“Thank God for Bitcoin…that transcends the irresponsibility of governments,” Senator Cynthia Lummis said.
Sen. Lummis’ remarks came in response to the Senate’s approval of a bill to increase the U.S. debt limit by $480 billion.
“Time and again…presidents of both parties have run up the debt irresponsibly with no plan to address it.”
Bitcoin is a blessing of God amid irresponsible policies at the government level, said Senator Cynthia Lummis in a speech to the Senate. The Senator provided her perspective on how Bitcoin can help people stay immune to “irresponsible” monetary policies.
“One of the reasons I became so interested in non-fiat currencies is because they’re not issued by a government. Bitcoin is not issued by a government.”
On October 7, the Senate approved a bill to help the U.S. avoid a default on its debt in the next few weeks. The agreement enables an increase of $480 billion to the debt limit, “a sum the Treasury Department estimates will allow it to pay bills until December 3,” CNBC reported.
“Time and again, in the U.S. house of the senate, presidents of both parties have run up the debt irresponsibly with no plan to address it,” Lummis added. “So thank God for Bitcoin…that transcends the irresponsibility of governments, including our own.”
Lummis also warned of the dangers of embarking upon irresponsible debt management, including the dollar’s devaluation. She said that both parties are “truly irresponsible” if they fail to act right and let the dollar decline, in which case Lummis would like to give Americans an option.
“In the event that contingency occurs, I want to make sure that non-fiat currencies, not issued by governments, not beholden to political elections can grow, allow people to save, and be there in the event that we fail at what we know we have to do,” the Senator claimed.
I have spent my career in financial markets, focusing on risk analysis and trading with a viewpoint that is honed through the prism of credit. I believe credit markets to be the most important, most informed, and unfortunately the most misunderstood of the various risk asset silos.
Credit analysts are pessimists by nature. They always ask, “How much can I lose?” as opposed to equity analysts, who seem to believe trees grow to the moon and growth can accelerate forever. Credit analysts prefer math, downside sensitivity analysis, priority of claims certainty, and can calculate bond price moves — on the fly — from changes in credit spreads.
I too prefer statistics to subjective analysis. Math is the base layer of language, yet many investors are illiterate in this capacity. While this leads to tremendous capital structure arbitrage opportunities for credit-focused hedge funds (my previous life) who trade credit against the equity and equity derivatives of a given company, it is often the retail stockholder who gets used as the cannon fodder.
That is life. Play stupid games, win stupid prizes. If the ill-informed investor does not understand credit and bonds/pricing yet invests in the (subordinate claim) equity of a levered company, he/she is exposing themselves to a potential world of hurt.
With that disclaimer out of the way, I would like to focus on the current Evergrande situation in China and what it means for global risk assets. I will examine the potential effects of contagion in the domestic credit markets in China, contagion in risk assets globally, as well as some potential macroeconomic concerns. I also conclude that the credit contagion implications for sovereign credits is increasing, and that BTC is the perfect insurance against declining fiat credit quality.
Don’t overthink this. BTC is sovereign credit insurance (long volatility) with no counterparty risk.
Size Of Potential Default
In the context of recent meaningful global defaults, the Evergrande debt is not overly concerning. Total liabilities at Evergrande are $300 billion, of which $200 billion is pre-payments for housing from Chinese citizens. The balance of the exposure is debt, both onshore bank and public debt, as well as offshore debt to international investors. Compare this to Lehman Brothers’ default $600 billion of on-balance-sheet exposure, as well as multiples of that in off-balance-sheet derivatives and credit default swaps (CDS). Goldman has recently calculated potential off-balance sheet liabilities for Evergrande at $155 billion (one trillion yuan) in “shadow-banking” exposure. This is worrisome because this is more like a Lehman moment but again, it is not catastrophic in the global context.
The contagion risk at Lehman was easy to understand, as the whole system was on the brink due to counterparties whose insurance contracts (CDS contracts) were not able to be claimed. Remember, the rumor was that if AIG was allowed to fail, Goldman would fail too since it had purchased so much insurance from AIG in order to lay off its exposures (both client exposures as well as principle exposure).
Another global default which had macro implications was the Greece restructuring in 2012. That was on about $200 billion in debt, and while there were trade claims and other non-debt obligations to consider, the overall restructuring was small compared to Lehman, but still two times as large as Evergrande (prior to adjusting for economic growth).
Therefore, as the size of a default goes, I feel this should largely be contained to the Chinese high-yield (HY) market and other related credit markets. Total global debt is $400 trillion. I know that I am old enough to remember when a $100 billion default in public debt was meaningful (as with the “LDC debt crisis” in 1988, for example) but with all of the growth in debt, the truth of the inescapable global debt spiral, and the liquidity that the global central banks are flooding into the market, I believe the contagion risks are low. Not zero, but certainly nothing like a Lehman moment. The shadow banking concerns should be contained in China and in banks with Asian credit exposure, so watch bank certificates of deposit for names like Standard Chartered and HSBC for indications it is spreading.
Reaction In Chinese HY And IG markets
Looking only at the Chinese HY market, one can feel the pain experienced in the price action of the bonds. It would more accurately be defined as the Chinese “distressed debt index,” since the market is largely made up of property developers and, of those developers, Evergrande accounts for about 15% weight in the index. The index yields over 14% (compared to the U.S. HY index at about 4%).
However, there are some meaningful considerations, including some bond math. Firstly, the U.S. HY market is far more diversified by industry, has far more diversified and experienced players, and has a true distressed debt buyer group that lives under the HY market. In the event that a credit becomes stressed or distressed, U.S. distressed debt buyers swoop in to fill the buyer gap from traditional “going concern” HY buyers. The Chinese HY market is younger, is far less diverse, and far less experienced in terms of a learning history.
