Writing and Illustration, Oswaldo Lairet
“Just as individual control of fire changed the balance of power between humans and nature, individual control of the energy to monetize, store, access, transfer, and protect, value-creation, has shifted the power balance between ordinary humans and nations.” ―The Bitcoin Power Shift
SUMMARY
Over the past two millennia, Seigniorage, as defined below, has been every ruler’s preferred method of taxing citizens, ever since gold/silver coins became widely accepted as money. This practice became even less traceable and more profitable to rulers after the BOE began acting as England’s central bank in 1694, since paper money was easier to debase than any metal. Then, in 1971, the advent of fiat money made monetary intervention so untraceable, that except for the much faster materialization of its pernicious effects, it would require an audit to expose it. Also, by the time fiat came along, rulers had turned education and mass communication systems into persuasive linguistic devices.
Language allowed them to introduce such a high comprehension hurdle versus all matters related to money and finance, that some 99% of the population lives in a state of severe Information Asymmetry. In developed nations, this fantastic hurdle has allowed centralized economic planning to intervene every economic sector by creating imprecise and even false belief-systems, specially in finance. Through these imperceptible devices, rulers are able to indirectly tax their citizens’ income, on top of regular taxes, and in much larger amounts.
Fortunately, information symmetry and thus, self-sovereignty across centralized-interest barriers is within reach. Over the past fifty years, the invention of the microprocessor, brought us the internet, aside from exponentially higher levels of production efficiency, personal productivity, and individual connectivity. Cyberspace allowed us, not only a higher degree of intellectual independence and creative abilities, but it eventually led to the uncensorable, unbribable, and immutable “Cybercash” predicted by Davidson & Rees-Mogg, nearly 30 years ago in The Sovereign Individual. The only form of money that has been developed specifically to prevent governments from trampling on their citizen’s right to property, mobility, privacy and self-defense.
The Recurrence of Monetary Seigniorage Through the History of Civilization
For thousands of years, money has been used to facilitate exchange transactions and to transfer value between people and entities. Yet, ever since Lydia’s Croesus began stamping animal images on miniature chunks of gold and silver, 2,500 years ago, money became commonly tied to those metals . Metals stood as money, until the rise of central banks and later, fiat currency, turned money into a notional construct, whose marginal cost to reproduce makes it ideal for economic central planning.
While monetary units of one type or another have long been used as a medium of exchange, the concept of seigniorage has never changed, except in name, regardless of how internet dictionaries and investment guides now want to define it. Seigniorage has nothing to do with the “production” of anything, but monetary debasement.
Seigniorage was the difference between the alleged face value of gold or silver coins minted by monarchs and governments, versus the value of the actual amount of gold or silver the coins contained. As such, seigniorage became the ideal way for rulers to covertly capture the difference between the implied vs real value of their monetary units and funnel it toward expanding their political and personal power agendas.
Under the gold/silver standard, the price of any economic resource, should roughly equal the ratio between the total stock of existing resources versus the total stock of gold/silver in circulation. However, as seigniorage reduces the total stock of gold/silver contained in the nation’s coins in circulation, their purchasing power sinks below their face value, as the economy’s existing resources begin selling directly for gold/silver or well-recognized foreign gold/silver backed currencies.
Having arrived at the true meaning of seigniorage makes it easy to understand why modern governments make such a systematic effort to linguistically dissociate the word seigniorage from what their central banks have been doing for the past three centuries. Otherwise, from prestigious economists to political actors, academic pundits and the general citizenry would have happily avoided decades of misleading epistemological controversy and policy-setting disputes regarding what inflation is, what originates it, and whether it is actually “beneficial”!
Instead, everyone would have noticed that Inflation is just another word for plain old seigniorage. A hidden tax, imposed by governments on their citizens, that is meant to covertly capture the difference between the implied vs real value of their monetary units, and funnel it toward expanding their domestic and foreign military and political power, influencing global public opinion, and funding the power elite’s culturally biased, and recurringly apocalyptic or intimidating propaganda projects.
Yet, while the “inflation” debate continues, trillions of brand-new notional currency units get reproduced at zero marginal cost at the touch of a button, keep adding fluff to global monetary aggregates, displayed via paper or computer screens. “Fluff” keeps destroying the purchasing power of each currency unit in the hands of citizens, while diverting seigniorage gains to the power elite, just as it happened in the Middle Ages. For instance, when kings used their coins’ seigniorage profits to finance every new war against foreign, or domestic targets.
Central Banks Covertly Seize Individual Purchasing Power by Generating Inflation, While Simultaneously Driving Real Interest Rate Returns on Individual Savings Negative by Lowering Nominal Interest Rates
As established, central banks’ persistently excessive monetary printing creates an inflationary environment that leads to steadily rising prices across all goods and services. Perpetually rising prices is what ends up dissolving the purchasing power of the country’s currency and all payments coming to any citizen’s present or expected income, such as wages, rent, dividends, interest returns, etc.
