Get Out of Banks The Fiat-Currency Racket Will Fall By Fergus Hodgson,
Gold Newsletter’s Roving Editor Dear John, The glorious power of creative destruction is coming to bear on conventional banks, and the financial system that depends on fiat currencies and cronyism must evolve or die — the latter being the more likely of the two.
In the words of technology author and gold bug George Gilder, “the internet, as a global system, needs a global currency...that reflects the real scarcity of time in our lives.” That contrasts with the bottomless printing presses and costly geographical constraints of central banks that reign, for now.
What the market wants, she inevitably gets. We observe, on the one hand, the widespread closure and amalgamation of brick-and-mortar bank branches. On the other hand, the uptake of accounts in private currencies is accelerating, as clients lose trust in the status quo.
Earlier this year, for example, Wells Fargo announced that it would close 400 branches across the United States, after Bank of America closed more than 250 branches and followed the wider trend in recent years. Meanwhile, America’s most popular exchange platform for private currencies has ballooned to 9.3 million users, up more than 50 percent since March this year.
The spread and density of bitcoin-accepting businesses worldwide (pictured)
has grown by orders of magnitude in the past four years. (Coin Map)
The market capitalization of alternative currencies is also breaking records by the day, with bitcoin’s soaring 660 percent since last year. Further, the variety of innovative new currencies and applications entering the market, often with crowd-funding support, is leaving regulated, inflexible financial intermediaries in the dust.
The new financial sector is mobile and beholden to no nation or regulatory regime. In fact, around half of cryptocurrency exchanges around the world decline to have any financial license. For digital-wallet providers, that proportion is north of three quarters.
Naturally, unbanked populations and those suffering under inflationary regimes were the first to see potential in the open and low-cost private currencies. Argentina and Venezuela, in particular, have become hotbeds for bitcoin use; Wayniloans of Buenos Aires offers a platform for direct lending and borrowing in bitcoin without requiring any bank to approve anything.
What is hitting conventional banks where it hurts, however, is the long-term migration of the wealthier demographics in the First World. As the network, security, and versatility of private currencies expand, the transition makes sense for more and more people, whether they are idealistic or not.
The rush for the exit is beginning. The question is whether you will get caught in the crossfire or take advantage of the burgeoning opportunities.
As the departure accelerates and banks feel the squeeze, it is likely to get messy. The protectionist battle to tax and regulate new competitors out of existence has begun, albeit doomed to fail. The Internal Revenue Service and other federal agencies will continue to make an example of and hurt a few rogue entrepreneurs, but they cannot stop the avalanche of users and the rising tide of superior alternatives.
US citizens experienced a week-long bank holiday in 1933, and if the pace gets frantic enough, such a policy could make a comeback. Although not in the forefront of people’s minds, a gander across the Atlantic should serve as a warning. Cyprus, an EU member, faced mandated bank closures and a hold on withdrawals in 2013. Perhaps seeing the writing on the wall, last month EU officials also introduced a proposal for Eurozone-wide account freezes, if necessary to “prevent bank runs.”
If you think the Federal Deposit Insurance Corporation has your back, think again: They have already limited coverage for non-interest bearing accounts. Even the purported insurance is a charade, since the FDIC has assets equivalent to a mere 1 percent of what it is supposed to insure, and the vast majority of that is tied up in Treasury securities.
On the flipside, the opportunities in the private domain are seemingly never ending, particularly in the alt-coin space. For those with an inclination towards gold, Gold Newsletter has reported on the anthem, a traceable digital currency with 100-percent backing. The latest news is that the project, led by Anthem Blanchard, exceeded its first round of financing and garnered more than $500,000 from investors to get the ball rolling.
Blanchard’s success suggests not only his new currency but many more are to come. While a new regime of competitive currencies might be unsettling, you can still get ahead of the pack, embrace it, and avoid the perils of both the inflation tax and the risks and costs of conventional banks. Fergus Hodgson is an economic consultant and Gold Newsletter’s roving editor. |
