A Bitcoin Hard Fork is Helicopter Money
It’s all fun & games until someone loses an eye — correction — until someone creates inflation
The Bitcoin Cash hard fork left many of us “I’m not an economist, but I play one on Twitter” types scratching our heads. In short, economic theory said that pre-split 1 BTC would equal post-split 1 BTC + 1 BCH.
Practice laughed maniacally and produced a post-split 1 BTC + 1 BCH that was demonstrably HIGHER than pre-split 1 BTC. Round numbers: the hard fork created a BCH circulating supply of $10B — poof! — out of thin air. And BTC? Let’s just say (understatement) BTC did NOT go down.
In theory, there is no difference between practice and theory. In practice, there is.
The topic now under discussion is “How might we explain the post-fork landscape in practice, using the tools of economic theory?” Along the way, perhaps we can make some predictions about how the landscape will play out over time.
Do note that the topic of this post IS NOT “Was the hard fork a good idea?” or “Who stands to benefit from the hard fork?” or any of a dozen other perfectly valid questions of context. (Professional economists ignore context routinely, and I see no reason I can’t pull the same shit.)
Conventional Monetary Policy
Hey, you, don’t leave! Drop a heading like the one on the line above, and I worry that everyone stops reading this post and heads back to Facebook.
Introducing a topic like conventional monetary policy into a post on bitcoin hard forks may seem like a non-sequitur. Rest assured, this all ties together. One cannot fully appreciate the implications of helicopter money without understanding what PRECEDES helicopter money.
You may recall we had a Great Financial Crisis (GFC) in 2007–2008. While we didn’t see bread lines on television — pardon me, YouTube — the GFC deserved its ominous name. Its impact was REALLY bad: one of the broadest and deepest recessions the world has seen. The GFC shook economies to the core, and nowhere was the anguish more evident than at the world’s central banks. Those are the folks in charge of monetary policy, and well, they were scared shitless.
Interested in learning about the origins of the crisis? Check out “Too Big to Fail” by Andrew Ross Sorkin. A lighter though more entertaining read is “The Big Short” (the book, not the movie) by Michael Lewis.
Every central bank with a name, abbreviation, or acronym — the Fed, the ECB, the PBoC, the Bank of England —was terrified by the GFC. Without hesitation, central banks started cutting interest rates to mitigate impending recession. And pretty much without exception, they kept cutting interest rates until they hit ZERO. Never before had so much of the world’s GDP come under zero interest rate policy (ZIRP) from its central banks.
Cutting interest rates is on Page 1 in the “You’re a Central Banker Now!” pamphlet, and falls under “conventional monetary policy.” It is supposed to motivate businesses to borrow and SPEND more money, boosting economic activity. Short version: ZIRP did not work.
Unconventional Monetary Policy
Having deployed ZIRP around the world for the first time in history — and with VERY little economic improvement to show for it — central bankers were well beyond scared shitless. While technically “out of bullets” vis-à-vis conventional monetary policy, they had other tools at their disposal.
The world’s central banks printed (not literally) money. LOTS of money. Over $12 TRILLION dollars worldwide. Where did all that money go? Haha, you really need to ask? It went to the the banks in a process called “quantitative easing” and better known as QE.
There’s quite a bit of “wink wink, nudge nudge, say no more, say no more,” involved in the actual mechanics of QE.
- A central bank targets an asset class and uses their shiny-new money to purchase that asset class from the market (in other words, from banks).
- Given that said central bank deploys a LOT of money hoovering the asset class, they force up the price.
- Should that asset class be two-year treasury, for example, forcing up the price equals forcing DOWN the interest rate.
- The central bank sticks the wad of purchased assets on its balance sheet, where they sit and gather dust … oh, geez … story for another day.
Now we’re cooking with gas! All kinds of interest rates are keyed off assets like two-year treasuries. QE nudged those rates lower AND flushed that newly printed money into the banks. That must have had a positive economic impact! Well, how shall I put this, NOT SO MUCH. You’re quite correct in thinking “$12 TRILLION dollars of QE and all I got was a t-shirt?” How the hell could that happen?
- Banks held back lending, because (a) they worried borrowers might default and (b) they’re dicks.
- Companies that DID borrow often used the money to buy back their own stock, which is cool if you own the stock but SUCKS if you’re an employee that gets laid off because business is down.
Helicopter Money: REALLY Unconventional Monetary Policy
If the banks are dicks and companies aren’t borrowing like mad to invest and expand, what is a central banker to do? Take it away, ex-Chairman of the Federal Reserve Ben Bernanke:
Helicopter money could prove a valuable tool. In particular, it has the attractive feature that it should work even when more conventional monetary policies are ineffective.
Now you’ve got the context: [a] all else fails, then [b] helicopter money.
As I learned when I spoke about it in 2002, the imagery of “helicopter money” is off-putting to many people. But using unrealistic examples is often a useful way at getting at the essence of an issue.
It is worth noting the title of his 2002 presentation: “Deflation: Making Sure ‘It’ Doesn’t Happen Here.” Helicopter money is central bank heavy artillery to prevent deflation. And deflation is NOT simply the opposite of inflation — nope, deflation is the economic end of days to a central banker.
In more prosaic and realistic terms, a “helicopter drop” of money is an expansionary fiscal policy — an increase in public spending or a tax cut — financed by a permanent increase in the money stock.
