bitcoin is mathematically capped at 21 million. New bitcoins are "mined" at a controlled, predictable, and diminishing rate through a computational process. The key point is this: no one can arbitrarily decide to inflate the supply of Bitcoin the way central banks do with fiat currencies.
This is the only currency with a supply that is entirely insensitive to demand.
This built-in scarcity acts as a powerful shield against devaluation. When a government creates more currency out of thin air, it dilutes the value of each existing unit. With Bitcoin, this fundamental inflationary lever simply doesn't exist.
Store of Value
Bitcoin is notoriously volatile, with wild price swings that can scare off traditional investors. This short-term volatility, however, is important to distinguish from the long-term, deflationary trend designed into its supply mechanics.
Think of volatility as a turbulent ocean.
A boat violently tossed about by waves is hardly stable, but the ocean itself has a defined volume. Over time, as Bitcoin issuance slows with each halving and its network grows, the argument goes that the volatility will subside, while its fundamental scarcity gives it the potential to be a store of value resistant to the inflationary erosion plaguing fiat currencies.
Whether Bitcoin will succeed in this long-term vision is intensely debated. It's a high-risk, high-potential asset compared to traditional "safe havens" like gold. However, for those disillusioned with the constant devaluation of their savings under the current system, Bitcoin presents a compelling alternative.
Does this mean you should throw your life savings into Bitcoin?
Absolutely not.
It's a complex asset with unique risks which requires thorough research to understand. The unique combination of math and game theory at Bitcoin’s heart is area worth studying in more depth. There’s no doubt any rise in Bitcoin implies a drop in fiat, and the reasons for that drop have been the subject our our analysis before. However, in a world where your purchasing power is constantly under siege, it's an option worth exploring thoughtfully.
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