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Bitcoin as a global standard would be an ‘absolute economic catastrophe’ – Ernst & Young’s

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(Kitco News) If Bitcoin were to become a global monetary standard, it would be an “absolute economic catastrophe,” said Ernst & Young’s global blockchain leader Paul Brody.

The world’s largest cryptocurrency is by default considered a deflationary asset in the digital space. What this means in the crypto world is that its supply is finite — set at 21 million tokens ever to be minted — and as investors buy and hold Bitcoin, the supply is reduced, and prices increase.

“Deflationary systems like Bitcoin are bad for the economy. I don’t think people devote nearly enough time and attention to discussing why. If Bitcoin were to become a global standard, it would be an absolute economic catastrophe,” Brody told Kitco News in a recent interview. “And there are mountains of evidence.”

Deflationary assets are especially terrible as global monetary standards during economic slowdowns. And one of the clearest examples from the past is gold, Brody added, noting that the gold standard failed for a reason.

“There is evidence from prior to WWII that deflationary systems like gold are catastrophic during economic slowdowns. And the reason for that is in a deflationary model. If you believe your currency will be worth more tomorrow than it is today, your incentive is to save it, not spend. And that leads to a collapse in demand, which in turn triggers a further decline in the economy, which makes people even more paranoid,” Brody described.

This becomes what Brody refers to as “a death spiral” for the global economy. “In the run-up to WWII, almost every major industrial country abandon the gold standard. The evidence shows the sooner you abandon the gold standard, the faster your economy is likely to recover,” he said.

Many proponents of Bitcoin refer to the cryptocurrency as gold 2.0, and Brody views this analogy as fair. “Bitcoin is digital gold. If you wanted to take the properties that people love about gold and recreate them in a digital system, you would make Bitcoin. And in many ways, Bitcoin is better gold than gold. The only downside is you can’t bury it in your backyard,” he said. “But if we end up back on a gold standard, that will not be a good thing.”

With Bitcoin’s popularity surging over the past decade and many proponents calling it a solution to the current global monetary policy system, it is worth being cautious around arguments calling for adopting a Bitcoin standard, according to Brody.

“The system is fundamentally deflationary if the economy it operates in grows faster than the money supply. If the Fed grows the money supply at 1% a year, we have a fundamentally deflationary system. It’s true that the number of dollars in the system is going up a little bit, but the economy is growing even faster, which would cause a deflationary cycle where the available goods and services would be growing faster than the number of dollars chasing them. And therefore, the price of goods and services would actually have to go down,” Brody explained.

How permanent is the current inflation problem?

Fear of inflation and concerns around whether the Federal Reserve can contain it with aggressive rate hikes have triggered massive volatility in the broader markets. However, Brody disputes this narrative.

“During the pandemic, we underwent massive reconfiguration of the global economy. Overnight, we went from a global economy that was heavily focused on services to one focused on goods. In this space of a year, we reconfigured the entire global economy from doing things to buying stuff,” Brody said. “Now, we’re turning around and doing exactly the opposite.”

The world has experienced multiple massive reconfigurations of the entire global supply chain. And this time around, that has come with large amounts of government stimulus, he added.

The idea that the global economy can come out of this with a smooth landing and no inflation is unrealistic. But, at the same time, the idea that the world will encounter stagflation similar to the 1970s is also not a given, Brody noted.

“I’m still on what I would call team transitory. After WWII, we had a similar global reconfiguration. We went from making lots of weapons and telling people ‘not to spend and buy war bonds’ to ‘the war’s over, let’s party’. And the world, particularly the U.S., went through a pretty brutal battle with inflation. It lasted almost three years, and it peaked at 18%. That was not the beginning of long-term stagnation. That was a transitory event resulting from a massive reconfiguration of the entire global economy.”

Brody sees signs that inflation might have peaked at above 8% in the U.S. this year. “That post-WWII inflation cycle was about three years. We’re a year into an inflationary cycle. There’s good evidence to believe that the cycle may have peaked at around 8%, and it will slowly decline,” he said.

Brody added there is a possibility of a mild recession, but unemployment will likely remain extraordinarily low.

Ethereum to take the lead?

However, despite Bitcoin being the world’s largest cryptocurrency, there are some red flags regarding its future.

“The main red flag is that fundamentally blockchains are not just digital assets, they are technology ecosystems. And the big red flag around Bitcoin is technology ecosystems live and die by the number of developers that are building products and services on top of them. And not very much of that is happening in Bitcoin,” Brody said.

Most of the developments and engineering work is happening in the Ethereum ecosystem. And even though Bitcoin seems to be doing well, there is concern around its long-term future, he added.

Overall, Brody does not see a multi-chain future, predicting that Ethereum is the most likely ecosystem to take everything over.

“Network effects mean that the largest ecosystem tends to win over time. Ethereum is the largest ecosystem,” he said. “If you’re trying to build a business, you want to build and deploy your business into the ecosystem with the most cash, the most liquidity, and the most investors.”

Brody compares Ethereum to the internet, noting that the world does not have 20 different networking standards. “If you go back 30 years, the internet protocol was for connecting different kinds of networks. Today, there are no different networks. It’s just the internet,” he said.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.



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