The bond math consideration is important, too. When debt trades at less than 50 cents on the dollar (Evergrande debt is at 25 cents on dollar), a calculation of yield-to-maturity (YTM) makes little sense and provides a garbage comparison. The debt is no longer trading to maturity value (100 cents to the dollar) but rather to a recovery value. In other words, in the case of Evergrande debt trading at 25% of claim, the buyers are calculating a return on recovery value, rather than the internal rate of return (IRR) or YTM on the cash flows, including a 100% principal repayment. So, looking at the 14% YTM of the Chinese HY market is sending out a flawed comparison.
In contrast, the investment-grade (IG) corporate debt market in China has held up rather well. Credit spreads have actually narrowed, reflecting no contagion concerns. One could argue that the IG market views the systemic risks as being reduced. I would not draw that immediate conclusion, but suffice to say that the IG market would be widening meaningfully if there were true systemic concerns.
Longer-Term Contagion Risks
The true contagion risks in China may be more psychological. Confidence in land as a store of value may be impacted. Real estate has always been an important investment in a portfolio in China and over one million Chinese consumers may lose a large portion of their prepayments. The trickle-down impacts include a slowing domestic economy (land sales accounted for 8% of GDP) together with reduced consumer confidence. Lower consumer consumption would be a natural impact.
There was also a noticeable widening of default insurance on five-year China CDS. In the eyes of the default insurance markets, China default risk is now more reflective of a BBB-rated credit rather than the single-A S&P rating. This is important, since the world’s second-largest economy is trending toward a junk-rated credit. One more rating downgrade (in the eyes of the market, to BB) and it is now a HY borrower. Wow!
Finally, it will be very interesting how China deals with the domestic claims versus the international lenders. I know how a capitalist court would deal with this situation. There is precedent in the West and that gives the distressed debt investors a well-worn roadmap. The CCP is a different animal and its “messing” with the priority-of-claims model that is law in the West may substantially increase its borrowing costs when international investors decide to avoid the Chinese exposure.
Also, think of China banning Bitcoin mining and how that is actually a gift for the West and the true flow of global capital. These two events may lay the groundwork for the further centralization (and control/abuse of capital) by the CCP versus the decentralized model that used to be embraced by freedom-loving Western countries. Markets are generally smart over the long term. In my opinion, there will certainly be long-term consequences.
How Does Bitcoin Fit In?
I have long argued that Bitcoin should be considered default protection on a basket of fiat currencies. If the second-largest economy is trading as a junk borrower in the eyes of the market, then the value of the insurance provided by bitcoin should increase as other, less important countries and credits are also dragged into the vortex of declining sovereign credit quality.
This is the far bigger issue in my mind. As noted in my paper (published by Bitcoin Magazine in April and linked here), the intrinsic value of BTC based on CDS of a basket of sovereign credits was over $150,000 per coin prior to the recent widening of CDS spreads. Since the intrinsic value of BTC increases when the spreads widen, that intrinsic value has now increased.
Some readers will say, “Well Foss, your thesis doesn’t hold any water then. BTC is acting like a risk-off asset.”
To which I respond, “The market for BTC still has its training wheels on. The market doesn’t understand that BTC is a longvolatility position. When you are short credit, you are long volatility. And BTC is a short credit position on a basket of sovereigns.”
Proceed accordingly. BTC is the best asymmetric investment opportunity (and hedge) I have seen in my 32 years of managing risk. Fiat is the ponzi.
“But Foss, they can print money to pay down the debt!”
This is true, but in a debt spiral, debt never matures, it needs to roll over. And when an auction fails and the debt does not roll, the receding tide will show who has been swimming naked.
All fixed income investors need to own BTC as insurance against inevitable fiat debasement (bonds are just a fiat contract), as well as declining sovereign credit quality.
This is a guest post by Greg Foss. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
A former drug and alcohol addict discusses our addiction to fiat money, debt slavery and how Bitcoin inspires him for the future.
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Although the general sentiment of the Bitcoin community and that of Bitcoin Magazine is one of hope and optimism, the real world is often not so straightforward.
One of our recent posts discussed the reality of addiction, and how this relates to the fiat world and debt. I believe that this is an important topic that touches nearly everyone. With drug and alcohol addiction widespread in the United States, almost everyone knows a friend or family member impacted. Addiction can also be found, in a way, in our fiat monetary system and the debt cycle it proliferates.
OtterBTC, a former durg and alcohol addict himself, and I discussed both of these topics in this podcast episode, so be sure to give it a listen, check out his article and read our interview below.
What’s your Bitcoin rabbit hole story?
I was fully introduced to Bitcoin during the mania of the bull run in late 2017. I bought a little coin and then watched the price fall into the bear market of 2018. At some point, I wanted to know more.
I started trying to find content in the space where I could learn. I remember listening to a podcast with Tim Ferris, Naval Ravikant and Nick Szabo and then another where Wences Casares was interviewed. I fell down the rabbit hole hard. I felt like a veil was being lifted from my eyes. I had previously been interested in gold and silver coins as valuable collectables, but this was different. The implications of widespread bitcoin adoption as a benefit to every person on the planet has kept me enamored ever since.
How has Bitcoin changed your life?
I am more hopeful and optimistic for the future today because of bitcoin. Even in all of the chaos around us, I still tend to have a glimmer in my eye knowing that bitcoin exists and there are advocates everywhere and more people being enlightened every moment. I always intuitively believed that centralized control over anything valuable — money, goods, services or even humans themselves, was the cause of much oppression in the world, but I never dug deep enough to understand the mechanisms behind how this control was wielded. And it all starts with the money.
My eyes are more open today. I take even more responsibility for my reaction to life today and I absolutely prefer to verify before trusting in what any person or institution puts forth as fact. Show me the incentives…
Your recent piece on addiction, fiat, debt and bitcoin was really interesting. Could you discuss some of the parallels you see between these things and what led you to write this article?
As I lay out in the article, our global economy is addicted to cheap fiat debt in an unsustainable way. The consequences cause huge distortions in markets that have rippling effects across society. Much of the populous acts with the objective of fulfilling high time preference (short-term gratification) goals. We are ever in fear that the prices of the things we want will go up, therefore we must get them now, so we take on debt to acquire such things.
