Key facts: Economic planners act as if they are omniscient. A rules-based economy, like bitcoin, gives greater predictability. State intervention in the economy, far from solving problems, generates new distortions that justify further intervention, perpetuating a cycle of dependency and economic imbalance. What happened this week in international markets is a compelling proof of this and a new argument against the central bank. Although we can trace the panic that triggered this Black Monday in the world markets to different causes (wars, conflicts and political uncertainty in different regions of the world; unexpected macroeconomic results), taking the example of the so-called carry trade of the Japanese yen we can see how at the core of the global economic situation there is a history of government intervention that continues to be a source of uncertainty. postponing and aggravating the inevitable and natural outcomes of economic interaction.
Historically, the Bank of Japan authorities have intervened to prevent an overly strong yen that would harm exports. To achieve this, they have used a brutal debt issue (300% in its ratio to Gross Domestic Product), and by maintaining interest rates equivalent to zero to stimulate, again, indebtedness. A weak yen has mixed effects on the Japanese economy. While it increases import costs and pressures inflation, which harms consumers, it also benefits exporting companies by increasing their profits in yen. However, since 2022, Tokyo has intervened to stop the fall of the yen, given that its depreciation has made imports of fuels and raw materials more expensive, negatively affecting households and retailers. In its latest measure, the Bank of Japan raised interest rates to 0.25%. While it may not seem like much, it was an unexpected increase. This caused thousands of international investors, who had taken advantage of the interest rate differential between Japan and the United States to borrow free money in yen and invest in other markets, to rush to liquidate their assets in order to pay off their debts before the cost became higher than expected. This caused the prices of the assets in which they were invested to plummet.
Japan interest rates over time. Source: TradingView. The Bank of Japan's intervention not only hurt its citizens with devaluation and inflation, but also created a widespread collapse of global marketsIt is easy, when you are in a position of power, to fall into the so-called Hayekian fatal arrogance of economic planning. But that means forgetting that market information is chaotic, asymmetrically distributed, and each market agent will make the decision that he believes is most convenient for himself based on the information available to him. And the result of this is impossible to predict. Interventionist policies, such as wage and price controls, interest rate manipulation, and so on, distort natural market price signals, leading to inefficiencies. When these are unexpectedly modified, they cause problems for everyone, even more so in a globally interconnected world. In the fiat model, where the Central Bank can play God, raise and lower the cost of money, issue huge amounts of debt to “save” the economy, mortgage the future through fiscal deficits, or intervene to “rescue” banks and companies of its choice, reality is distorted. Actors who would otherwise have gone bankrupt and learned valuable lessons about responsibility are artificially kept afloat. And the worst thing is that to do so, Responsibly generated value is extracted from other citizens through increases in the money supplycreating a society of impoverished adolescents always under the care of state paternalism. But, more than that, as America's unrestrained debt suggests, all state intervention has done is sweep problems under the rug, leaving an unmanageable burden of difficulties for future generations.
Debt levels of the world's major economies and their relationship to their gross domestic product. Source: USDebtClock. This is the difference between a rules-based economy, rather than a ruler-based economy. When the rulers are in charge of intervening to fix the problems of their previous interventions, they modify the rules of the game in such a way that the market suffers. With a rules-based economy like the one proposed by Bitcoin, where the rules of the game are agreed upon and guaranteed by each member, all economic agents share the same information, which provides predictability, enables economic calculation and the reality of failure is acknowledged when it happens, along with its valuable lessons. Not only are there no bailouts for the irresponsible at the expense of the responsible, but the arbitrary subtraction of value through monetary emissions is made impossible. Each good must be covered up as far as the blanket reaches and create value from there. It can be argued, again, that Bitcoin reacted with equal or greater volatility than the rest of the market to Japan's interventions. And yes, this will probably happen for a while until it is internalized that Bitcoin is the new «global denominator of wealth.» But while there was an absorption of market fear in the price during an unforeseen circumstance, the Bitcoin network continued to function with its immutable rules, maintaining its predictability. Beyond whether Bitcoin should or should not be the basis of the next monetary system, the events that occurred this week are a good opportunity for the reader to consider the existence and need for central banking and its interventionist role in the economy. Does it do more good than harm? It is a question that each person must undertake to answer. In the meantime, we must remain alert, as if in danger, to the next economic intervention by any government in the world that could cause havoc in people's lives.