The Medicine That Feeds the Disease

A painkiller does not heal you. It hides the pain so you can keep going. The problem underneath is still there. Sometimes it even gets worse, because you stop resting and keep straining the injury.

This essay argues that modern monetary policy works in much the same way. When the economy hurts, central banks reach for cheap money. The pain fades. Markets calm down. But the deeper problem does not go away. It gets pushed into the future, and it grows.

We touched this idea once before, in our essay on the Bitcoin halving, where we wrote that the cure feeds the disease it claims to treat. This piece follows that thread to the end.

One note before we start. What follows is one school of thought, not settled fact. It comes mostly from the Austrian tradition in economics, and many mainstream economists disagree with it. We will give their side a fair hearing too.

Naming the Sickness

Start with the illness itself.

In the Austrian view, the boom is the real problem, not the bust. Here is the idea. When a central bank pushes interest rates below their natural level, borrowing gets cheap. Businesses then start projects that only look profitable because money is so cheap. Ludwig von Mises described this back in 1912. Friedrich Hayek and later Murray Rothbard built on it.

These weak projects are the injuries. Sooner or later, reality catches up. The projects fail. The bust arrives.

Here is the key twist. In this view, the bust is not the disease. The bust is the cure. It clears away the bad bets and lets the economy heal. It is painful, yes, but it is necessary.

So what does the central bank do when the cure begins to work? It reaches for the painkiller again. More cheap money. And the bad investments never fully clear out.

The Honest Other Side

Now the other side of the argument, because it is a strong one.

Most mainstream economists reject this story, or at least large parts of it. Their case goes like this. When a financial system freezes, doing nothing is not a neutral choice. It is still a choice, and often a disastrous one.

They point to the Great Depression. Milton Friedman and Anna Schwartz argued that the Federal Reserve made the 1930s far worse by letting banks fail and the money supply collapse. Ben Bernanke, who later ran the Fed during the 2008 crisis, built much of his career on that lesson. In their view, a central bank that acts as a lender of last resort stops a local fire from burning down the whole city.

The cost of not stepping in, they argue, is mass unemployment, falling prices that feed on themselves, and ruined lives on a scale that makes the bailout look cheap. This is not a weak argument. Any honest look at the painkiller idea has to take it seriously.

A Stronger Dose Every Time

So which story does the evidence support? Look at the pattern over the last thirty years.

In 1998, a single large hedge fund called Long Term Capital Management collapsed. The Fed organized a rescue worth about 3.6 billion Dollar. The message to the market was simple. If you are big enough, help will come.

When the dot-com bubble burst in 2000, interest rates were cut hard. When the housing bubble burst in 2008, the response was far bigger. The US bank rescue, known as TARP, paid out around 443 billion Dollar. The Fed also began buying assets on a huge scale, a policy called quantitative easing. It came in three separate rounds.

Then came 2020. The response to the pandemic dwarfed everything before it. The Fed's balance sheet, a rough measure of how much it had created and bought, climbed to nearly 9 trillion Dollar.

Notice the shape of it. Each rescue is bigger than the last. Each dose has to be stronger to get the same effect. That is exactly what you would expect from a painkiller you keep taking.

The One Time We Chose the Cure

There is one famous exception, and honesty means we have to look at it.

In 1979, inflation in the US was out of control. Paul Volcker took over the Fed and did the opposite of reaching for a painkiller. He raised interest rates to brutal levels, above 19 percent. The economy fell into a sharp recession. Unemployment rose. It hurt a lot of people.

But it worked. Inflation was broken. The disease was actually treated, not just hidden.

Volcker's stand cuts both ways. It shows that the correction is genuinely painful. It also shows that it is possible, and that it can cure something a painkiller never could. The question the rest of this essay asks is why we so rarely choose it.

But Do We Not Need Inflation to Grow?

Here the mainstream raises a fair objection. Do we not need a little inflation to grow at all? Many economists say yes. A gentle rise in prices, they argue, nudges people to invest and spend rather than sit on their cash. A hard money system, they warn, chokes growth and invites deflation.

It is a serious point. But history makes it more complicated.

Look at the classical gold standard era, roughly 1870 to 1914. Money was tied to gold and could not be printed freely. Yet this was one of the great growth periods in modern history. Industry expanded. Railways and electricity spread across whole countries. And prices often drifted gently downward, year after year, while the economy still grew. Cheaper goods that come from real progress are not the same thing as a debt collapse. That difference matters.

We should not paint that era as perfect either. It had real flaws. There was no lender of last resort, and banking panics hit hard, in 1873, in 1893, and in 1907. The panic of 1907 is part of what convinced America to create the Federal Reserve in the first place.

But look closely at how those older failures worked. When a bank lent out more paper money than it held in gold, and depositors lost trust, they lined up to pull their money out. If the bank could not pay, it failed. The people who banked there were hurt, and that was real. But the damage stayed mostly local. The bad bank cleared away, and the rest of the system moved on.

Compare that to today. When a big bank fails now, the central bank often creates new money to save it. The local fire gets put out. But the risk does not vanish. It gets spread across everyone who holds the currency. And it teaches banks a dangerous lesson. If you are large enough, you can take big risks and let someone else pay for them. Economists call this moral hazard, and too big to fail.

