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Why_the_2020_Bitcoin_Halvening_Is_the_Most_Important_Yet - Bitcoin Magazine

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halvening

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bitcoin halvening of 2020

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In May of 2020, bitcoin will see its next halving: the reduction of the reward for successfully mining a block. The <a href="https://bitcoin.org/bitcoin.pdf">Nakamoto</a> white paper specifies that every 210,000 blocks, the reward for successfully mining a block is cut by half. But while these occur roughly every four years (with the estimated reward dropping to one Satoshi on or around the year 2140), the <a href="https://bitcoinmagazine.com/guides/what-is-the-halvening">Bitcoin Halvening of 2020</a> is particularly momentous. 



At present, the reward for mining a block is 12.5 BTC; in May, the reward for successfully adding a block to the blockchain will drop to 6.25 BTC per block. The current annualized rate of “inflation” (some disambiguation regarding this later) is between 3.7 percent and 3.8 percent: An average of 144 blocks mined per day at 12.5 BTC each, yielding approximately 1,800 new BTC each day.&nbsp;



(A quick point of disambiguation: To describe the expansion in size of bitcoin’s outstanding number of coins as inflation — what might be called the “float” in equities or the “money stock” in more conventional currencies — is consistent with an older definition. Today, the term inflation is used to describe, and assumed to mean, an increase in general price levels within an economy. In fact, from the perspective that with increasing value one bitcoin buys more over time, it is indisputably deflationary.)



What’s noteworthy about this point is that, upon this particular halving, Bitcoin “inflating” at a roughly 1.8 percent rate annually will nominally — and by then, quite possibly in real terms — be “inflating” at a rate lower than both the Federal Reserve target of 2 percent per year and current, CPI-based estimates of real U.S. inflation of 1.9 percent annually.



<h2>Testing on Human Beings; No Institutional Review Board Required</h2>



In light of the broader field of monetary policy worldwide, the upcoming Bitcoin Halvening will come at a particularly auspicious juncture. Despite considerable efforts over more than a decade, the Federal Reserve (and other central banks) have attempted and failed to engineer a rate of inflation (in the case of the Federal Reserve, of 2 percent) even after vastly expanding the size of the Federal Reserve’s balance sheet and undertaking numerous other expansionary programs.



Even casual observers of global central banking practice will note that the apparent inability of the Federal Reserve, the ECB, the Bank of Japan and other such institutions to manufacture inflation has not led to some newfound respect (let alone humility) in light of their demonstrated lack of understanding of so powerful a force. Even a cursory review of history reveals that inflation is second only to war where forces laying waste to civilizations are considered.



To the contrary: Legions of economists within these (usually) quasi-public entities have redoubled their efforts, embracing unconventional policy implementations; the most recent and well-known of which are sequential phases of <a href="https://www.yardeni.com/chronology-of-feds-quantitative-easing/">quantitative easing</a>. Whether Federal Reserve economists have forgotten or don’t care that billions of real human beings toil beneath their policy machinations is an exercise for the reader to consider.&nbsp;



Indeed, despite scores of warnings about <a href="https://money.com/low-inflation-bad/">the</a> <a href="https://www.thestreet.com/markets/economist-paul-krugman-tells-bloomberg-tv-the-fed-should-raise-inflation-rates-13677112">alleged</a> <a href="https://fortune.com/2019/03/26/federal-reserve-powell-low-inflation/">dangers</a> of low inflation, the drumbeat of statistics and other reports citing <a href="https://www.gobankingrates.com/saving-money/savings-advice/americans-have-less-than-1000-in-savings/">the</a> <a href="https://www.marketwatch.com/story/all-the-disturbing-reasons-behind-the-meteoric-rise-in-americans-debt-2019-05-10">deteriorating</a> <a href="https://www.bankrate.com/banking/savings/financial-security-june-2019/">character</a> of U.S. household finances leads one to question exactly what impact the Federal Reserve thinks that raising prices by several percent would have on <a href="https://wallethub.com/blog/late-payments-survey/58680/">tens</a> of <a href="https://www.cnsnews.com/commentary/terence-p-jeffrey/welfare-generation-kids-households-getting-government-assistance-drop">millions</a> of <a href="https://www.usatoday.com/story/money/personalfinance/2019/02/28/average-grocery-store-bill-cost-is-driven-up-most-by-these-items/39094659/">families</a>.



