If war comes, what will you do?
Zoltan Pozsar, head of global short-term rates strategy at Credit Suisse (former Fed and US Treasury official), said in his August 1, 2022 article titled “War and Interest Rates”:
“War brings inflation.
War takes many different forms, hot wars, cold wars, and wrestling in “cold spaces” such as cyberspace, space, and the deep ocean. We add the U.S., China, and Russia to the cold list of “corridors of power” where major powers are waging hot wars over technology, commodities and commodities—economic hot wars—that have been the main drivers of recent inflation. “
In his article “War and Industrial Policy,” published on August 24, 2022, he wrote:
“War means industry. War cannot be waged in a globalized world, global supply chains are crisscrossed, and chips produced on small Asian islands can only be shipped if airspace and seas remain open.”
It is strongly recommended that you read these articles in their entirety. Zoltan succinctly describes the global war going on in the current centers of political power. While Ukraine and Russia may be the only direct, high-profile conflict currently taking place, make no mistake: a multifaceted economic war is quietly unfolding among the world’s major powers. The US/NATO (EU) alliance is facing off against Russia/China.
(To be clear, of course there are other wars going on in the world, and it’s not to ignore the lives lost in those conflicts – but they don’t have the same global impact as the NATO-Russia/China entanglement. When As the nuclear powers confront each other in proxy wars and resort to less high-profile alternatives to war, the whole world must pay attention.)
brink of war
To underscore the gravity of the current conflict, the chart below shows major past conflicts between established hegemons and emerging challengers.
Of the 16 instances listed, 75% resulted in war. History is not always on the side of humanity when we hope to avoid a major dynamic conflict.
Before continuing, I must share this quote I read in Dale Copeland’s masterpiece, Economic Interdependence and War. Copeland wrote:
“Acknowledging that the economic stimulus provided by rearmament can never be the basis for a long-term sound economy, Hitler further elaborated on the supply dilemma: ‘There is a clear military weakness in those countries that depend on foreign trade for their survival. Since our foreign trade is at sea dominated by Britain carried out on the air route, so it was not so much a transport security issue as a foreign exchange issue, which exposed the weakness of our food situation in wartime. The only remedy, which seemed to us far-sighted, consisted in obtaining huge Living space.””
History never repeats itself, but it has rules. China could find itself in a similar dilemma, with all of its maritime trade being done with the tacit approval of the US, which has the most powerful navy in the world (it’s worth noting that, technically, China has the world’s largest navy, but it relies disproportionately on smaller class ships and does not have the same ability to wage war on the high seas and deep waters). If the United States wanted to, he could easily cut off access to the Strait of Malacca, an important sea route through which a lot of Chinese trade passes. The United States could also cut off China’s eastern seaboard, where all of China’s economic power resides, through an alliance with Japan.
From this perspective, the U.S.-China trade war has some similarities to the German-UK global trade situation nearly a century ago.
power of the state
When waging war, the nation takes precedence. No matter what the prewar legal norms were, in wartime, the state takes whatever it needs. Because states must have everything they need to wage war, the private sector is often excluded from a wide range of goods and services.
“But, that’s illegal!”, one might say. “My country can’t do this just because it’s a wartime expediency.” To remind these readers that the COVID-19 pandemic is also a war — and in the ongoing battle against an invisible virus, who of us is not limited over personal freedom? Wear a mask, get vaccinated, stay home, avoid funerals of loved ones, etc. While everyone was whining and moaning, they ended up – in most cases – doing what the state told them.
When the domestic economy cannot produce enough goods and services to support the state and the private sector, the state turns to the supply of fiat currencies to pay people and governments, which become less valuable as wars progress and goods become more difficult to obtain . During previous total world wars, shortages of milk, bread, butter, sugar and labor abounded. In the current iteration of the global economic war, we still have shortages – they just look a little different. We are already in short supply of semiconductor chips, masks, infant formula and weapons, without exception.