Who Pays for the Painkiller?

So who actually pays for the painkiller? This is where the story turns personal.

When central banks create money and hold rates down, that money does not reach everyone at the same time or in the same way. It tends to flow first into assets, into things like stocks and property. So the people who already own assets watch their wealth rise. The people who mainly hold savings and earn a wage do not.

The data supports this. In the US, the richest 1 percent now hold around 31 percent of all net worth. Even the Bank of England admitted, back in 2012, that its bond buying had pushed up asset prices and mostly helped the households that already owned them. The gap between rich and poor opens wider, and loose money is one blade of the scissors.

This is exactly where Bitcoin educators like Blocktrainer, the German commentator Roman Reher, aim much of their criticism. He argues, and this is his opinion rather than a neutral fact, that today's money system quietly moves wealth from ordinary savers toward those sitting closest to the money tap. On this point, many people in the Bitcoin space agree with him.

And how much money are we talking about? Look at what happened after 2020. In the US, the M2 money supply grew by roughly 40 percent in about two years. A large share of all the Dollars that exist today were created in that short window. Europe did much the same thing. The European Central Bank ran its own enormous program, buying assets and expanding the euro supply through its pandemic package. The Fed and the ECB were playing the same game on two continents.

Here is a way to feel this in daily life. As technology improves, things should slowly get cheaper. Think about the baker on your street. Over the years the baker gets better ovens and faster machines, and can make more bread rolls of the same quality with less effort. Now step one link back down the chain. The farmer who grows the wheat runs bigger and more efficient harvesters every decade. Fertilizer improves. New grain varieties yield more from the same field. Every part of making that bread roll gets more productive over time.

So the bread roll should get cheaper. How can it possibly get more expensive, year after year? In large part, because more money keeps being created. The growing money supply pushes prices up faster than better technology can push them down.

You can see the honest version of this in the products where progress runs ahead of the money printer. Look at laptops and other electronics. Each year you get more computing power for the same price. Put another way, a laptop that cost a small fortune ten years ago now costs a fraction of that for the same performance. That is what prices look like when technology is allowed to do its work. It is a quiet reminder of how much cheaper many everyday things could be, if the money supply simply held still.

Now think about a saver. Someone who worked, earned their Euro or Dollar, and set part of it aside over many years. That money is stored labor. It is time and effort, turned into savings. When the money supply expands quickly and prices rise, that stored value quietly shrinks. The saver did nothing wrong, and still ends up poorer in real terms. In a sense, a slice of the life they spent earning that money is quietly taken back.

There is a deeper mechanism under all of this, about who receives the new money first and who receives it last. It is called the Cantillon effect, and it deserves an essay of its own. We explore it in full in Closest to the Source.

To be fair, defenders of the system have an answer to all this. They say savers are not forced to hold cash, that they can put their money into assets that grow, and that a little inflation keeps money moving through the economy instead of sitting idle. That answer works well for people who already have assets to buy. It works far less well for those living closer to the edge.

Can Hard Money Break the Cycle?

This brings us to hard money, and to Bitcoin.

Bitcoin has a fixed supply. There will only ever be 21 million coins, and the schedule that releases them cannot be changed by any government or central bank. This sits at the heart of what writers like Saifedean Ammous call the hard money argument.

Set the price aside. Set aside whether you would ever own any of it. Just look at what a fixed supply does to incentives.

If no one can print new money, then no one can be rescued with new money. So ask yourself a few plain questions.

What happens to a bank that lends far too recklessly, if there is no printer standing by to save it?

What happens to a giant company that makes a bad product, if no government can quietly fund its survival?

What happens to a state that spends far beyond its means, if it cannot simply inflate its debt away?

Under a hard money standard, the answer to each is the same. They face the consequences of their own choices. The mistake is not spread out across every saver who holds the currency. It stays with the people who made it.

There is a second effect, and it runs deeper than any single rescue. When people know that no printer will save them, they act differently from the very start. A bank lends more carefully. A company keeps a real cushion instead of betting everything and hoping. A government weighs each Euro or Dollar it spends, because it cannot quietly paper over the bill later. Hard money does not only punish bad decisions after they happen. It steadily pushes everyone toward sounder ones before they happen. In that sense, a money that cannot be printed disciplines the people who use it. It forces sound business rather than merely rewarding it, because the reckless path is no longer cushioned by someone else's money.

That changes what survives. Not the biggest. Not the best connected. But the product that people actually choose to pay for, at a price they agree is fair. The consumer decides, not the money printer.

None of this is a promise that Bitcoin is easy, or safe, or right for any particular person. That is not the point here. The point is narrower. A money that cannot be printed changes who carries the cost of failure. And that is a genuinely different set of rules to live by.

The Question Worth Sitting With

Return to the painkiller one last time.

A painkiller is not evil. Sometimes it buys you time that you truly need. But if it becomes the only tool in the cabinet, and the dose keeps climbing, one of two things eventually happens. Either the medicine stops working. Or someone finally decides to treat the cause instead of the symptom.

For about a hundred years, we have mostly chosen the medicine. The question Bitcoin raises is not whether the painkiller works. It clearly does, for a while. The real question is what we are storing up by never letting the patient truly heal.

That is a question worth sitting with. We will keep following where it leads.