Contrarily, bitcoin’s limited supply has always been a draw for investors and spenders cognizant of the effects of inflation on purchasing power. With the rate of production of bitcoin via mining taking place at a rate less than the Federal Reserve’s stated target rate (and possibly less than the real rate of inflation), in May 2020, bitcoin may have economically incontestable reasons to become a legitimately competitive store of value versus most of the other world currencies; part of that, of course, hinges critically upon price volatility.



<h2>Quantitative Easing versus Qualitative Tightening</h2>



One may argue — I certainly am — that by algorithmically limiting the ultimate number of bitcoin which will ever exist, and further by making their origination (via mining) adhere to a predictable, transparent and decrementing character, Bitcoin (and more specifically the <a href="https://bitcoinmagazine.com/articles/genesis-files-hashcash-or-how-adam-back-designed-bitcoins-motor-block">Hashcash</a> proof-of-work protocol) closely approximates a monetary policy implementation known as qualitative tightening. That is to say, economically speaking, it is the diametric opposite of the qualitative easing campaign that central banks are continuing to tinker with, at our peril.



This will undoubtedly add to its attractiveness and, barring the outbreak of extreme volatility, will likely increase its store-of-value characteristics. Many people believe that the Bitcoin Halvening of 2020 will spark a new uptrend in price, but that is far from certain.&nbsp;



Although the market for bitcoin (and cryptocurrencies, more generally) is more liquid and transparent now than it was at the last halving, much, if not all, of the effect may already be priced in. Sentiment surrounding bitcoin has cooled in the last 18 to 24 months, and the entire crypto complex has traded differently since BTC futures contracts were introduced on the Cboe and subsequently <a href="https://www.cnbc.com/2019/03/18/cboe-to-stop-listing-bitcoin-futures-as-interest-in-crypto-trading-cools.html">cancelled</a> (although they continue to <a href="https://www.cmegroup.com/trading/equity-index/us-index/bitcoin.html">trade</a> on the Chicago Mercantile Exchange).&nbsp;



<h2>The Bitcoin Halvening of 2020: Compelling Prospects&nbsp;</h2>



There are plenty of reasons for which the arrival of bitcoin (and cryptocurrencies broadly) as an asset class a bit over a decade ago has been a most fortuitous development, not least of which is the increasingly experimental bent of central banks around the world. Alongside that are political candidates endorsing central planning and, to accomplish them, recommending even more <a href="https://www.forbes.com/sites/miltonezrati/2019/05/28/what-is-modern-monetary-theory/">outlandish</a> monetary theories.&nbsp;



Add to those reasons not only an algorithmically scheduled, predictable rate of inflation (again, in the antiquarian sense), but rates which are lower than both nominal and real rates of inflation, and bitcoin’s use case begins to look increasingly less speculative.&nbsp;



This is an op ed by Peter C. Earle, Research Fellow at the American Institute for Economic Research. Views expressed are his own and do not necessarily reflect those of Bitcoin Magazine or BTC Inc.

Bitcoin Magazine provides news, analysis, information, commentary and price data about Bitcoin.

Bitcoin Magazine

Peter C. Earle is a research fellow at the American Institute for Economic Research in Great Barrington, MA. He focuses on financial markets, monetary policy and virtual/cryptocurrencies.

Peter C. Earle

Why_the_2020_Bitcoin_Halvening_Is_the_Most_Important_Yet

The Bitcoin Halvening of 2020, may give bitcoin economically incontestable reasons to become a legitimately competitive store of value.

The Kindest Cut: Why the 2020 Bitcoin Halvening Is the Most Important Yet - Bitcoin Magazine The Kindest...