In wartime you either have a loaf of bread or you don’t; in wartime banks are either open or not; in wartime when you want to travel you either have the correct stamp in your passport or you don’t; in wartime Access is key and price is secondary; therefore, the price curve for all necessities and services is inelastic.
So as we enter World War 3, fighting in unconventional corridors, how can we, as ordinary citizens, protect ourselves and our families from the “all or nothing” dichotomy that prevails during wartime? In the absence of traditional legal protections, how can we protect ourselves from countries that need our resources because of war?
Previously, many believed that the best way to do this was to save money in “hard currency” precious metal currencies such as gold. But recognizing the pervasiveness of this line of thinking and wishing to exploit it, the state (in this case the US) banned private ownership of shiny rocks and forced gold owners to sell their bullion to the government at low prices.
Not so easily discouraged, some of the more industrious civilians began converting their money into “harder” fiat currency and storing it abroad. But the government also has a way to do it: capital controls (that is, the imposition of laws that restrict the flow of money out of the domestic economy).
So, if the government has all of this to prevent its citizens from protecting their wealth, what options do we have to recover and strengthen ourselves as quickly as possible from the devastation that may have occurred after World War 3?
Many understand the shift in how markets work in peacetime versus wartime, and may use that understanding to create, accelerate and/or consolidate their wealth and power in an effort to be part of the tragic event we call a total global war. one of the participants.
If you think that’s a bit dramatic, let’s look at Mr. Roman Abramovich’s recent trials and tribulations.
Bloomberg recently published an excellent article, Roman Abramovich’s London Empire Unravels as Sanctions Bite, describing the impact of Western anti-Russian sanctions on one of the world’s wealthiest people.
With the exception of CZ and SBF, Mr. Abramović is probably richer than every reader of this article. If you think wealth = power, then you think the law may not apply to him. You might be largely right – in peacetime, I’m sure wealth provided Abramovich with many privileges in his current home, London.
However, the UK is engaged in an economic war with Russia. Regardless of your paper wealth, you are either a patriot or a rebel. Unfortunately, the passport held by Mr. Abramović had the wrong flag on it.
Bloomberg described how the sanctions affected his wealth:
“Roman Abramovich’s beige Kensington mansion on a tree-lined street has a dozen bedrooms and many guards. Nearby neighbours include British royals, steel magnate Rucker Himi Mittal and Warner Music Group owner Ryan Blavatnick.
It is one of several London assets the Russian billionaire has acquired in recent decades that have helped make the city the center of his wealth. But that foothold has proven fragile in recent months, as his mansions in the British capital – from Chelsea FC to a mansion to a stake in London Steel Group Evraz Plc – have come after Russia’s invasion of Ukraine. has been sold or frozen. “
One day, the rule of law protects your assets; the next day, they are frozen or forcibly sold.
One of the descriptions is interesting:
“‘He’s not in the lead anymore,’ says David Lingelbach, who headed Bank of America’s Russia operations in the 1990s and now teaches at the University of Baltimore. ‘In my opinion, he’s on the defensive.’”
No, he’s defending. The British government deprived him of his property rights without due process, effectively freezing one-third of his assets with the swipe of a pen. What does the common law say about this? In this case we will all be on the defensive.
We are not arguing here whether what the UK is doing is justified. Just simply point out that no matter how rich or powerful you are, any asset with legal title is fair game that may be confiscated in wartime. Your bank account, your stock portfolio, your house, your car—your ownership of these things depends on whether the state maintains and protects your exclusive right to use them.
Mr. Abramović’s “dilemma” is a good modern example, but let’s go back to World War II and observe how different countries treat the property of their citizens. In this article, we will explore how the US, United Kingdom (UK), Germany and Japan deal with wartime rationing, and what this means in terms of capital controls, food access and prices, and ownership of “hard currency” gold, etc. – in Under these difficult conditions (which we will likely see again in one form or another if World War 3 begins to escalate into a larger conflict), Bitcoin is the best option for civilians to protect their wealth means.
