Bitcoin as a global standard would be an “absolute economic disaster” – Ernst & Young’s global blockchain leader

(Kitco News) If Bitcoin were to become a global monetary standard, it would be an “absolute economic disaster,” 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 cryptocurrency world is that the offer is limited – set at 21 million tokens that will ever be minted – and as investors buy and hold Bitcoin, the offer decreases and prices increase.

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

Deflation assets are particularly terrible as global monetary standards during economic downturns. 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 before World War II that deflationary systems such as gold are catastrophic during economic downturns. And the reason for that is in a deflationary model. If you think your currency will be worth more tomorrow than it is today, your incentive is to save “It does not use. And it leads to a collapse in demand, which in turn triggers a further downturn in the economy, which makes people even more paranoid,” Brody described.

This is what Brody describes as “a death spiral” for the global economy. “In the run-up to World War II, almost all major industrialized countries are leaving the gold standard. Evidence shows that the sooner you leave the gold standard, the faster it is likely that the economy will recover,” he said.

Many supporters of Bitcoin refer to the cryptocurrency as gold 2.0, and Brody sees this analogy as fair. “Bitcoin is digital gold. If you wanted to take the properties people love by 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 that you can” not bury the one in your yard, “he said.” But if we end up back to a gold standard, it will not be good. “

With Bitcoin’s popularity growing over the last decade and many advocates calling it a solution to the current global monetary policy system, it is worth being wary of arguments that require the adoption of 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 increases the money supply by 1% a year, we have a fundamentally deflationary system. It is true that the number of dollars in the system goes up a bit, but the economy grows even faster “, which will lead to a deflationary cycle where the available goods and services will grow 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?

Fears of inflation and concerns about whether the Federal Reserve may limit it with aggressive rate hikes have triggered massive volatility in the broader markets. However, Brody disputes this narrative.

“During the pandemic, we underwent a massive reconfiguration of the global economy. Overnight, we went from a global economy that was strongly focused on services to one focused on goods. Within a year, we reconfigured the entire global economy from doing things to buying. thing, “said Brody. “Now we turn around and do the exact opposite.”

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

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

“I’m still on what I would call the team transient. After World War II we had a similar global reconfiguration. We went from making a lot of weapons and telling people ‘not to use and buy war bonds’ to ‘the war is over, let’s party’. And the world, especially the United States, went through a rather brutal battle with inflation. It lasted for almost three years, reaching a peak of 18%. It was not the beginning of long-term stagnation. It was a transient event as a result of a massive reconfiguration of the entire global economy. “

Brody sees signs that inflation may have peaked at over 8% in the US this year. “This inflation cycle after World War II was about three years. We are a year into an inflation cycle. There is good evidence to believe that the cycle may have peaked at around 8%, and it will slowly decline,” he said.

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

Ethereum to take the lead?

But despite the fact that Bitcoin is the world’s largest cryptocurrency, there are some red flags regarding the future.

“The most important red flag is that blockchains are not just digital assets, they are technology ecosystems. And the big red flag around Bitcoin is technology ecosystems that live and die by the number of developers who build products and services on top of them. And not so much of it happens in Bitcoin, “Brody said.

Most of the development and engineering work takes place in the Ethereum ecosystem. And while Bitcoin appears to be doing well, there are concerns about its long-term future, he added.

Overall, Brody does not see a future with multiple chains, and predicts that Ethereum is the most likely ecosystem to take over everything.

“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 distribute your business in the ecosystem with the most money, 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 to connect different types of networks. Today, there are no different networks. It’s just the Internet,” he said.