The Kindest Cut: Why the 2020 Bitcoin Halvening Is the Most Important Yet - Bitcoin Magazine The Kindest Cut: Why the 2020 Bitcoin Halvening Is the Most Important Yet

In May of 2020, bitcoin will see its next halving: the reduction of the reward for successfully mining a block. The Nakamoto white paper specifies that every 210,000 blocks, the reward for successfully mining a block is cut by half. But while these occur roughly every four years (with the estimated reward dropping to one Satoshi on or around the year 2140), the Bitcoin Halvening of 2020 is particularly momentous. At present, the reward for mining a block is 12.5 BTC; in May, the reward for successfully adding a block to the blockchain will drop to 6.25 BTC per block. The current annualized rate of &ldquo;inflation&rdquo; (some disambiguation regarding this later) is between 3.7 percent and 3.8 percent: An average of 144 blocks mined per day at 12.5 BTC each, yielding approximately 1,800 new BTC each day.&nbsp; (A quick point of disambiguation: To describe the expansion in size of bitcoin&rsquo;s outstanding number of coins as inflation &mdash; what might be called the &ldquo;float&rdquo; in equities or the &ldquo;money stock&rdquo; in more conventional currencies &mdash; is consistent with an older definition. Today, the term inflation is used to describe, and assumed to mean, an increase in general price levels within an economy. In fact, from the perspective that with increasing value one bitcoin buys more over time, it is indisputably deflationary.) What&rsquo;s noteworthy about this point is that, upon this particular halving, Bitcoin &ldquo;inflating&rdquo; at a roughly 1.8 percent rate annually will nominally &mdash; and by then, quite possibly in real terms &mdash; be &ldquo;inflating&rdquo; at a rate lower than both the Federal Reserve target of 2 percent per year and current, CPI-based estimates of real U.S. inflation of 1.9 percent annually. Testing on Human Beings; No Institutional Review Board Required. In light of the broader field of monetary policy worldwide, the upcoming Bitcoin Halvening will come at a particularly auspicious juncture. Despite considerable efforts over more than a decade, the Federal Reserve (and other central banks) have attempted and failed to engineer a rate of inflation (in the case of the Federal Reserve, of 2 percent) even after vastly expanding the size of the Federal Reserve&rsquo;s balance sheet and undertaking numerous other expansionary programs. Even casual observers of global central banking practice will note that the apparent inability of the Federal Reserve, the ECB, the Bank of Japan and other such institutions to manufacture inflation has not led to some newfound respect (let alone humility) in light of their demonstrated lack of understanding of so powerful a force. Even a cursory review of history reveals that inflation is second only to war where forces laying waste to civilizations are considered. To the contrary: Legions of economists within these (usually) quasi-public entities have redoubled their efforts, embracing unconventional policy implementations; the most recent and well-known of which are sequential phases of quantitative easing. Whether Federal Reserve economists have forgotten or don&rsquo;t care that billions of real human beings toil beneath their policy machinations is an exercise for the reader to consider.&nbsp; Indeed, despite scores of warnings about the alleged dangers of low inflation, the drumbeat of statistics and other reports citing the deteriorating character of U.S. household finances leads one to question exactly what impact the Federal Reserve thinks that raising prices by several percent would have on tens of millions of families. Contrarily, bitcoin&rsquo;s limited supply has always been a draw for investors and spenders cognizant of the effects of inflation on purchasing power. With the rate of production of bitcoin via mining taking place at a rate less than the Federal Reserve&rsquo;s stated target rate (and possibly less than the real rate of inflation), in May 2020, bitcoin may have economically incontestable reasons to become a legitimately competitive store of value versus most of the other world currencies; part of that, of course, hinges critically upon price volatility. Quantitative Easing versus Qualitative Tightening. One may argue &mdash; I certainly am &mdash; that by algorithmically limiting the ultimate number of bitcoin which will ever exist, and further by making their origination (via mining) adhere to a predictable, transparent and decrementing character, Bitcoin (and more specifically the Hashcash proof-of-work protocol) closely approximates a monetary policy implementation known as qualitative tightening. That is to say, economically speaking, it is the diametric opposite of the qualitative easing campaign that central banks are continuing to tinker with, at our peril. This will undoubtedly add to its attractiveness and, barring the outbreak of extreme volatility, will likely increase its store-of-value characteristics. Many people believe that the Bitcoin Halvening of 2020 will spark a new uptrend in price, but that is far from certain.&nbsp; Although the market for bitcoin (and cryptocurrencies, more generally) is more liquid and transparent now than it was at the last halving, much, if not all, of the effect may already be priced in. Sentiment surrounding bitcoin has cooled in the last 18 to 24 months, and the entire crypto complex has traded differently since BTC futures contracts were introduced on the Cboe and subsequently cancelled (although they continue to trade on the Chicago Mercantile Exchange).&nbsp; The Bitcoin Halvening of 2020: Compelling Prospects&nbsp; There are plenty of reasons for which the arrival of bitcoin (and cryptocurrencies broadly) as an asset class a bit over a decade ago has been a most fortuitous development, not least of which is the increasingly experimental bent of central banks around the world. Alongside that are political candidates endorsing central planning and, to accomplish them, recommending even more outlandish monetary theories.&nbsp; Add to those reasons not only an algorithmically scheduled, predictable rate of inflation (again, in the antiquarian sense), but rates which are lower than both nominal and real rates of inflation, and bitcoin&rsquo;s use case begins to look increasingly less speculative.&nbsp; This is an op ed by Peter C. Earle, Research Fellow at the American Institute for Economic Research. Views expressed are his own and do not necessarily reflect those of Bitcoin Magazine or BTC Inc.