In my opinion, now is the time to buy bitcoin while you still can. Because once your fiat assets are frozen or fiat capital controls are established, your wealth cannot be converted into a more “hard” currency. At that time, you can only hope that the flag printed on your passport will be available. This is how the state gets the support of the masses – it robs them of a way to escape and the only way out is to survive.
The country that can amass most of its citizens’ resources and throw them into war is the country that wins. The government must control these private resources in physical form (i.e. food, machinery, labor) or in abstract form (i.e. financial assets such as money, stocks, bonds, etc. in circulation). Imagine a government thug knocking on your door and demanding to feed starving soldiers with all the food you have in your kitchen; or making you work 8 hours a day building ammunition in a converted factory at below market wages. For ordinary citizens, this is very true in war.
Therefore, we can expect the state to go the abstract route and target the funds and assets of its citizens. Countries have always had very ingenious ways to impose monetary patriotism on their populations.
Its mildest strategy is to sell low-yielding government bonds to appeal to their love of their country and to persuade them to invest their spare cash in government out of patriotism. A common example is war bonds. War bonds turn citizens into “investors” in war. Now, everyone’s interests are aligned. We win the war and you get your money back.
The yield on these war bonds would not be higher than the domestic inflation rate, because if they did, the government would slowly go bankrupt. But governments won’t stress the fact that their yields are lower than inflation – they’ll be counting on their citizens to be clueless about how bonds work.
No matter how hard the government tries to sell the justice of these bonds to the public, the average person probably understands that war means inflation (or at least realizes it as it goes on). As long as there is human civilization, there will be war. And countries always use inflation to pay for wars. Ultimately, this may prompt citizens to commit themselves to finding ways out of this situation.
From a national perspective, this is why capital controls—laws that prohibit or restrict the transfer of funds and assets outside the domestic economy—must be established. Without them, treasonous civilians will turn their capital into hard money, like removing oxygen from the flames of war. Capital controls are almost impossible to escape a country’s financial system, as all options to convert the domestic currency into a harder equivalent or to buy financial assets with higher yields than government bonds are essentially prohibited. Once citizens are in financial distress, they are likely to succumb to the situation – a paltry gain that doesn’t exceed inflation is better than no gain at all. Here’s how to start the process of turning land prodigals into financial patriots.
Let’s look at how countries implemented capital controls during World War II.
public capital control
Overt capital controls directly restrict the flow of funds between borders and currencies. The end result is a fragile capital pool that can easily be used for “patriotic” purposes.
During World War II, the flow of capital outside the United States was largely unrestricted. The United States has the strongest economy and no actual fighting within its borders; domestic capital has little reason to flee.
However, one asset that the US does impose strict controls on is gold.
For decades, the Federal Reserve was required to hold 40% of its issued currency in gold and redeem the gold held by American citizens at $20.67 an ounce. But the Emergency Banking Act of 1933 gave the president greater control over banking, international transfers, and gold, and paved the way for Executive Order 6102 — an order by President Franklin Delano Roosevelt (FDR ) was enacted during World War II, requiring Americans to immediately exchange their gold for the government or face penalties.
Roosevelt’s confiscation of gold meant private owners had to take their coins, bars or certificates to a bank and exchange them for dollars at the prevailing exchange rate of $20.67 an ounce. Over the next year, the president then raised his official gold price to $35 an ounce, effectively devaluing the dollar by 40% to stimulate inflation and the economy. It was part of Roosevelt’s effort to get America off the gold standard. The ban on personal gold remained in effect until President Ford legalized private ownership in December 1974.
From this chart, we can see: Gold capital controls lasted for 41 years, during which time the US dollar lost 80% of its gold purchasing power.
The UK has extensive capital controls – covering most exports and imports as well as private portfolio and retail investment. These policies were implemented as part of the Emergency Powers Act 1939; later updated as the Exchange Control Act 1947.
