Paul Brody, global blockchain leader at Ernst & Young, says that if Bitcoin were to become a global monetary standard, it would be an ‘absolute economic disaster’. Also, Brody shares the altcon he thinks will be the star of the future and why.
“If bitcoin were a global standard, it would be an economic disaster”
The leading cryptocurrency Bitcoin is by default considered a deflationary asset in the digital space. What this means in the crypto world is that its supply is limited, and as investors buy and hold Bitcoin, supply decreases and prices increase. Paul Brody says in a recent interview:
Deflationary systems like Bitcoin are bad for the economy. I don’t think people devote nearly enough time and attention to discussing why. If Bitcoin were to become a global standard, it would be an absolute economic disaster. And there are mountains of evidence.
Deflationary assets are particularly dire as global monetary standards during economic slowdowns. Brody notes that the gold standard failed for some reason. In this context, he adds that one of the clearest examples in the past is gold. Paul Brody explains his views as follows:
There is evidence from before WWII that deflationary systems like gold were disastrous during economic slowdowns. This is because it is a deflationary model. If you believe your currency will be worth more tomorrow than it is today, your incentive is to save it, not spend it. This leads to a collapse in demand. This triggers further declines in the economy and makes people even more paranoid.
This is what Brody calls the ‘death spiral’ for the global economy. Brody said, “At the start of World War II, nearly every major industrial country is abandoning the gold standard. “The evidence shows that the sooner you abandon the gold standard, the faster your economy will recover.”
Paul Brody: Bitcoin is digital gold!
Many proponents of Bitcoin refer to the cryptocurrency as gold 2.0. Brody finds this analogy fair. “Bitcoin is digital gold. “If you wanted to take the properties people love of gold and recreate it in a digital system, you would make Bitcoin,” he says. Brody continues his explanations as follows:
In many ways Bitcoin is better gold than gold. The only downside is you can’t bury it in your backyard. But if we go back to the gold standard, that won’t be a good thing.
Bitcoin’s popularity has grown over the past decade. Many of its advocates presented it as a solution to the current global monetary policy system. However, according to Brody, it is worth being cautious about arguments for adopting a Bitcoin standard. The famous leader makes the following assessment:
If the economy in which it is operating is growing faster than the money supply, the system is fundamentally deflationary. If the Fed increases the money supply by 1% a year, we basically have a deflationary system. It is true that the number of dollars in the system has increased slightly. But the economy is growing even faster, resulting in a deflationary cycle in which available goods and services will grow faster than the number of dollars that follow them. And therefore, the prices of goods and services will have to really fall.
How persistent is the current inflation problem?
There are fears of inflation and whether the Fed will be able to contain it with aggressive rate hikes. This triggered great volatility in the broader markets. However, Brody disputes this narrative and comments:
During the pandemic, we went through a major restructuring of the global economy. Overnight, we have moved from a predominantly services-focused global economy to one focused on goods. In that one year period, we’ve restructured the entire global economy, from making things to buying things. Now we turn and do the opposite.
The world has experienced multiple major restructurings of the entire global supply chain. And this time, he adds, it has come with a large amount of government incentives. According to Brody, the idea that the global economy could come out of this on a soft landing and without inflation is unrealistic. But at the same time, the idea that the world will face stagflation similar to the 1970s is also uncertain. Paul Brody explains this issue as follows:
I’m still in what I would call a team temporary. After the Second World War, we experienced a similar global restructuring. We went from making loads of guns and telling people ‘don’t buy war bonds and spend them’ to ‘war is over, let’s party’. And the world, especially the USA, has gone through a pretty brutal war with inflation. It took almost three years and peaked at 18%. This was not the beginning of a long-term recession. This was a temporary event resulting from the massive restructuring of the entire global economy.
The famous leader is seeing signs that inflation may have peaked above 8% in the US this year. “The post-WWII inflation cycle was about three years,” Brody said. We have left a year behind in the inflation cycle. There is good evidence to believe that the cycle may have peaked around 8% and it will gradually decrease,” he says. Brody says there is the possibility of a slight recession. But he adds that unemployment will likely remain extraordinarily low.
Will Ethereum take the lead?
However, despite Bitcoin being the world’s largest cryptocurrency, there are some red flags regarding its future. Brody comments on this:
The main red flag is that basically Blockchains are tech ecosystems, not just digital assets. And the big red flag around Bitcoin is that tech ecosystems live and die by the number of developers building on products and services. Most of this does not happen with Bitcoin.
Most of the development and engineering work takes place in the Ethereum ecosystem. He adds that while Bitcoin seems to be doing well, there are concerns about its long-term future. Overall, Brody does not see a multi-chain future, saying that Ethereum is the most likely ecosystem to take over everything. Based on this, he says:
Network effects mean that the largest ecosystem tends to gain over time. Ethereum is the largest ecosystem. If you’re trying to start a business, you want to build and distribute your business into the ecosystem with the most cash, the most liquidity, and the most investors.
Brody likens Ethereum to the internet. He points out that the world doesn’t have 20 different network standards. The famous leader said, “If you go back 30 years, the internet protocol was for connecting different types of networks. Today, there are no different networks. There is only the internet,” he says.
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