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Central bankers are increasingly embracing the idea of negative interest rates. But what will this mean for bitcoin?

Bitcoin and the Negative Interest Rates Era - Bitcoin Magazine

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Op Ed

Central banks

negative interest rates

central bankers

debt markets

economic growth

firms and individuals

firms and projects

interest

interest rate

interest rate world

interest rates

On the morning of Monday, September 15, 2008, at 6:55 a.m., I arrived at my turret on the trading floor of a Manhattan-based hedge fund and flipped on my Bloomberg terminal. As the head of trading, I was in the habit of looking at sovereign debt markets before checking our positions from the previous trading day. But on this morning, reviewing world bond markets took on a particular urgency. Lehman Brothers was filing for bankruptcy and the entire world was in the throes of the worst financial crisis in 75 years.



What I saw was that, all over the world, short-term debt markets — “bills,” in industry parlance — showed negative yields. In virtually every industrial nation, firms and individuals were seeking the safety of the printing press, effectively handing $100 to governments for the assurance of receiving $98 in four weeks.



This was, of course, a brief moment in time within a highly liquid and mostly unhindered financial market. Rather quickly, the classic shape of the yield curve returned.&nbsp;



<h2>Fast-Forward One Decade</h2>



Currently, the Danske Bank of Denmark is in the process of <a href="https://danskebank.com/-/media/danske-bank-com/file-cloud/2019/8/scoperatingsrealkreditmcbratingreport2019aug-.-la=en.pdf">introducing the first negative 10-year fixed-rate mortgage</a>. In recent weeks, the German Finance Ministry has voiced disappointment at the lack of demand for <a href="https://www.bloomberg.com/news/articles/2019-08-21/germany-sees-anemic-demand-for-30-year-bond-sale-at-zero-coupon">30-year zero-coupon bonds</a>. And with early anticipation of a recession, the U.S. and Sweden are contemplating issuing <a href="https://www.bloomberg.com/news/articles/2019-08-27/sweden-explores-issuing-bonds-as-long-as-100-years-as-rates-sink">half- and full-century bonds</a>, even as the <a href="https://www.bloomberg.com/news/articles/2019-08-19/trump-urges-fed-to-cut-interest-rates-to-boost-the-world-economy">U.S. president is urging the Federal Reserve to lower rates by 100 basis points</a>, back to all-time low levels.



