History Repeats: Time to Party like it’s 2013

Bitcoin

The following is an extract from Chapter 3 of my new book, ‘Crypto Revolution: Bitcoin, Cryptocurrency and the Future of Money’. I wrote this book to explain to everyday people why bitcoin and cryptocurrency exists today.

I wrote it to give some context and background. I wrote it to help people understand what’s going on and how to become a part of the biggest wealth creation opportunity in history.

This particular extract explains the geopolitical turmoil of 2013.

There was a run on banks in Cyprus. Greece was close to default. There was fear, uncertainty and doubt (FUD) everywhere.

‘If [Cyprus and Greece] were to default, it would bleed out to the global banking system. Again, this would likely result in a systemic failure, which would probably result in another GFC.

It was an incredibly tense, albeit brief period where it really did look like GFC 2.0 would strike. It was looking like another banking system collapse in Europe, triggered by Cyprus, fuelled by Greece and then swiftly caught by the rest of the world.

This was all while countries like Iceland, Ireland, Italy, and Spain were all still reeling from the first GFC. And the US attempts to stave off another crash and crisis on home soil were resulting in levels of money printing by the US Fed like it was Monopoly money.

Just to make it all worse, earlier in 2013 the US had passed legislation called the American Taxpayer Relief Act of 2012 to try and avoid falling off the ‘fiscal cliff’.

This was a potential situation where expiring tax cuts and cuts to government spending would send the US into further economic decline, into a recession, and further damage an already broken down system.

While they avoided the fiscal cliff, things weren’t rosy for the US in 2013.

The US government debt ceiling is a law created by US Congress. And in 2013 the debt ceiling was at US$16.4 trillion.

But in 2013 the US was on track to hit their debt ceiling. If they hit the ceiling then it would effectively shut down government. President Obama made note they would not be able to pay wages to government employees, and the government would default on its obligations.

Obama and Ben Bernanke, (amazingly, still) Chairman of the Federal Reserve both pushed for the debt ceiling to rise, to allow the government to continue to function. The debt ceiling did get a lift in May, to US$16.7 trillion. But they quickly approached it again.

Estimates were that around October/November the US government would stop paying their obligations and they too would default. And in case you don’t remember, the US government actually went into partial shutdown mode on 1 October because they couldn’t pay their bills or keep the figurative and literal lights on.

Take two for some deja vu

What is a ‘debt ceiling’? It’s a term you’ll hear a lot about in the next few weeks. But how does it really work?

An easy way to think about it is like a credit card.

When you get a new one it comes with a predetermined limit. You can spend on it and spend on it. And ultimately you need to pay it back.

But some people don’t. They spend up and then just manage the payments to avoid default. And if you manage your payments well enough you can stay just off the maximum limit but never actually pay it off.

The card companies love this. It means no defaults, but lots of interest for them. And sometimes you can increase your limit by asking. You can do this usually once every couple of years.

That means bigger purchases. And more debt to service. If you’re not good at managing your debt (like the US) then you hit your limit. Now sometimes you can manage it back down and get it to a serviceable level for a while.

But what happens next is ingenious. The credit card company will just raise your limit for you. You don’t even have to ask. They do this so you can buy even more stuff…and ultimately pay more interest.

The higher limit leads to more spending. But there’s only so high the card company will raise your limit. Eventually it will stop when your debt repayments are too high to pay back, ever. And soon enough you hit the maximum limit. At this point you have some choices to make.

1. Find a way to pay off the debt. Sell some things. Borrow from someone else to pay it off (debt recycling). Or figure out how to cut your spending to pay it off.
2. Default. Don’t pay it off. But do that and soon enough the debt collectors will be after you. And it destroys your credit rating and any future hope of borrowing.

Pushing up debt limits and spending more only ever leads to trouble. But this is exactly what the US has done.

Luckily it’s the US government — you are the credit card company. You can spend and spend and spend on debt. And when you reach your limit you just raise the limit higher.

Repeat cycle.

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The ultimate alternative financial system

However, even the government sometimes has a limit. Congress may decide that enough is enough and refuse to raise the limit (debt ceiling) any higher. This is what happened in 2013 and is what’s happening again now.

The government needs to raise the debt ceiling again. But parts of congress say no, no more.

This is exactly what happened in 2013. And for a brief moment things actually shut down. But then Congress got scared. They raised the debt ceiling.

The situation now is equally as dire. As reported by Reuters,

The Treasury Department has said the ceiling must be raised by Sept. 29. If not, the government would be unable to borrow more money or pay its bills, including its debt payments. That could hurt the United States’ credit rating, cause financial turmoil, harm the U.S. economy and possibly trigger a recession.’

The likelihood is that they will eventually raise the debt ceiling…again. The consequences if they don’t are truly dire for the US and President Trump. Good luck building ‘The Wall’ then.

But raise the debt ceiling now and the problem will come back once more. Meanwhile as the government borrows more and leads the country to a dark future the price of bitcoin again continues to surge.

It’s no coincidence that bitcoin flourishes when traditional fiat monetary systems flounder. If the US economy defaults, loses its credit rating and goes into recession, bitcoin’s price will soar. If there’s more geopolitical turmoil (which is likely), bitcoin’s price will soar.

Bitcoin and cryptocurrencies are the ultimate alternative, decentralised, anti-government financial system. It’s not too late to get involved. In fact before things get worse in the world, perhaps it’s time for you to get into cryptocurrencies.

Regards,

Sam Volkering,
Editor, Australian Small-Cap Investigator

Sam Volkering

Sam Volkering is Editor for Money Morning and its small-cap, cryptocurrency and technology expert. Find out what he has to say here with all his latest articles.

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