The sale of securities, the conversion of sterling into any other currency, and the movement of funds abroad are strictly controlled. Your capital is not yours at all. You can only sell securities, conduct foreign exchange transactions, or send funds abroad if the government deems your reason for moving funds abroad to be legitimate under their regulations.
Professor Daisuke Ikemoto writes: “Exchange controls were first introduced in 1939 for wartime purposes but were maintained after the conflict. This has enabled successive UK governments to combine the maintenance of a fixed exchange rate with their commitment to demand management policies. in harmony.”
During the war, Germany imposed capital controls so that funds could be used to “invest” in government bonds. These measures will be covered in more detail in the next section discussing yields on German government bonds during the war.
After the war, in the early days of the Federal Republic, current account deficits and insufficient foreign exchange reserves led residents to strictly prohibit all capital exports. The foreign exchange regulations of the Allied-occupied territories provided the legal basis for these controls. By the early 1950s, however, West Germany’s accounts turned surplus and the country’s war-related foreign debt was finally settled. Restrictions on foreign direct investment began to be liberalized in 1952, and residents were allowed to purchase foreign securities in 1956.
I don’t have a good document detailing the capital controls faced by Japanese citizens. However, I found this illuminating paper discussing the various ways in which Japan stole basic goods produced in the Southeast Asian countries it occupied during the war. The following is the abstract of the paper:
“This article analyzes how Japan financed its occupation of Southeast Asia during World War II, the transfer of resources to Japan, and the monetary and inflationary consequences of Japanese policies. In Malaya, Burma, Indonesia, and the Philippines, military vouchers paid for resources and occupation forces. The problem greatly increased the money supply. Despite high inflation, hyperinflation barely occurred due to the continued demand for currency exchanges, Japan’s strong enforcement of its currency monopoly, and Japan’s diminished military ability to bring resources home. In Thailand and India, occupation costs and bilateral clearing arrangements have created near-unlimited Japanese purchasing power and have allowed as much as one-third of India’s annual GDP to be transferred to Japan. Although the Thai and Indian governments have largely met Japan’s demand by printing large amounts of money demand, but inflation only rises with currency expansion as currency continues to be used as a store of value in rice-surplus regions.”
If Japan “diverted” a third of India’s annual gross domestic product to fuel its wars due to lack of basic goods, do you think it is letting ordinary Japanese citizens shirk their patriotic financial responsibilities by allowing capital flight?
After the war, the focus on economic reconstruction meant that capital inflows and outflows were tightly controlled. The policy was implemented in the early days of the Allied occupation of the country, and eventually took its legal basis from the Foreign Exchange and Foreign Trade Control Act of 1949. In principle, the Executive Order prohibits all cross-border movement unless specifically authorized. It was not until the early 1960s that these restrictions began to be relaxed, and even then, only for certain transactions closely related to foreign trade transactions.
Post-war global situation
The chart below shows the prevalence and persistence of capital controls after the post-war Bretton Woods agreement came into force.
Let’s take a quick step forward and understand what overt capital controls look like in the world today. Russia has taken several steps to shore up the ruble as the conflict in Ukraine intensifies. Most notably, Russia imposed a $10,000 withdrawal limit on consumers and required companies to convert their foreign exchange reserves into rubles. The expected result of the ruble’s appreciation has been achieved, with the government justifying the restrictions by arguing that the restrictions are necessary to avoid financial pain and will be lifted once the risks subside.
Back in World War II, countries now had capital controls in place, their domestic capital was trapped within borders, and their civilians had limited investment options available. What did they do next to seize the assets of their citizens and throw them into war? They happily offered debts to their patriots to fund the fight. Where possible, we attempted to compile a figure showing the real yields on various “war bonds” or other government bonds issued during and after the war.