The European Central Bank’s Governing Council <a href="https://www.theguardian.com/business/2019/jul/25/ecb-signals-it-will-move-to-boost-growth-amid-fears-of-low-inflation">believes that inflation is too low</a>, growth is anemic and prospects are bleak. It appears that by the end of October 2019, the deposit rate will be minus six-tenths of 1 percent and the refinancing rate minus two-tenths of 1 percent.



<blockquote class="wp-block-quote">Like it or not, we stand at the dawn of the negative interest rate world.</blockquote>



Convinced of the necessity to inflate, irrationally fearful of deflation and, in any case, eager to add a new tool to their policy armamentarium, central bankers are — both in peer-reviewed journals and less formally — embracing the idea with gradually increasing interest. Early experiments, such as those previously mentioned, are underway.



<h2>Blunting the Market Process</h2>



Market processes are social processes, and human beings are fundamentally economic actors. Econometric modeling and hopeful theorizing set aside, people are temporal beings for whom present satisfaction is preferred to future satisfaction. Interest rates are nothing less than the memorialization of this. However, an implication of a negative natural rate of interest would be that, given a choice between receiving $100 today or receiving $10 one year from now, economic actors would (<a href="https://www.intelligenteconomist.com/ceteris-paribus/">ceteris paribus</a>) choose receiving $10 in one year.



Thought of another way, the natural, positive interest rate is a forbearance discount; a spread or value adjustment of sorts, comparing the current assessment of a later desire with an earlier desire. Although this comparative rate may change — it may steepen or flatten, even invert at times — it is always and everywhere positive. It doesn’t disappear, and it never goes negative.



Positive, temporally rising interest rates are a function of the intersection of infinite desire, limited availability and mortality. Negative interest rates are a corruption of economic calculation.



<h2>An Invisible Subsidy</h2>



On a grander scale, under a negative interest rate regime, many firms and projects which would have failed under normal, positive rates of interest will continue to operate. The commercial failure and liquidation which, to no small extent, central banking policies seek to prevent, in fact (and however painfully), frees up capital for new firms and projects, all of which keeps innovation vibrant and rewards the most efficient stewards of capital.&nbsp;



By delaying or thwarting the forces of creative destruction, negative interest rates — not unlike their less radical cousin, artificially low interest rates — bring about a dearth of investment and lack of opportunity. Market signals are confounded, and economic growth inevitably suffers.



<blockquote class="wp-block-quote">When negative interest rates are introduced, technocratic sleight-of-hand will undermine market-based processes — not least of which, entrepreneurial alertness.</blockquote>



<h2>Interest Rates Coordinate Savings and Investment</h2>



And interest rates do more than simply influence rates of saving and consumption. A major mistake in this policy making worldview is the treatment of the interest rate as primarily, or exclusively, a yoke or accelerator on "spending." In fact, interest rates coordinate investment, production and consumption decisions over time, ranging from the heaviest consumption goods to the simplest consumer goods. Individuals and firms make choices based upon prices which are, in turn, influenced by financing. Those choices en masse send signals to producers throughout the economy regarding shifts in tastes and preferences.



There are, as with all central planning initiatives, possibilities for unintended consequences as well. For one, expecting market interest rates to move in lockstep with rates targeted by central banks is a dicey bet. In a negative interest rate environment, market interest rates may in fact rise.



Most banks take in short-term deposits and lend over the longer term. The bank’s revenue and net income (profit) is, therefore, dependent upon the spread between the rate it charges to borrowers and the rate it pays to depositors. With negative interest rates, some banks will need to find a way to recoup lost revenue.&nbsp;



But if they charge a negative interest rate to depositors, they will almost assuredly experience an outflow of deposited savings. Banking executives would then face an unenviable decision: Call in loans to satisfy exiting depositors or liquidate facilities and decrease staffing. But both of these choices would be — like so many other banking choices — penny-wise and pound-foolish, decreasing trust in the bank and perhaps accelerating the withdrawal of savings.