Being in debt can be perceived as another form of slavery. Being underneath debt can feel like getting on a hamster wheel inside of a cage, where you stay active but do not realize your main objective is only to service the liability that you’ve been saddled with. This is a soul-sucking endeavor and leads to the degradation of the individual.
I was once enslaved to drugs and alcohol. It’s a desperate and demoralizing place to be. At many points I was only living to service the spell of the addiction that I was under. I had a moment of grace and took the opportunity to change my life, which I’ll forever be grateful for.
In writing the article, I wanted to share a bit of my story and give back and contribute a perspective to the community. Societal ills affect us all. Misinformation around money and the negative effects of debt seem to be shrouded in ignorance similarly to the way we as a society address drug/alcohol addiction and its associated stigma. I’d love to help shed light on both.
What are you most looking forward to in the Bitcoin space?
I’m looking forward to more widespread adoption and education. Millions more “lightbulb” moments. I want more people to feel their minds being blown as they interact with bitcoin, send their first transaction, and watch their savings increase over time. I’m looking forward to seeing people place more value on their time and in turn, spend that time with their families or doing what they love.
Price prediction for the end of 2021, and the end of 2030?
I’d say we see $100,000 before January 1, 2022. (I’m purposefully being bearish so as to not have any dashed expectations, haha.) Easy $1.5 million bitcoin price by 2030.
Coinbase’s sale of a junk bond with a total value of $1.5 billion shows that cryptocurrencies have gradually become mainstream.
Coinbase is expected to sell $1.5 billion in bonds. However, Moody’s Investor Services, a world-renowned credit ratings institution set Coinbase Global Inc.’s debt issuer rating to non-investment grade or junk grade mainly due to the uncertain regulatory environment and future competition.
Several analysts from Moody’s Fadi Abdel Massih, Donald Robertson, and Ana Arsov wrote in a report on Tuesday:
“Coinbase’s financial profile suggests investment-grade credit strength, but for now the uncertain regulatory environment and fierce competition offset these strengths.”
Coinbase sells two types of bonds, 7-year bonds due in 2028 at a coupon rate of 3.375% and 10-year bonds due in 2031 at an interest rate of 3.625%.
An industry research analyst from Bloomberg said Julie Chariell said that:
“The strong demand is clearly a big endorsement by debt investors.”
This bond issuance is a favourable event for the entire cryptocurrency industry and Coinbase. This product allows investors to directly participate in the benefits of cryptocurrency without investing in cryptocurrency and earn interest from it.
Since the bonds are one grade lower than the investment grade, Coinbase did not get the lowest borrowing cost. Generally speaking, the average yield of similarly-rated bonds is about 2.86%, which is lower than the interest rate of more than 3% this time.
Coinbase is not the first U.S. marketer to issue cryptocurrency-related bonds. As early as June of this year, MicroStrategy Inc. announced that the company plans to offer $400 million of senior secured notes to qualified institutional buyers to raise more capital to make more Bitcoin purchases.
As reported by Blockchain.News yesterday, Nasdaq-listed cryptocurrency exchange Coinbase Global Inc has announced its plans to raise new capital by issuing $1.5 billion aggregate principal amount of its Senior Notes to potential investors.
Instead of asking, why am I an alcoholic? I prefer to ask, how? As in, how did I become as hopeless as I once was and then how did I miraculously — slowly — progress to where I am today? What were the actions I took, the motivations for those actions, and the destructive patterns that arose and shaped the incentive structure for my reality? Most importantly, now that I am years into recovery and free of the bondage of active addiction, I constantly have to ask: What am I doing to continue to live freely in this new way? What will I do, what actions will I take, through service, self-care and human communion to continue on this more enlightened path?
I’ve stopped caring about why I became an alcoholic. The laundry list of causes looks the same for many of us. I started with family, genetics and some circumstances and all of that was just a roll of the dice. What’s important to me is how I reacted to all of that and how I continue to react to life today.
I was often motivated by fear before sobriety. Today, I have to be on alert for when a fearful story pops up in my head: “Some of the worst things in my life, never even happened.” — Mark Twain.
My alcoholism is clearer to me now, but what I’ve discovered more recently is that I didn’t know I had another addiction: fiat money.
I’m the “bitcoin guy” in my group of family and friends. Random conversations and text threads about current events regularly end up with me inserting a casual and sometimes not so casual, “Bitcoin fixes this,” or “Better buy some more bitcoin,” or “Good job on cutting out those costs … more bitcoin.”
When my brother sends me an article about how meat prices are skyrocketing and another about how lumber costs are going through the roof, I can’t help that, after some exchange, I inevitably conclude my assessment with: “It’s all a signal. Put your time and energy in something that can best store value across space and time — buy more bitcoin.”
We are operating in a debt-based global economy that acts very much like a chronic alcoholic/addict. We get increasingly into more debt, individually and collectively, and in order to service these debts, the powers that be would rather print money to service their aim, instead of allocating tax revenue effectively and practicing austerity. With the alcoholic/addict, abstinence is painful. If the world were to transition to a more sustainable monetary system, it would almost certainly come with pains too.
It is an unpopular decision in the nervous system when all of the sudden you deprive it of the substance it has relied on. If the populace is one big nervous system, then we have been living on debt and cheap money in an arguably unsustainable way. When an alcoholic/addict decides to get clean and sober and cut themselves off from the destructive behavior and substances they have been relying on, it can seem catastrophic for them. And in many cases, they need to be medically assisted in their detox or the process can be fatal. After the dust settles and their body is no longer dependent on the chemicals, the real work usually begins.
The incentive for the individual alcoholic/addict to get clean and sober is freedom from the disease. When they achieve this, they reap the benefits. Family and friends usually benefit enormously as well. Communities and society as a whole benefit from this.
Now let’s look at the incentives for the administrators of a monetary system, central bankers and governments. What are their incentives to administer a new, more fair monetary system? I’d argue that they have no incentive to level the playing field and bring up the disenfranchised — those most affected by modern inflationary monetary policy. Even if the mobs came for them, they have money and the means to get away. They have been living off the fat of the land. Why would they change the current structure? They privatize the gains and socialize the losses. Their decision-making is based on high time preference — short-term goals — and self-interested policy. In their world, rules change at their whim and they know how to act beforehand in order to come out on top.
