Trust in central and commercial banks is eroding quickly. The internet and social media are oil in the fire and Bitcoin is the extinguisher...
‘TRUST US, BRO’ AS THE ONLY TOOL LEFT
Banking only works when there is trust. It’s fundamentally based on the belief that the banking system is strong and resilient enough to protect your money. But this trust-based system has shown that the rich and powerful benefit from this protection. As we saw in 2008 and since, the regular taxpayer is paying the bill.
It’s ironic that Credit Suisse, which emerged as one of the winners of the 2008 financial crisis, is among the first banks to bite the dust in this current crisis. Between 2008 and 2023, we’ve seen many scandals, constant litigation, terrible risk management,and never-ending drama, slowly eroding trust in a once prestigious institution.
So, who has to pay the price for this? You guessed right: Everyone in Switzerland does! The Credit Suisse bailout (though no one officially calls it a “bailout”) is estimated to cost Swiss taxpayers a staggering 109 billion Swiss francs ($13,500 for every man, woman and child in the country).
Like those of commercial banks, central banks' decisions and actions are only effective when people trust them. The Federal Reserve and the European Central Bank (ECB) (among many other central banks worldwide) have made bold claims, only to be proven wrong. Officials like Janet Yellen, Jerome Powell and Christine Lagarde have consistently underestimated inflation. They even ridiculed anyone warning of the consequences of years-long ultra-low interest rates and unhinged balance sheet expansions during COVID-19.
Now, the claims meant to calm us are back to haunt them. Yellen famously said in 2017 that we would “never see a financial crisis again.” Lagarde was reluctant to explain how to tackle inflation in a talk show and just said that inflation will come down in “due time,” only to now freak out because of the “monster” that is inflation.
It is becoming increasingly evident that, while politicians and central bank officials like to tell the masses that they have many tools at their disposal, the only means left is a constant “Trust us, bro.”
THE ‘CONFIDENCE SCHEME’ DOESN’T WORK IN THE AGE OF SOCIAL MEDIA
As confidence in the banking system and possibly the financial system at large wanes, and bold words of reassurance are proven to be nothing more than hollow phrases, it’s no surprise that the fragility of it all just increases. Given this fact, it should also not be surprising that (among other things, like a constant deterioration of reputation) Tweets and WhatsApp messages triggered the Credit Suisse bank run. Similar to how the run on the Silicon Valley Bank (SVB) was set in motion by public warnings from influential people within the startup scene, like Peter Thiel.
What may sound like an unlucky coincidence is a symptom of a broader crisis in trust. Establishing a joint narrative, a common belief and direction is a lot harder in 2023 than it was, say, in the 1970s. Instead of newspapers and weekly magazines, we now have news spread within seconds. And expert opinions and contrarian views go viral on Twitter, Reddit and elsewhere within minutes.
We can see that bank runs in the digital age are different. Frightened people don’t need to walk to a branch and ask for their money. They can do that from their homes. What makes it worse for banks in the fractional reserve era is that tens of thousands of people can do that simultaneously.
Will this lead to a domino effect of centralization of banks because the trust in banks, especially smaller ones, is quickly eroding? The message Yellen sent after the collapse of SVB was loud and clear: We decide case by case if it's worth saving smaller banks. Go to large banks like JPMorgan Chase to be safe because we’ll not let those banks die. The trend of smaller banks getting absorbed by the big fish is accelerating like never before.
This shows that not only is our money not fit for the internet age, but also that the institutions and the Powells, Yellens and Lagardes of the world are not able to keep up with the pace and complexity of their surroundings.
More central planning and constantly intervening in markets can’t be the answer. Assuming that the people who brought us here can show us the way out is naive.
MONEY PRINTER WILL GO BRR AGAIN… AND THEN?
Despite (unofficial) government bailouts like the one we’ve seen with Credit Suisse, politicians and central bankers worldwide are stuck between a rock and a hard place. They face a tricky balancing act between raising interest rates to tame inflation and maintaining liquidity in the banking system.
On the one hand, they have to raise interest rates. They need to tame inflation somehow and pop the “everything bubble” that pushed the price of everything from stocks, real estate and luxury watches to NFTs and thousands of “crypto” projects up over the last few years.
On the other hand, they need to ensure enough liquidity in the banking system, so the wheel can keep running. While no official spokesperson wants to use the term “bailout” after 2008 anymore, what is happening in the U.S. and Switzerland with Credit Suisse is precisely this. It all boils down to what enraged people in 2008: Banks know they can take risky bets, so they do it. And when shit hits the fan, they get saved by taxpayer money.
The money printer will roll again, casting even more doubt on the promises of central bankers and politicians. The reason is simple: There is no other solution in central bankers' toolkits in the era of unlimited fiat money backed by nothing more than promises and grand speeches.
The question is not whether our money will be devalued, but only how quickly. In any case, the current speed is unbelievable even in the richest countries in the world, such as Germany. With price inflation currently at 8.7%, it will take eight years (!) for the value of money to be halved in the Federal Republic of Germany. In the U.K. and Austria, we are currently seeing inflation rates beyond 10%, not to mention countries like Argentina or Turkey, where hyperinflation (price inflation of over 50%) is the order of the day.
OPT OUT WITH BITCOIN, EXIT COUNTERPARTY RISK
Tidjane Thiam, who became Credit Suisse’s chief executive officer in 2015 and held the position until 2020, famously called bitcoin a bubble in November 2017: “From what we can identify, the only reason today to buy or sell bitcoin is to make money, which is the very definition of speculation and the very definition of a bubble.”
Back then, the bitcoin price was around $7,000. The rest is history and irony.
Thiam didn’t seem to or didn’t want to understand why people buy an asset like bitcoin: They want to opt out of the confidence scheme described above. They are looking for ways to place a contrarian financial bet and exit the financial system altogether. It’s ironic and sad that we need events like the downfall of formerly-prestigious institutions like Credit Suisse to clarify a case for Bitcoin for skeptics like Thiam.
Now, more and more people are waking up to why Bitcoin exists and what it can do for them: hold their wealth in an asset that no one can debase — no government, no CEO. An asset that no one can censor, that is hard to confiscate and that can’t just vanish in the turmoil of a crisis.
Political movements like Occupy Wall Street made headlines during the 2008 financial crisis. Fifteen years later, we know that it went nowhere. On the other hand, Bitcoin is healthier than ever as both a movement and a technological solution. Bitcoin is not just a theory in the heads of academics and activists. It can be used 24/7 by anyone around the globe, no matter if you have access to a bank account, live in an authoritarian country experiencing hyperinflation or just want to store wealth for the long term.
After a decade of wild speculation and thousands of stupid cash grab experiments in the “crypto” space, people realize that Bitcoin has fixed counterparty risk.
While price fluctuations in euros or U.S. dollars grab headlines, the actual value of Bitcoin lies in its ability to transact and store value outside of the financial system. It's digital gold with extra features, a beacon of hope in an uncertain economic landscape.
In conclusion, as trust in central and commercial banks continues to erode, Bitcoin is a viable alternative for those seeking financial sovereignty. It’s digital gold with extra features. The challenges posed by the internet, potential geopolitical seismic shifts and the social media age call for a solution that can withstand these pressures — Bitcoin and the principles of sound money it represents could be part of that solution.