American War Bonds
Thankfully, the U.S. Treasury Department has written an excellent report on the history of how World War II was financed. While I don’t have similar reports on other countries, please note how the funds were raised and the rationale provided. Here’s a snippet from that report:
“By early 1941, public debt was expanding rapidly. As defense spending flooded the economy and diverted consumer goods from the market, the danger of rising prices was increasing. It was clear that the remaining funds needed to be taken from the spending stream and stored for This will help reduce inflationary pressures during this critical period.”
This is Economics 101 – Government Demand Overriding Private Markets. If the government needs a water tank, you can’t have a washing machine.
The government created a new bureaucracy to market the newly issued war bonds. Art created by famous artists helps persuade ordinary citizens to give up their scarce capital.
“The entry of the United States into the war brought many new problems to the government that could only be solved with the help of the public. Rationing – protection – manpower – distribution of rare materials – these were just some of the key points that required public cooperation (besides buying war bonds).”
Even while the sale of small bonds to small investors has gone well, a thorny question has arisen: For a voluntary bond scheme to really work, or a system of compulsory lending to the government (i.e., compulsory savings) must be devised ?
Only Treasury Secretary Morgenthau, supported by President Roosevelt, opposed the plan [a plan to force ordinary citizens to surrender their savings to the state]. His point was that the voluntary way was the “democratic way” — but even he was forced to admit that some form of forced savings might indeed have to be considered if the upcoming war loan campaign failed to produce the expected results.
If the public will not voluntarily give the state what it needs, the state must take its place. Although the “coercive” option was never adopted, the US Treasury is ready to do whatever it takes to fund the war, even if it means stripping its citizens of their property rights.
The United States issued $186 billion worth of war bonds (E, F, G bonds) between 1941 and 1945. The picture below is one of them.
Are War Bonds a Good Investment? It depends on your definition of “good”. If by “good” you mean that bondholders are earning more than inflation, let the chart below disprove any notion that these are “good” investments.
The bonds have maturities of 10 to 12 years. Assuming you bought the bond and held it to maturity, the graph above is how much you actually lost. This is shocking.
But from the government’s point of view, the war bond issue was a huge success. During the war, the people voluntarily handed over hundreds of billions of scarce funds. The money is used to arm and feed the military, rather than compete for limited consumer goods and fuel domestic inflation.
The UK Consol bond is the longest-running bond of the modern nation-state, lasting from 1756 to 2015/16. We will focus on the real yields of these bonds during and shortly after the war.
During the war from 1939 to 1945, Consol bondholders actually lost 24%. Thanks for participating!
In an insightful paper titled “Financing the German Economy During World War II,” author Zdenka Johnson talks about measures to segregate capital and finance the war:
“The merchants who traded with the Empire had to admit that up to 40% of the payments for their goods and services were made in the form of interest-free tax receipts (Steuergutscheine). These vouchers could have been used to pay taxes to the state in the future , and offers tax incentives. This debt instrument solves several problems at once – the government gets very favorable loans, reduces cash outlays, and doesn’t have to issue as many government bonds. Half a year after the regulations are in effect, private companies “borrow” Give the government nearly $5 billion.”
Opportunities to invest in private securities are successfully limited. For banks and private investors, there is virtually no choice but to invest in government securities. In 1940, mainly savings banks provided 8 billion to the state, and the following year nearly 13 billion. By the end of 1944, two-thirds of savings were in securities, 95 percent of which were state bonds.
Both during and after the war, Germany followed a standard recipe for how to finance the war. Lock up capital and then force it to lend to the state at pitiful interest rates.
As mentioned above, seized capital of individuals and businesses is forcibly lent to the state. While I couldn’t find solid data on bond yields and consumer price indicators, the chart below details how public debt ballooned during wartime. One data I found on yields showed that in 1939 the average yield was 3.9%, and in 1942 it dropped to 3.5%. Yields fell but public debt rose 4.5 times. Usually, when supply increases dramatically without a surge in demand, prices must fall. When bond prices fall, yields rise. So even from this small amount of data, we can observe how the government saves money by forcing the public to “invest” its idle money into the state.