Enter Bitcoin, a monetary network that is accessible to anyone in the world at any time, with no gatekeepers, intermediaries or central points of failure. The record of its transaction log is immutable and auditable by anyone. The supply of the asset is fixed. The issuance is awarded to those that expend their time and energy, the amount won commensurate with how much of their resources they expend. The disbursement of it is true trickle-down economics as those who have acquired it through provable work and energy expenditure, choose to sell it for other currencies, goods or services. This, in turn, enriches and compensates those that offer such goods and services, in exchange for their time and energy spent. Bitcoin is “engineered money.” It is a monetary network with rules but no rulers and is resistant to corruption by human fear and greed.
How did I get into Bitcoin? I was in the right place at the right time. I had experienced enough to be open to it. I had watched my parents get into debt, then bankruptcy, then divorce, then homelessness. I had experienced my own moral degradation and recovery. In 2016, a friend tossed me an old quarter and said it was made of silver. I had no idea. I quickly wanted to know about money. I soon found bitcoin.
Through this journey, I’ve come to understand money as an information tool. It can be thought of as an information tool that enables people to be accurately (or inaccurately) compensated for their time and energy. The fact that more units of the most pervasive information tool in the world, the U.S. dollar, can be arbitrarily produced at the whim of relatively few individuals, has never boded well for the majority. Money touches everything. Chaotic and shapeshifting money leaves everything it touches in an abyss of misinformation.
Most people go about their lives while never deeply questioning what their finite time on this planet is worth, let alone questioning the money they accept for their time and who controls it. When some entity can create money instead of work for it, they are stealing your time. This is inflation. It is a stealth tax on your wealth. When central bankers and governments decide to put more money into the system, it makes the pie bigger and makes your slice of the pie smaller. You thought the pie would stay the same size or at the most grow as humanity grew, that your work and sacrifice would let you climb the ladder and acquire more of the pie for yourself and your loved ones. Instead, you are subconsciously and often overtly incentivized to spend your money the moment you get it. You are ever in fear that the prices of the things you want will go up. In your lifetime, prices of desirable and scarce things have always gone up.
Unfortunately, disenfranchised and financially illiterate people are the ones who get left behind. They are usually unaware of the rules of this game and the fact that having wealth gives you access to borrow money at close to zero percentage interest, where you can, in turn, buy the scarce assets and reap the benefits of inflation. Most people never get out of the doldrums of lower and middle class, as they live paycheck to paycheck. In this pervasive case, it is common for people to live in debt. In debt to a system that holds an imaginary prize, the American dream, freedom, in front of them, just out of reach. America may be the best country in the world, but the pursuit of life, liberty and happiness gets increasingly harder the more you are beholden to debt.
Fear once ruled my life. Fear of taking chances. Fear of self-expression. Fear and inaction toward love to avoid being hurt. Fear and inaction toward success to avoid the pain of failure. I found a way out through recovery and accessed the fundamental behavioral change necessary. I also found bitcoin along the way. Recovery and bitcoin align well.
Self-sovereignty and taking responsibility for your actions are one in the same. Honest self-appraisal by taking a hard look at incentives and motivations helps me stay true to a more principled life based on honesty, open-mindedness and willingness. I also must be of service to those that desire positive change in their lives, in order for me to feel that I have some tangible purpose. Helping the next suffering alcoholic in the way that I have been helped gives me purpose. Helping the next sovereign individual grasp and develop an understanding of a brilliant alternative to government-backed money helps give me purpose too.
Bitcoin is an asset as well as a network that features a transparent monetary system, wherein provable work is rewarded with wealth creation, in a way that actually motivates innovation. I am abstinent from drugs and alcohol in the same way that I hope to one day be abstinent from participating in and, in consequence, perpetuating, a crooked economically structured world. Government-mandated, pay-your-taxes-in-it, crooked money that is excessively pervasive, leads to the degradation of the health and spirit of a society. Drugs and alcohol, done in excess, leads to the degradation of the health and spirit of the individual.
If we are to recover from the ills of wasteful consumerism, re-election seeking, bought-and-paid for government officials, and the unsustainable dependencies we as a society have on the cheapest goods and labor, we must adopt better money by which to use as the conduit for change. Bitcoin fixes this.
— — — — — —
Special thanks to the people, whose writings, thoughts and actions helped inspire this article:
Jeff Booth: thepriceoftomorrow.com/amazon/
Robert Breedlove: https://breedlove22.substack.com/
The United States tax bill which could hurt Bitcoin (BTC) and crypto holders will “continue the plunder of future generations,” Cameron Winklevoss argues.
According to new estimates, the proposed Infrastructure Bill currently under discussion in Washington would pile on an extra quarter of a trillion dollars in debt.
Bill may add $256 billion in debt
As the contentious bill makes its way through government, crypto voices continue to warn about a potential tax nightmare which, they argue, can still be easily avoided.
As Cointelegraph reported, language in the Bill may place undue demands on hodlers and businesses alike.
An effort is currently underway from pro-Bitcoin senators and the crypto industry to change the Bill’s phrasing to reduce the future burden.
Nonetheless, the Bill in and of itself is a cause for concern on an economic level, Winklevoss says.
“The infrastructure bill is estimated to add another $256B to the federal budget deficit,” the Gemini exchange co-founder tweeted Friday.
“It will not be fully paid for. The plunder of future generations continues. Bitcoin fixes this.”
His words come the week after the Federal Reserve saw a new record on its balance sheet, which topped $8.24 trillion for the first time on July 26.
Federal Reserve balance sheet chart. Source: Federal Reserve
More broadly, central banks worldwide have favored continuation of asset purchases regardless of future debt implications, flagging new variants of the Coronavirus as the impetus.
“The wrinkle, now, is Delta: if Delta causes the labor market to heal much more slowly, then that’s going to cause me to step back,” Minneapolis Fed President Neel Kashkari said Thursday, quoted by Reuters.
