Albaby1 has written two absolutely brilliant posts about why cryptocurrency is not a Ponzi scheme.
Since cryptocurrency companies can “mint” as many “coins” as they want, they represent a “foreign” currency. Buyers who spend USDs to buy the “coins” are making an uncovered bet in this “foreign” currency. The crypto company can offer a high interest rate, covering it with newly issued “coins.” The exchange rate with USDs will drop since the crypto company is not producing any goods or services of value so the “coins” experience inflation against the USD.
This is not a Ponzi scheme, since the crypto company doesn’t need to steal from customer accounts to cover other customers’ withdrawals. They simply “mint” more crypto “coins.”
Thank you, Albaby! You are smart!!
Now, let’s consider what you wrote in light of the Federal Reserve, which creates USDs out of thin air to lend to banks at negative real interest rates.
Let’s consider the relationship between the USD and my very first purchase from my own earnings as a babysitter, when I was age 12: a Hershey chocolate bar. It was a nickel (5 cents) in 1966. (At that time, pennies were solid copper and also had real value.) A Hershey bar is a REAL GOOD. It is tangible and can be duplicated.
The original Hershey bar was heavier than today’s Hershey bar. When Hershey reduced the size of its bar in 1972 to keep the price equal due to inflation, the New York Times reported it as a sign of the inflationary times. “The company announced from its headquarters in Hershey, Pa., that its milk chocolate bar would shrink in size by 8.35 per cent.” Manufacturers are doing the same today: a sure sign of inflation.
Now take a look at asset price inflation.
Bonds – remember that the price of bonds increase when interest rates drop. Also these are nominal rates, not adjusted for inflation.
Stocks, Price-to-earnings ratio based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted P/E Ratio (CAPE Ratio)
How many USDs are in the system? We have to use M3, the broadest measure of money.
Prices are always set by supply and demand. If the supply of money (which fuels demand) is growing faster than the supply of real goods and services (including assets like stocks and bonds) the price will rise.
It is clear that systemic money (which is controlled by the Federal Reserve, government spending and lending by banks and other lenders) has been increasing much faster than the supply of real assets, goods and services.
Ultimately, it’s the Fed that controls the money supply which mostly affects asset prices. The government controls fiscal spending into consumer hands.
The crypto companies are just following the Fed’s example.
The Fed is not a Ponzi scheme. But the effects have been inflationary over decades.
The Fed hates deflation. The Hershey bar will never go back to costing a nickel.
But the rate of inflation in the future will surely rise.
The government has made immense commitments for future entitlement spending which will grow much faster than the growth of supply. Inflation in the service sector – medical care and higher education, etc. – has been growing faster than goods inflation for years. Low-cost foreign labor has suppressed the price of goods. Services must be performed hands-on by American workers and the price is rising. And will continue to rise as the profits are suctioned off by management (as intercst is so fond of reporting).