The bank’s preferred solution then might be to keep income up by widening the spread between deposit rates and lending rates by increasing the interest rate charged to borrowers. Thus, dropping into negative interest rates on deposits can lead to a rise in interest rates for borrowers.



Negative interest rates are, in any case, likely to bring about a rise in banking fees: for ATM use, for transfers, for overdrawn accounts and so on. And rising banking fees disproportionately affect the poor, which invites greater regulation and control by political entities.



<h2>The Road to Serfdom … via Credit Markets</h2>



A final implication of negative interest rates is that the spending of the state, essentially all of which is not productive, will become the primary contributor to economic growth. A gradual shortening of focus, which is already an Achilles’ heel of democracies, will magnify. With policies oriented toward front-loaded economic growth will come increasingly disproportionate influence of interest groups, more possibilities for calculation error and lackluster growth.



And if negative interest rates mean that essentially any firm or individual can receive a loan, central bankers will eventually have to pursue a policy of credit rationing. Political entities, rather than markets, will decide what firms and individuals receive loans and upon what terms and conditions. Will this favor defense contractors over, say, casino and gaming firms? Will only industries that are unionized receive credit, or will collective bargaining be required in order to do so? Should weaker sectors be supported or stronger sectors bolstered? In the EU, such issues as what countries should be allocated more credit will undoubtedly rear their troubling heads.



So, by squeezing out and possibly starving credit markets, central banks will, over time, heavily influence choices regarding production, consumption and terms of exchange. Even the remote possibility of that occurring should be alarming.



<h2>Where Does Bitcoin Land?</h2>



The role of bitcoin, and cryptocurrencies more broadly, in a negative interest rate world (as unlikely as that truly is), is twofold.



First, one can imagine a new era of cryptocurrency banking — a throwback to an earlier, brick-and-mortar age — in which time preference (expressed via savings) influences interest rates, which in turn funds current production for future consumption.



And once millions of depositors realize that their savings will be winnowed away absent constant consumption, they will rush for the exits. In this case, one of two likely outcomes is possible: There will be bank runs or, more likely, the imposition of controls on withdrawals. Staving off the temptation of conspiracy theorizing, negative interest rates, modern monetary theory and a number of other newfangled monetary policy proposals face the same Achilles’ heel: a massive wave of withdrawals from banks and other financial institutions that will put their viability at risk.



The recent rash of proposals toward creating a cashless economy — variously explained as bringing about new efficiencies or to thwart criminal activity — should be viewed with far more suspicion than they have been thus far. The new crop of utopian plans require nothing less than a personal finance surveillance state;



<blockquote class="wp-block-quote">Bitcoin is the best defense for individuals seeking to rapidly exit the financial system if access to cash were rendered difficult, more costly, or outright illegal.</blockquote>



<h2>Endgame</h2>



What we are seeing at present is only the latest stage of a widening gulf between sober policymaking and a body of economic theory divorced from the realities of human action. But unlike the many tweaks and changes that have come about over the last century or so, the breaching of the zero barrier represents a major point of inflection in monetary policy, a thumbed nose at the conventions which built modern civilization.



It brings to mind the joke about the primary difference between economists and biologists: Biologists at least have the decency to test their experiments on fruit flies before human beings.



This is an op ed by Peter C. Earle, a research fellow at the <a href="http://aier.org">American Institute for Economic Research</a>. Opinions expressed are his own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

Central bankers are increasingly embracing the idea of negative interest rates. But what will this mean for bitcoin and the world economy?