Source: 「Financing the German Economy during the Second World War」
We don’t have wartime bond or inflation data.
While no government bond yields above inflation, the winners at least get their principal and interest back. German bondholders face outright defaults and serious legal challenges in recovering their postwar debt. It shows – it pays to be a winner.
So far, no major power has started selling “war bonds”, mainly because the US/NATO and Russia/China are not technically at war. However, in today’s era of more mobile capital, keep an eye on the rules and regulations surrounding how public and private pension/retirement accounts must be invested. Global baby boomers have trillions of dollars worth of “savings” in these custody pools. The government has deliberately made rules so that these funds can only go into “approved” investments. Keep an eye out for more restrictions on how to invest your retirement savings.
we want to eat
Now, I’ll describe the last major form of economic control the government exercised during wartime—food rationing—and its impact on prices and citizens’ wages during World War II. Before I begin, I should point out that food rationing during WW3 may not have been the same as it was during WWII. I think we’re more likely to see food shortages than outright food rationing (I’ll share more reasons later in this section). However, I expect the price impact and cultural impact of food shortages will be similar – so it’s still useful to look back at what happened with food rationing during this period. let’s see.
The official rationing system was first introduced in 1938 and “gradually expanded to include almost all basic necessities by 1942”. As Junko Baba points out, rationing is carried out under the slogans “Luxury is the enemy” and “No desire until victory is achieved”. Rations are systematically controlled, monitored and distributed to each household through neighborhood committees (tonari-gumi) in various communities across the country.
In 1939, rice supply was controlled by the government, and in 1940, local rationing of consumer goods began. By 1942, rice, wheat, barley and rye were monopolized by the government. Despite police efforts, the black market—or the free market, as I like to say—has flourished, facilitating the exchange and sale of all kinds of consumer food.
Below is an example of how big a price difference can be for one basic commodity.
If you’ve ever been to Japan (or all of Asia), you know how important rice is to your general diet. During the samurai era, the samurai class was paid with rice (called koku).
As you can see in this log chart, the “real” price of rice is sometimes 10 times higher than the official price. Given that basic food items are strictly rationed, you have to pay a high price for rice if you want to be full.
Unless your income increases tenfold after the war, the fiat banknotes you hide in your mattress will be 90% poorer in rice terms. I ask you, what’s the value of fiat currency when you can’t even buy a bowl of rice?
I don’t have a chart like this to illustrate the free market prices of basic food items in the US, UK, and Germany, but I’ll briefly describe the food rationing systems for each of the others.
The United States rationed extensively to aid in the war effort. Tires, sugar, meat, milk, coffee, etc. can only be purchased using government-granted ration points. As Laura Schumm points out, “On January 30, 1942, the Emergency Price Control Act gave the Office of Price Administration (OPA) the power to set price limits and ration food and other commodities to discourage hoarding and ensure fair distribution of scarce commodities. resources.” Managing rationing is a complex bureaucratic system with more than 8,000 local offices that reassess the distribution of points each month. Different groups of people get different benefits, and everyone gets a non-transferable coupon booklet. Families are encouraged to grow “victory gardens” to provide their own food whenever possible.
Britain began war rationing in 1939, administered by the Department of Food. Basic commodities (meat, sugar, cheese, etc.) and most products (cereals, crackers, rice) are distributed by coupons. While fruits and vegetables were never rationed, long queues and shortages made household supplies a daunting task for most housewives. The population distribution is different, workers get more shares, children get more fat, mothers get more milk, etc. The government also encourages the cultivation of crops at home, which they call “Victory Gardens”.
Rationing in Germany began in 1939, shortly after the start of hostilities. Everyone received a card (refreshed every 4 weeks) with points for the food distribution. While strict rationing did not come into effect until 1942, food supplies of meat, eggs, milk, bread and more have been in short supply for the past three years. Germany is also allocated by personal area (more laborers, mothers, fewer Jews, etc.). Unsurprisingly, the country has experienced a booming free trade market.