Cutting to the chase, a central bank deploys helicopter money as follows:
- Print a LOT of money, as in QE, but …
- SKIP OVER THE BANKS (by this point, one supposes even the central bankers have determined that they are dicks).
- Flush the money directly into the economy. A tax cut/credit, for example, puts the money directly in the hands of consumers.
- At least here in the United States, putting money in the hands of consumers means almost all of it WILL get spent.
- Et voilà! Deflation averted!
Bitcoin Hard Fork = Helicopter Money?
Now that we all understand helicopter money, let’s see how it works as an economic theory for a bitcoin hard fork.
A new crypto-currency created by a hard fork is VERY different from a new crypto-currency created “conventionally” (in an ICO, for example).
- BCH was “born” with a full historical ledger of transactions: 478,557 blocks (8 years and 7 months) worth of history.
- At the risk of stating the obvious, said history was IDENTICAL to the BTC ledger through the same number of blocks.
- Therefore, all unspent transaction outputs (UTXOs) through block height 478,557 exist on BOTH BLOCKCHAINS. In other words, every BTC had a BCH doppelgänger blink into existence with the hard fork.
- Again at the risk of stating the obvious, those 16.5-some-odd million BCH just “showed up” … NO PURCHASE REQURIED.
We have the two “signature features” of helicopter money: BCH is instantly created AND distributed, WITHOUT any offsetting liability.
BCH is $10B of helicopter money (round numbers).
Before peering into the post-hard-fork future of BCH and BTC, let’s briefly discuss two other economic models for a hard fork commonly tossed around.
Bitcoin Hard Fork = Stock Split?
A stock split is straight math: 1 shares @ $200 begets 2 shares @ $100. Nothing gained, nothing lost, no change in cost basis … just arithmetic.
Pre-split: you owned an asset worth $X. Post-split: you own the SAME asset worth the SAME $X.
A stock split does NOT model a bitcoin hard fork.
Bitcoin Hard Fork = Stock Spin-Out?
In a spin-out, one company is split into two companies. Perhaps an acquisition never achieved the forecast “synergies,” so that division is best off on its own (cough — Intel/McAfee — cough).
A spin-out is also math, ever so-slightly more nuanced. 1 share of ‘Old Corp’ begets 1 share of ‘Old Corp’ AND 1 share of ‘New Corp’. While this DOES give us “two tickers,” nothing new is created in a spin-out … whereas the entire raison d’etre for a hard fork is to create NEW functionality.
Let’s examine that in the real world.
- Intel/McAfee. Pre-spin-out: you own a semiconductor company with an anti-malware division. Post-spin-out: you own a semiconductor company and an anti-malware company. No “new functionality” is created.
- BTC/BCH. Pre-hard-fork: you own a crypto-currency with small blocks and SegWit (BTC). Post-hard-fork: you own a crypto-currency with “smaller” blocks and SegWit (BTC) AND you own a crypto-currency with large blocks and no SegWit (BCH). The latter is NEW functionality.
A stock spin-out does NOT model a bitcoin hard fork.
Peering into the post-hard-fork future
As we walked through the monetary policy tools of central bankers — conventional, unconventional, EXTRA-unconventional — the omnipresent impetus is FIGTING DEFLATION. That is to say, the entire motivation behind deploying these tools is CREATING INFLATION.
Perhaps one day, I will share my thoughts on the “wisdom” of central bankers creating inflation … along with my thoughts on central bankers in general. Preview: such a missive would make heavy use of phrases like “playing with fire” and “watch out what you wish for.”
Helicopter money deliberately creates inflation. Contemporary central bankers (99% Keynesian-school economists) literally gear their policies toward creating “a little” inflation. Austrian-school economists — the torch bearers of strong money — have a diametrically opposing view of inflation (using phrases like “playing with fire” and “watch out what you wish for”). Austrians argue the efficacy of helicopter money, but agree completely with the Keynesians that it will create inflation.
Now, inflation is a funny thing. Funny in the sense that it is hard to predict: when it will show up, how sharply it will rise, how long it will last, etcetera. Also funny in the sense that when it does show up, you tend to get a lot more of it than you imagined possible.
Having not experienced significant inflation since the early 1980s, I strongly suspect few economists (to say nothing of normal people) will know how to deal with any future bout of inflation. Another topic for another day.
In its typically comprehensive definition of inflation, The Economist states:
Inflation means less bang for your buck, as it erodes the purchasing power of a unit of currency.
IF a bitcoin hard fork fits the economic model of helicopter money, and IF that theory translates in practice, then a bitcoin hard fork is inflationary. Not today and not necessarily tomorrow. Perhaps not right after November’s hard fork.
At some point, a bitcoin hard fork — specifically the helicopter money created by a hard fork — WILL create inflation. That WILL erode the purchasing power of ALL bitcoin units of currency. Why ALL of the bitcoins? Example: unless it fails and goes to zero, BCH will compete with BTC in the crypto-currency open market.
Supply and demand is the one economic theory that ALWAYS translates into practice.
Coda
Three paragraphs above, notice the “IF (A & B) THEN” construct. What if a bitcoin hard fork DOESN’T fit the economic model of helicopter money? Well that would take us all the way back to the opening paragraph:
The Bitcoin Cash hard fork left many of us “I’m not an economist, but I play one on Twitter” types scratching our heads. In short, economic theory “said” that pre-split 1 BTC would equal post-split 1 BTC + 1 BCH.
Put simply, the alternative is that the helicopter money goes to zero: either BCH fails or BCH “takes a bite” out of BTC.