Caution over BTC price reaction
Short-term headwinds for Bitcoin are thus skewed by progress on the Bill, something which was already forecast to be a major market force this week.
Related: Bitcoin bulls overtake the $40K barrier ahead of Friday’s $625M options expiry
Traders were of mixed opinions on its market impact once passed, with popular Twitter account Pentoshi arguing that Bitcoin has already overcome more significant setbacks.
We’ve literally been through far worse and Btc is sitting at 40.2k
Zoom out
— Pentoshi Wont DM You (@Pentosh1) August 6, 2021
Other macro signals remain more muted, with the U.S. dollar currency index (DXY) treading water after recent volatility.
In this episode of Bitcoin Magazine’s “Fed Watch” podcast, hosts Christian Keroles and Ansel Lindner sat down with Dylan LeClair from Bitcoin Magazine.
LeClair is the writer of “The Conclusion Of The Long-Term Debt Cycle And The Rise Of Bitcoin,” an article on Bitcoin Magazine using Ray Dalio’s long-term debt cycle to look at the current system and how bitcoin fits in. LeClair is a great example of the growing Bitcoin Magazine community; spreading valuable content to beginners, who in turn become the valuable content producers.
After some introductions, LeClair begun by walking through short-term versus long-term debt cycles. Most people will be familiar with the idea of business cycles. These are periods of seven to ten years, where the economy expands and contracts, recovery and recession. Those are the short-term cycles. We all live through several of them in our lifetimes.
However, the long-term debt cycles can be anywhere between 75 to 100 years in length. These cycles are due to each individual short-term cycle not completely clearing the bad debts and misallocations of capital out of the system. Every 75 to 100 years, a larger bust finally resets the economy more deeply. It happens so infrequently, no one personally remembers the last cycle, so no one other than economic historians are around to warn everyone.
LeClair and the co-hosts then discussed the tools at the disposal of the government and the Federal Reserve to delay or deal with short- and long-term debt cycles. These tools are typically used in order, because they vary in how politically difficult they are to get enacted. First is to adjust interest rates, next is quantitative easing (QE), lastly the government starts spending to boost the recovery. Whether or not these tools work as designed was the topic of conversation on this podcast. Do they or can they accomplish their goal? We tried to answer that.
Toward the end of the show, talk turned to bitcoin. For bitcoin, as an asset with no counterparty risk, in other words, there’s no direct risk to bitcoin from these long-term debt cycles. It could happen fast, over the next couple of years, or slowly, taking another decade or two. The question they ended the episode on was, “Where does the dam break?” Which central bank will fall first, or which one will adopt bitcoin first? It’s quite possible that the Federal Reserve is the first major central bank to have bitcoin reserves.
In this article, I will detail why the incumbent global financial system is irreversibly broken, how it got to this point, and what the world will look like coming out the other side of the present crisis. I will use the frameworks presented in Ray Dalio’s Principles for Navigating Big Debt Crises along with my own analysis to contextualize the global economic landscape, and I will detail how the emergence of bitcoin as a global monetary asset will serve as a release valve.
For an abridged version of Principles for Navigating Big Debt Crises, watchthisexcellent 30-minute video produced by Dalio himself.
The Cyclicity Of Debt
To put it simply, debt is cyclical. When you borrow money today, you increase your buying power today at the expense of the buying power of your future self. Buying something you cannot afford today means that you are spending more than you make: you are borrowing not only from the lender but also from your future productivity/output. In an economic system built on credit, expansions and contractions of credit availability serve as drivers of economic growth/activity and contraction/recessions, respectively.
This holds true at both the individual and macroeconomic levels. When an individual borrows money to consume or invest and does not receive a positive return, it decreases that person’s future investment/consumption/spending. The same framework applies to sectors of an economic system, or more broadly, economic systems as a whole.
Although productivity is the most important aspect of an economic system over the long term, not productivity but the forces of debt/credit are the main driving forces in volatile economic swings.
Time Value Of Money
The time value of money is a very important concept in the roles of debt and credit in an economic system. Explained simply, any rational economic actor would prefer to receive money today rather than the same amount of money in the future. There is an opportunity cost to parting with money, and the return that one could earn on their money tomorrow by parting with it today should theoretically be positive to compensate for risk and opportunity cost.
The Interplay Between The Short- And Long-Term Debt Cycles
Although most are familiar with the short-term debt cycle, many are unfamiliar with the concept of the long-term debt cycle, which is of much greater significance. The reason why many are unfamiliar with the long-term debt cycle is because it repeats very rarely, about once every 75–100 years. Most people live their entire lives without experiencing the conclusion of a long-term debt cycle, and thus, its significance is rarely understood.
Below, I will outline the archetypal short- and long-term debt cycles and present some historical context and current statistics to frame the current state of the domestic and global economy.
The Short-Term Debt Cycle: ~7–10 years
Debt cycles can be observed by viewing debt-to-income ratios and interest rates, among other metrics. Although there has not been a completely free market for the cost of capital during the era of central banking, interest rates set by central banks serve as the “risk-free rate,” upon which the economic foundation is built. With the advantage of hindsight, one can clearly see many examples of short-term debt cycles, more commonly known as the “boom-and-bust cycle,” by looking at the interest rates set by central banks.
The Long-Term Debt Cycle: ~75–100 years
The long-term debt cycle is made up of numerous short-term debt cycles. Debt crises occur because debt and debt servicing costs rise more rapidly than incomes are able to support them, which necessitates deleveraging. In response to credit contraction, central banks can lower interest rates, which reduces relative debt servicing costs and provides the economy with a stimulative boost. This process repeats itself as productive investments are made, and the self-reinforcing upward boom of credit expansion then brings about speculative activity and misallocation of capital. Eventually, the debt burden and interest expenses grow far too large to service, and central banks respond by again cutting interest rates.