However, aside from maintaining an inflationary environment, over the past forty years, central banks have driven real interest returns to zero or negative on fixed-income investments, by forcing nominal interest rates lower. This means that individuals are not only robbed of their financial investments nominal purchasing power, but their nominal returns, as they become negative, after discounting from inflation.
Meaning that, in addition to eroding the purchasing power of individual income, central banks encouraged a never-before-seen increase in the size and maturity of debt balances by creating persistent inflation, while forcing the real interest cost of borrowing to zero or negative. Knowing both factors rob ordinary citizens of their income, they simultaneously incentivized the issuance of long-term obligations to fully monetize the purchasing power and real rate return losses they suffer.
Through Persistent Inflation and Lower Interest Rates, Central Banks Promoted the Exponential Debt Growth That Has Enabled the Redistribution of Income from Individuals to the Globe’s Most Powerful Economic Agents
As chronic inflation increases purchasing-power decay over time, it encourages the issuance of longer maturity obligations, while lower nominal rates significantly reduce the real interest rate cost of borrowing, it becomes clear why Central banks engineered the exponential increase of global long-term debt of the past 40 years.
As such, what central banks have truly enabled is a nearly continuous redistribution of income from individuals across the globe to the globe’s largest and most powerful economic agents, sovereign, financial and corporate debt issuers.
Aside from this “Reverse Robin Hood” effect, Central banks have also enabled wealth concentration via the Cantillon effect. A process by which, as the first recipients of imminent policy decisions, power insiders can act in anticipation, to monetize the event, before financial markets learn of it.
As a result, the power elite continues to control most of the global wealth, while the wealth gap between it and its subjects remains the same as it has been throughout history.
Fortunately, Fifty Years After the Invention of The Computer Microchip, Its Use Has Begun to Dramatically Alter the Balance Between the Power Elite and Individual Citizens.
Since Intel invented the computer microchip in 1971, microprocessing technology began enabling individuals to access knowledge never previously available to them and executing tasks that until that point, were impossible for them to perform, due to their knowledge complexity.
Over time, as microchips miniaturized computer components and made them globally available, brand-new technologies and devices became feasible, that gradually launched exponentially higher levels of production efficiency, employee productivity, and consumer reach than was possible during the Industrial Era.
Upon these developments, the Information Age was born and began to replace the sheer industrial size and assembly-line collectives of the industrial era. It enabled the constantly expanding growth, accessibility, productivity, and use cases for microprocessor diversification, which, gradually made private assets protection easier to manage and more accessible to private individuals, while in many cases limiting the power of government extortion over them.
The Internet, for instance, has already taken on characteristics of an organic system, as foreseen by the late physicist Heinz Pagels in his visionary book, The Dreams of Reason, “I am convinced that the nations and people who master the new science of Complexity will become the economic, cultural, and political superpowers of the next century.”
Yet, the megapolitical dimensions of the change described above are so little understood, that even those who have recognized its transcendental importance, have done so in anachronistic ways.
Until January 3rd, 2009, the day the Information Age’s encryption technology made it possible to create a digital asset*, outside of the reach of state coercion, it was still difficult to fully internalize how much the technological change brought upon by the microprocessor’s cyberspace frontier will render the world’s political systems obsolete.
The 21st century’s cyber economy will be shaped by this profound change in the use of knowledge, as the algorithm that dramatically tipped the balance between extortion and protection in the direction of protection, facilitates the emergence of an independent economy, where free markets emerge as spontaneously adaptive mechanisms and not as the result of a bureaucracy’s conflicted resource allocation procedure.
Societies that reconfigure themselves to become more complex adaptive systems will indeed prosper. The more likely immediate beneficiaries of the increased complexity of social systems will be the citizens of those nations that first recognize and adopt the technology that brought upon the change in the balance of power that renders the central-control stage of human development obsolete.
Conclusion
As the world reaches the end of the current long-term debt cycle and commodity purchases become unaffordable, regardless of how much domestic currency or sovereign debt G-7 economies issue, the global ratio of production versus consumption is likely to reverse, with interest rates moving towards their 5% nominal geometric-mean of 5,000 years.
That will strip governments of their highly levered, iliquid, and inefficient monetary scheming. Their four decades of interest rate distortion will likely not survive the onslaught of real interest rates and truly capitalist competition… Thank goodness!
Fortunately, as humanity faces the current cycle ending, we are the first generation to have access to a monetary technology that can endure longer than ornamental rocks. Its name is Bitcoin, the only payment in specie ever invented to be impregnable to government decrees, counterfeiting, shipping blockades, or the threat of violence.
BITCOIN: An open-source, peer-to-peer network algorithm that every ten minutes, prior to registering a single accounting entry on its digital ledger, achieves simultaneous, verifiable, and irreversible consensus among its innumerable, unrelated, anonymous, and globally disseminated stakeholders. An encryption technology so advanced it allows private individuals unrestrained control and instantaneous access to their capital, while rendering it impregnable to extortion.
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