Bitcoin and the Negative Interest Rate Era &raquo; Bitcoin Magazine

On the morning of Monday, September 15, 2008, at 6:55 a.m., I arrived at my turret on the trading floor of a Manhattan-based hedge fund and flipped on my Bloomberg terminal. As the head of trading, I was in the habit of looking at sovereign debt markets before checking our positions from the previous trading day. But on this morning, reviewing world bond markets took on a particular urgency. Lehman Brothers was filing for bankruptcy and the entire world was in the throes of the worst financial crisis in 75 years. What I saw was that, all over the world, short-term debt markets &mdash; &ldquo;bills,&rdquo; in industry parlance &mdash; showed negative yields. In virtually every industrial nation, firms and individuals were seeking the safety of the printing press, effectively handing $100 to governments for the assurance of receiving $98 in four weeks. This was, of course, a brief moment in time within a highly liquid and mostly unhindered financial market. Rather quickly, the classic shape of the yield curve returned.&nbsp; Fast-Forward One Decade. Currently, the Danske Bank of Denmark is in the process of introducing the first negative 10-year fixed-rate mortgage. In recent weeks, the German Finance Ministry has voiced disappointment at the lack of demand for 30-year zero-coupon bonds. And with early anticipation of a recession, the U.S. and Sweden are contemplating issuing half- and full-century bonds, even as the U.S. president is urging the Federal Reserve to lower rates by 100 basis points, back to all-time low levels. The European Central Bank&rsquo;s Governing Council believes that inflation is too low, growth is anemic and prospects are bleak. It appears that by the end of October 2019, the deposit rate will be minus six-tenths of 1 percent and the refinancing rate minus two-tenths of 1 percent. Like it or not, we stand at the dawn of the negative interest rate world. Convinced of the necessity to inflate, irrationally fearful of deflation and, in any case, eager to add a new tool to their policy armamentarium, central bankers are &mdash; both in peer-reviewed journals and less formally &mdash; embracing the idea with gradually increasing interest. Early experiments, such as those previously mentioned, are underway. Blunting the Market Process. Market processes are social processes, and human beings are fundamentally economic actors. Econometric modeling and hopeful theorizing set aside, people are temporal beings for whom present satisfaction is preferred to future satisfaction. Interest rates are nothing less than the memorialization of this. However, an implication of a negative natural rate of interest would be that, given a choice between receiving $100 today or receiving $10 one year from now, economic actors would (ceteris paribus) choose receiving $10 in one year. Thought of another way, the natural, positive interest rate is a forbearance discount; a spread or value adjustment of sorts, comparing the current assessment of a later desire with an earlier desire. Although this comparative rate may change &mdash; it may steepen or flatten, even invert at times &mdash; it is always and everywhere positive. It doesn&rsquo;t disappear, and it never goes negative. Positive, temporally rising interest rates are a function of the intersection of infinite desire, limited availability and mortality. Negative interest rates are a corruption of economic calculation. An Invisible Subsidy. On a grander scale, under a negative interest rate regime, many firms and projects which would have failed under normal, positive rates of interest will continue to operate. The commercial failure and liquidation which, to no small extent, central banking policies seek to prevent, in fact (and however painfully), frees up capital for new firms and projects, all of which keeps innovation vibrant and rewards the most efficient stewards of capital.&nbsp; By delaying or thwarting the forces of creative destruction, negative interest rates &mdash; not unlike their less radical cousin, artificially low interest rates &mdash; bring about a dearth of investment and lack of opportunity. Market signals are confounded, and economic growth inevitably suffers. When negative interest rates are introduced, technocratic sleight-of-hand will undermine market-based processes &mdash; not least of which, entrepreneurial alertness. Interest Rates Coordinate Savings and Investment. And interest rates do more than simply influence rates of saving and consumption. A major mistake in this policy making worldview is the treatment of the interest rate as primarily, or exclusively, a yoke or accelerator on &quot;spending.