Over the course of each cycle, interest rates at the cyclical peak and trough are lower than those at the peak and trough of the previous cycle. This process repeats until the interest rate reductions that enabled each subsequent expansion can no longer continue, as interest rates reach the lower bound of zero. Interest rates hitting zero marks the beginning of the end for a currency regime, as it signifies that debt loads across the economic system have reached unsustainable levels. The logical path from that point, if we follow policy makers’ incentive structure with a historical perspective, is to sacrifice the value of the currency.
Types Of Monetary Policy
In a deleveraging event, three main forms of monetary policy can be used to ease the debt burden. As defined by Dalio in Big Debt Crises:
Monetary Policy 1: Interest rate-driven monetary policy. This is the go-to tool used by central banks and is the most effective tool to “stimulate” the economy. This is because lowering rates
1) raises the present value of assets, 2) makes it easier to buy items and invest with credit, and 3) reduces the debt-servicing burden. Interest-rate reduction is almost always the first response to a debt crisis, if there is room to cut the rates any further.
Monetary Policy 2: Quantitative easing (QE), or “printing money” to buy debt securities/financial assets. QE places cash in the hands of investors, who then seek to redeploy it into other financial instruments. Some economists argue that QE is not money printing money because simply entails swapping out a financial asset. This logic is flawed, as the freshly printed cash places bids in the credit markets that would not have otherwise existed.
QE positively affects investors and asset values but does very little to help those without assets. In many cases, including the present-day situation, this widens the wealth gap significantly. The more that QE is used, the less effective it becomes. QE is the most effective when there is a lack of liquidity in financial markets, but once credit markets become sufficiently reinflated, the effects diminish with each marginal unit of currency that is printed.
Monetary Policy 3: “Stimulus payments.” This form of policy puts money directly in the hands of the people. The recent popularization and support for universal basic income and stimulus checks are examples of Monetary Policy 3. This form of monetary policy is used because the first two forms disproportionately benefit the investor class, leaving the middle and lower classes struggling to get by. Political acceptance of this type of monetary policy becomes most prevalent late in a debt cycle, when wealth gaps are the most severe and the masses are looking for any possible way to “get ahead.”
Another form of this type of monetary policy is debt-financed fiscal spending monetized by the central bank, or what is today being called “Modern Monetary Theory.”
Brief Overview Of Monetary History
The dollar and the global monetary order changed considerably in 1971 with the Nixon Shock. With other nations having previously agreed to peg their currencies to the US dollar, and the US dollar redeemable for gold by global central banks, the decision by Nixon to “temporarily” close the gold window in August 1971 changed the global monetary order forever. Shortly following this decision, in March 1973, the currencies of the G10 nations abandoned the fixed exchange rate standard and began to float in the open market.
For the first time in history, nearly the entire world—with an increasingly developed and interconnected global economy—had free-floating (i.e., purely fiat) currencies. As a result, a very interesting dynamic has become increasingly prevalent whereby nations are incentivized to competitively devalue their currencies (and thus the cost of capital within their domestic economies) to attract foreign capital inflows and boost their export markets.
If a nation maintains the strength of its currency and does not devalue it along with the rest of the world’s fiat currencies, the country’s buying power appreciates significantly, but its domestic manufacturing base and competitiveness in international trade diminish significantly.
Although the dollar and the monetary policy decisions of the Federal Reserve are domestic, the decisions made by policy makers do not exist in a vacuum and are influenced by the dollar’s role as the international economy’s global reserve currency.
The Endgame
It is clear that we are in the final stages of a debt supercycle that has played out over the last ~80 years. We are in the endgame of the current monetary order, and something new will have to fill the void.
Effective Federal Funds Rate, 1955–2021
Over the last 4 decades, interest rates have been in a secular downtrend, and conversely, debt loads have continued to pile up across the economic system. Every economic boom that has occurred since 1981 has been aided by stimulus in the form of looser monetary policy.
This can be observed in a chart of the Effective Federal Funds Rate as well as the y/y percentage change in real GDP. Long-term growth in productivity and technology result from human entrepreneurship and ingenuity, but over the short–medium term, credit cycles have important impacts on economic activity.
Note the reduction of interest rates that follows every decline in real GDP.
Year-over-year % change in real Gross Domestic Product, 1981–2021
Interest rates peaked at 19% in 1981, and over the last 40 years, they have been in a secular downtrend. In other words, for the last 40 years, the discounted cash flows have caused every asset to skyrocket. Bonds, equities, and real estate have all appreciated by orders of magnitude based on the valuations supported by ever-decreasing interest rates, and these price increases cannot be effectively measured with the flawed CPI metric. Now, with the Federal Reserve’s funding rates at the zero lower bound, reducing interest rates is no longer an option.
Below are charts that illustrate three of the latest short-term debt cycles, as observed by the Effective Federal Funds Rate.
0.25% → 2.25% → 0.25% rate cycle, 2015–2020
1.0% → 5.25% → 0.25% rate cycle, 2004–2009
3.0% → 6.5% → 1.0% rate cycle, 1994 –2004
Second-Order Effects Of Easy Monetary Policy
A side effect of the increasingly easy monetary policy over the past decades has been significant asset price inflation. The majority of the increase in asset prices has not been the result of increased productivity or output, but rather the result of massive credit expansion and lessening discount rates following each subsequent “bust” or deleveraging event. Asset price inflation concentrates wealth into the hands of the few, and social unrest and popular polarization are second-order effects of this.
“Wealth gaps increase during bubbles, and they become particularly galling for the less privileged during hard times… It is during such times that populism on both the left and the right tends to emerge. How well the people and the political system handle this is key to how well the economy and the society weather the period. As shown below, both inequality and populism are on the rise in the US today, much as they were in the 1930s. In both cases, the net worth of the top 0.1 percent of the population equaled approximately that of the bottom 90 percent combined.” – Big Debt Crises
With this framing, the polarization and political division that have emerged in the United States over the last decade make sense. There is nothing new under the sun, and if we turn back time, we can view similar instances throughout history. The increasingly popular populist movements and policies that have taken hold in the United States are an expected response from a class of people who have been hurt by monetary policy decisions that have spanned across decades. Anyone focusing on the individual actors and not the systematic inequality created and enabled by easy money monetary policy is missing what has truly taken place.