Fast forward again, the US, Europe, Russia and China have not started rationing food. But remember – history is an imperfect guide to the future. While food rations in the past helped starving people in their quest for glory, today’s food rations—for all the countries that ended up embroiled in World War III, or all those countries that depended on these great powers for food exports—may be different.
Consider that modern farming is the reason most of us are able to make a living from computer screens. We use fossil fuels to power mechanized agricultural equipment and use our industrial chemistry knowledge to produce fertilizers at scale. This allows very few people to be employed as farmers without any negative impact on our vast modern agricultural output. In short, industrialization and urbanization moved humans from farms to cities.
Imagine a world in which countries that produce a disproportionate amount of global fertilizer restrict exports to rival countries; imagine a world in which countries that act as the “world’s factories” refuse to export building and operating industrial mechanized agricultural equipment key components needed; imagine a world where the flow of energy is disrupted so that the fossil fuels needed to power agricultural machinery simply don’t exist. The result would be a sharp drop in agricultural production followed by famine in some countries.
Domestic fiat currencies will not be able to keep up with this food inflation. If you’re experiencing food inflation, it means your country is structurally lacking the necessary ingredients for modern agriculture, and no amount of money printing can solve that deficit. Governments have always resorted to quotas and subsidies to ease the pressure – but they never work and only exacerbate the problem. Why would businesses take the risk of trying to solve the problem when the government will only end up expropriating their property to feed the people?
At this point, the free market will emerge. The free market used to be physical, but if physical cash were banned and only electronic forms of money were accepted, free market goods would be priced in electronic money and couldn’t be confiscated. I predict that the currency of the free market will be Bitcoin.
Break through the predicament
If you’ve learned anything from the preceding, it should be that there are several tools the government can use to enforce financial loyalty and limit your ability to invest – history shows that such controls (combined with other effects of war) often Can cause considerable harm to the personal finances of civilians.
With this in mind, the best time to get rid of wartime capital controls is before they are enacted. Remember, at the moment, your legal net worth is zero, and the state allows you to own access to your bank accounts, stock portfolio and real estate. But when the state says No to capital freedom, the game is over.
In this digital age, we have to think hard about what digital financial assets are fiat and what are truly decentralized cryptocurrencies. If you think you’re evading EU capital controls by converting your euro bank balances to Swiss franc bank balances, you’re missing the point. Any digital asset held within the banking system, regardless of currency, is a fair game of confiscation. You must log out of the system completely.
Bitcoin’s value and transmission network does not depend on government-chartered banking institutions. Therefore, it is outside the system and therefore “external currency”. Of course, the government can shut down the internet and the grid. But by then, your country has lost the war. At that point, instead of worrying about your financial assets, you better hope you have a passport with another flag.
The government could also easily ban the conversion of fiat currency to bitcoin, and may do so to prevent capital from escaping its control. However, it cannot confiscate bitcoins from those who already hold them.
Intrinsic Value of Bitcoin
At any time, there is no mathematical way to prove that a particular public bitcoin address belongs to me, or that I am able to spend the bitcoins contained in that address. Only when I sign a message using Bitcoin can I be reasonably certain that I have access to that address on that particular date and time. This is revolutionary.
For all other monetary assets, I can easily determine who owns it. If you say you have a gold bar, I can see gold. If you say your bank balance is $1 million, I can ask the bank to confirm. If you say you own the house, I can ask the government whose name is on the deed. But with Bitcoin, just because I suspect a public address might belong to you, doesn’t mean you can actually access the funds in that address.
Also, Bitcoin has no physical representation and I can keep my Bitcoin private keys in my head and use the funds at any time without anyone knowing. There is no obvious clue as to how much bitcoin I own.