&quot; In fact, interest rates coordinate investment, production and consumption decisions over time, ranging from the heaviest consumption goods to the simplest consumer goods. Individuals and firms make choices based upon prices which are, in turn, influenced by financing. Those choices en masse send signals to producers throughout the economy regarding shifts in tastes and preferences. There are, as with all central planning initiatives, possibilities for unintended consequences as well. For one, expecting market interest rates to move in lockstep with rates targeted by central banks is a dicey bet. In a negative interest rate environment, market interest rates may in fact rise. Most banks take in short-term deposits and lend over the longer term. The bank&rsquo;s revenue and net income (profit) is, therefore, dependent upon the spread between the rate it charges to borrowers and the rate it pays to depositors. With negative interest rates, some banks will need to find a way to recoup lost revenue.&nbsp; But if they charge a negative interest rate to depositors, they will almost assuredly experience an outflow of deposited savings. Banking executives would then face an unenviable decision: Call in loans to satisfy exiting depositors or liquidate facilities and decrease staffing. But both of these choices would be &mdash; like so many other banking choices &mdash; penny-wise and pound-foolish, decreasing trust in the bank and perhaps accelerating the withdrawal of savings. The bank&rsquo;s preferred solution then might be to keep income up by widening the spread between deposit rates and lending rates by increasing the interest rate charged to borrowers. Thus, dropping into negative interest rates on deposits can lead to a rise in interest rates for borrowers. Negative interest rates are, in any case, likely to bring about a rise in banking fees: for ATM use, for transfers, for overdrawn accounts and so on. And rising banking fees disproportionately affect the poor, which invites greater regulation and control by political entities. The Road to Serfdom &hellip; via Credit Markets. A final implication of negative interest rates is that the spending of the state, essentially all of which is not productive, will become the primary contributor to economic growth. A gradual shortening of focus, which is already an Achilles&rsquo; heel of democracies, will magnify. With policies oriented toward front-loaded economic growth will come increasingly disproportionate influence of interest groups, more possibilities for calculation error and lackluster growth. And if negative interest rates mean that essentially any firm or individual can receive a loan, central bankers will eventually have to pursue a policy of credit rationing. Political entities, rather than markets, will decide what firms and individuals receive loans and upon what terms and conditions. Will this favor defense contractors over, say, casino and gaming firms? Will only industries that are unionized receive credit, or will collective bargaining be required in order to do so? Should weaker sectors be supported or stronger sectors bolstered? In the EU, such issues as what countries should be allocated more credit will undoubtedly rear their troubling heads. So, by squeezing out and possibly starving credit markets, central banks will, over time, heavily influence choices regarding production, consumption and terms of exchange. Even the remote possibility of that occurring should be alarming. Where Does Bitcoin Land? The role of bitcoin, and cryptocurrencies more broadly, in a negative interest rate world (as unlikely as that truly is), is twofold. First, one can imagine a new era of cryptocurrency banking &mdash; a throwback to an earlier, brick-and-mortar age &mdash; in which time preference (expressed via savings) influences interest rates, which in turn funds current production for future consumption. And once millions of depositors realize that their savings will be winnowed away absent constant consumption, they will rush for the exits. In this case, one of two likely outcomes is possible: There will be bank runs or, more likely, the imposition of controls on withdrawals. Staving off the temptation of conspiracy theorizing, negative interest rates, modern monetary theory and a number of other newfangled monetary policy proposals face the same Achilles&rsquo; heel: a massive wave of withdrawals from banks and other financial institutions that will put their viability at risk. The recent rash of proposals toward creating a cashless economy &mdash; variously explained as bringing about new efficiencies or to thwart criminal activity &mdash; should be viewed with far more suspicion than they have been thus far. The new crop of utopian plans require nothing less than a personal finance surveillance state; Bitcoin is the best defense for individuals seeking to rapidly exit the financial system if access to cash were rendered difficult, more costly, or outright illegal. Endgame. What we are seeing at present is only the latest stage of a widening gulf between sober policymaking and a body of economic theory divorced from the realities of human action. But unlike the many tweaks and changes that have come about over the last century or so, the breaching of the zero barrier represents a major point of inflection in monetary policy, a thumbed nose at the conventions which built modern civilization. It brings to mind the joke about the primary...

Peter C. Earle

The Kindest Cut: Why the 2020 Bitcoin Halvening Is the Most Important Yet

Op Ed: Bitcoin and the Dawn of the Negative Interest Rate Era