“In some cases, raising taxes on the rich becomes politically attractive because the rich made a lot of money in the boom—especially those working in the financial sector—and are perceived to have caused the problems because of their greed. The central bank’s purchases of financial assets also disproportionately benefit the rich because the rich own many more such assets. Big political shifts to the left typically hasten redistributive efforts. This typically drives the rich to try to move their money in ways and to places that provide protection, which itself has effects on asset and currency markets.” – Big Debt Crises
A recent example can be seen in the push by Democratic Senators Elizabeth Warren and Bernie Sanders to pass a wealth tax. Different from a standard capital gains tax, a wealth tax would confiscate a percentage of one’s wealth above a certain net worth threshold. Many people across the political spectrum believe that these policies are needed because of the “ills of capitalism” However, the irony is that the massive economic imbalance and wealth inequality currently present in the United States (and worldwide) are not the results of free market capitalism. The large proportion of wealth held by the 1% and the investor class is not the result of productivity gains, but rather financial engineering enabled by easy monetary policy.
“Free-Market Capitalism?” Not So Fast…
Although the United States is frequently described as being “free-market capitalist,” this statement is not exactly true. Here is why:
In a free-market capitalist economic system, the most important pricing mechanism is that of money. When there is a monopolist institution setting the price of money, the market is inherently not “free.” There is nothing free about reducing the price of money whenever there is an economic downturn, including the most recent injections of hundreds of billions and now trillions of dollars into financial markets whenever a major liquidation of malinvestment occurs. This monopolistic pricing of money has partially enabled past systemic crises and will ensure the growth of future imbalance and excess. This is what has enabled the gross misallocation of capital, the effects of which are most glaringly obvious in the negative real interest rates offered in sovereign debt markets.
Time Value Of Money = Negative?
Real yields of United States Treasury Bonds at the time of writing
With the Federal Reserve pegging interest rates at zero, along with conducting massive QE programs to monetize federal deficits, the underlying “risk-free rates” of the financial system actually promise return-free risk. As a result, asset valuations have soared, and the holders of said assets have gotten exponentially more wealthy.
The wealth divide has been further exacerbated since the 2008 financial crisis. Below is the S&P 500 Index, which has risen nearly 500% in just 12 years, fueled by the ZIRP (zero interest rate policy) and QE.
A recent study by the Federal Reserve Board’s Survey of Consumer Finances found that the top 10% of U.S. households owned 84% of all U.S. equities, whereas the bottom 50% of households held just 1%. This alone establishes that when Federal Reserve Chairman Jerome Powell states that Fed policies “absolutely don’t contribute to wealth inequality,” he is flat-out lying to save face, full stop.
What Comes Next?
So, what happens next? The gap between the “haves” and “have-nots” has never been wider, central banks have been promising to keep interest rates at 0% for quite some time, and debt loads across the entire economy are larger and more unsustainable than ever before.
There is mathematically no way out of the current economic environment. The only path forward that policy makers know is more of what caused the problems in the first place: More stimulus in the form of QE (to provide financial markets with additional liquidity and suppress yields) and fiscal stimulus in the form of direct checks and aid to the people to minimize unrest.
This is not a sustainable system, as it is supported by exponentially expanding the monetary base, which simply exacerbates the problems of the current economic environment. In this reality, asset prices will continue to go parabolic, and it will become increasingly hard to get by for the lower and middle classes as real wages decrease due to monetary policy coupled with technological advancement stripping away automatable jobs that were previously performed by humans. The current actions being taken are simply not a long-term solution, as a look at the empirical data shows.
Displayed below is a series of charts that show various debt and income metrics since 2000. Feel free to draw your own conclusions from them.
Corporate Earnings: +55% since 2000
Corporate debt: +166% since 2000
Median household income: +63% since 2000
Total liabilities, households and nonprofit organizations: +146% since 2000
Gross domestic product: +115% since 2000
Debt securities and loans, all sectors: +206% since 2000
Federal debt: +380% since 2000
Technology Changing The Rules
The problem with chasing perpetual “growth” fueled by ever-increasing credit expansion is that the rules of the game have changed. Technology has fundamentally changed the rules of our economic system, and our monetary system is unable to adjust.
We live in a world where rapidly improving and advancing technology continues to give us more for less. As jobs of the past are automated away, and technology continues to drive the costs of many aspects of life to near zero, our monetary system necessitates that everything continue to increase in cost in nominal terms in perpetuity. Even though technological advances should be giving everyone the gift of a higher standard of living for less real cost, the incumbent monetary system must avoid deflation at all costs.
In a world that is experiencing exponential technological growth, exponentially more stimulus and debt are needed to keep the system glued together. Without ever-increasing amounts of stimulus in the form of central bank balance sheet expansion, the debt loads that have built up over the last 40 years would unwind, the cost of debt would explode in real terms, all of the banks would become insolvent, and the global economic system would experience a massive depression. Remember, it is only possible to consume more than you produce for so long, at both the microeconomic and macroeconomic levels.
Shown below are the balance sheets of the world’s major central banks. Although this piece has focused on the U.S. domestic economy, this figure shows that we have been describing a global phenomenon.
Policymakers are trapped by decisions made decades before their tenures. Their actions make sense with this framing, but that does not make said actions “right” or a practical long-term solution for the global monetary and economic system.
Human civilization is at an inflection point. Inflationary monetary policy against the backdrop of technological deflation means either that ever more power will become concentrated in the hands of the state, or that one by one, individuals will voluntarily opt into and adopt a superior monetary system, the rules of which cannot be arbitrarily changed.