The point is, you can convert fiat assets to Bitcoin unobtrusively. Bitcoin has no quality. Converting $1,000,000,000 to Bitcoin is as weightless as converting $1 to Bitcoin, while $1,000,000,000 to gold weighs many metric tons. Protecting many tons of gold from national attention is extremely difficult. Gold bars, fiat currency in a bank, or your house can also be stolen without your consent.
For someone to take “your” bitcoin, they either need to know your private key or you need to sign a transaction for them. But what if you “forgot” your Bitcoin wallet password? Then, funding will be completely unavailable. So, while states can enforce laws that grant themselves ownership of specific groups of public addresses, enforcing those laws will be quite difficult—because the state has no control over the bitcoins contained in these wallets without your consent.
Of course, there is a very easy way for them to get your consent. State agents with blunt weapons or firearms may visit your residence and ask you to sign a transaction to transfer your bitcoins to the state. You may protest that you “forgot your password,” causing agents to force you to remember in other ways. You might remember your private key at that point – but you might not, either. If you still don’t remember, you could be permanently maimed, or your life could be lost, depending on how depraved your country is, but they still won’t be able to get your bitcoins.
How Bitcoin will exist
Assumption: A full-scale world war and capital controls.
With these two assumptions, how to continue mining to get bitcoin? Remember that mining is necessary to keep the network functioning properly – because mining is actually the act of verifying and confirming transactions.
Obviously, any country that enacts a modern version of capital controls could ban Bitcoin mining within its territory. So how will the network work if the major economies are all fighting each other?
One party may decide to use Bitcoin as a financial weapon. If some countries believe that the operation of the Bitcoin network will financially weaken their adversaries, game theory suggests that they may allow miners to exist. However, this is naturally a fragile relationship, and if the state decides that mining Bitcoin has served its purpose, it may ban it and confiscate any associated machines.
Alternatively, in any conflict there will always be neutrals – neutrals that reap substantial economic rewards by allowing warring parties to coexist within their borders. Switzerland did not participate in any of the world wars. Switzerland is not inherently rich in natural energy, but imagine another country that is rich in natural energy (such as hydro or geothermal) decides to take Switzerland’s neutral approach. This would be an ideal place for Bitcoin miners to operate. Miners will be heavily taxed, but at least they will be allowed to exist. Bitcoin can continue to grow, and neutrality will be the birthplace of a safe haven for crypto capital.
Finally, keep in mind that prior to 2013 — when ASICs were first commercialized — Bitcoin mining could be done using a personal computer. Needless to say, the network hash rate was much lower at the time, but the beauty of the self-correcting nature of Bitcoin’s network difficulty is that it created an activity for Bitcoin mining to revert back to where the average person could participate and profit, not just Just a game for well-capitalized mining companies. If commercial mining were banned (expressly or implicitly), many individuals would still be involved and the network would still function.
Readers may also be frustrated if the economic war escalates and I don’t provide a price forecast. The moment when the war becomes completely complete for both sides is the moment when you lose all options to protect yourself financially. The fiat price of Bitcoin is no longer the same thing. Who cares how much USD/EUR/JPY/CNY/RUB etc. to buy one bitcoin when you are banned from exchanging fiat currency for anything other than domestic government bonds?
At that time, I expected the Bitcoin price to shift from fiat to oil. Oil is the energy that drives modern civilization. The ownership goal of Bitcoin is to maintain continued purchasing power over oil. “Bitcoin per barrel of oil” will be the new exchange rate.
Don’t twist what I mean.
My goal is to maintain financial flexibility amid the vagaries of war. Never keep 100% of your financial capital in one monetary instrument, be it Bitcoin, domestic fiat currency, bonds, stocks, real estate, commodities, or gold. However, your opportunity to transfer fiat assets to Bitcoin and other “real” assets only exists today, and may not exist tomorrow. Remember this.
AppendixCPI Source DataWar Bonds Source DataCPI and Consol Source Data
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/why-is-bitcoin-the-best-safe-haven-asset-on-the-brink-of-war/
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