The Solution: Bitcoin
“At this stage [in the long term debt cycle], policy makers sometimes monetize debt in even larger quantities in an attempt to compensate for its declining effectiveness. While this can help for a bit, there is a real risk that prolonged monetization will lead people to question the currency’s suitability as a store hold of value. This can lead them to start moving to alternative currencies, such as gold. The fundamental economic challenge most economies have in this phase is that the claims on purchasing power are greater than the abilities to meet them.” – Big Debt Crises
We are seeing this play out today. The global economic system is so over-indebted that there would be a deflationary collapse without ever-increasing liquidity injections/stimulus. As a result of rates being stuck at the zero lower bound and exponentially increasing debt monetization, a mass default is occurring not explicitly but implicitly. The error term is the value of the currency itself, which in this case is the dollar. A debt jubilee is coming in the form of creditors having their purchasing power wiped out.
During a period of debt monetization, the rational economic incentive is to protect one’s wealth by seeking out assets that cannot be devalued or “printed,” like bitcoin. There will only ever be 21,000,000 bitcoin. With its perfectly inelastic, programmatic supply issuance, it is the logical choice for every rational economic actor to adopt as a primary store of value, medium of exchange, and eventually unit of account for all economic calculations.
Monetary policy of Bitcoin
“Quite often, they are motivated to move their money out of the country (which contributes to currency weakness), dodge taxes, and seek safety in liquid, noncredit-dependent investments (e.g., low-risk government bonds, gold, or cash)… This typically drives the rich to try to move their money in ways and to places that provide protection, which itself has effects on asset and currency markets.” – Big Debt Crises
As previously mentioned, wealth taxes and increasingly ambitious taxation methods are being floated around the political sphere as “solutions” to the record wealth gap. History and economic reality tell a different story: these taxes are rarely effective, as the wealthy find a way to move their wealth outside of the taxable domain. Now, with the emergence of bitcoin, there is a seizure- and censorship-resistant asset that is outside the domain of any one jurisdiction. With Bitcoin, it is possible to store wealth in a self-sovereign way with absolutely zero counterparty or credit risk. Any individual or entity facing unfavorable tax codes can simply protect their wealth behind a wall of encrypted energy, free from the state’s needy hands.
The incumbent monetary order is irreversibly broken. In a process that has unfolded over nearly a century, the monetary system of the United States and the world has changed, and a small class of people have benefited at everyone else’s expense. If you are pro-humanity, then you must agree that a system of rules is superior to a system of rulers. Against the backdrop of technological advancement, a compatible monetary system is needed. Money is the coordination function of every action in the economy, and Bitcoin is the best tool humanity has ever had at its disposal to harness this function. With Bitcoin, money is once again a free-market phenomenon, and humanity will flourish as a result.
Bitcoin in Logarithmic View – image via https://bitbo.io/
For 12 years, Bitcoin has entrenched itself worldwide as an alternative monetary system that individuals are free to voluntarily adopt. Despite neverending streams of denouncement from “economic experts” and “monetary authorities,” bitcoin continues to exponentially increase in value.
Now, with the incumbent monetary order cannibalizing itself, here stands Bitcoin, a digital monetary network that provides direct incentives for every individual and entity on the planet to adopt it.
A great debt jubilee is coming, and it will later be known as hyperbitcoinizaiton.
In the same way that a year passes through a series of seasons, so too does Bitcoin appear to follow a seasonal trajectory during each halving cycle.
As we enter Bitcoin Spring, price discovery and growth within this industry will begin to accelerate as Bitcoin begins to draw more interest from people outside of the community. However, growth within the industry is not the only growth to be had. In the same way that the flowers of springtime must contend with weeds, so too must Bitcoiners contend with new rounds of FUD.
The latest individual of merit to publicly weigh in on Bitcoin is Logica Chief Strategist Michael Green. Green is a wealth of knowledge in the macro sphere and his interviews are always worth a listen, even if you don’t agree with him. That being said, I have a few points of contention with him because I believe he is speaking about Bitcoin from a position of bad faith and not a position of someone who generally wishes to learn and understand.
To begin with, he styles himself as open minded and has said time and again that it is important to listen and understand ideas with which you don’t agree. For example, he will be interviewing, or perhaps has already interviewed, Rohan Grey, which means that the merits of Modern Monetary Theory (MMT) will also be entertained. That is all good and well, however, it also appears clear that the same level of consistency on Green’s part will not be extended to the Bitcoin space.
This is evidenced by his use of cliche and banal pejoratives to describe bitcoin such as: Bitcoin is a fake system, Bitcoin is trapped in a lie, Bitcoin is a Ponzi, “bit con,” or comparing Bitcoin to Bernie Madoff. And yet, none of these claims are supported by any evidence on his part. Based on the many hours I have spent listening to podcasts of his, I think he would agree that making disparaging remarks prior to presenting evidence is a dangerous path to tread on.
I am not sure whether Green is wading into the space as a form of self-advertisement (his follower count has increased significantly since he began talking about Bitcoin), to protect the current system (himself?) or because he genuinely thinks there is something wrong with Bitcoin. His true intentions, whatever they may be, are immaterial to this discussion.
This article is not being written to attack Green’s character but is instead being used to refute some of the claims he made on the “Money MBA Podcast.” The list of his claims against Bitcoin that we will address include the following: money exists to extinguish debt, the inelasticity of Bitcoin is a problem, and Bitcoin disincentivizes risk taking. I would also like to add that, while you read this, it is important to keep in mind that these claims work off of Green’s position that we shouldn’t abandon the current system. This is the same system that Green benefits from despite an increasing number of participants falling by the wayside. One might go on to surmise that there is a hint of self interest behind his positions.
Nevertheless, the important principle here is that we must always be ready to meet challenges coming from outside of the space, which is the purpose of this article. Before we respond to the claims against Bitcoin, we must first challenge Green’s claim about the nature of money itself.
Money Exists To Extinguish Debt
The first point that needs to be addressed is the claim that “money is that which extinguishes debt.” This claim is demonstrably false. The primary reason that money came about was to solve the double coincidence of wants problem. An explanation and example of the double coincidence of wants problem is provided by Vijay Boyapati:
“In the earliest human societies, trade between groups of people occurred through barter. The incredible inefficiencies inherent to barter trade drastically limited the scale and geographical scope at which trade could occur. A major disadvantage with barter based trade is the double coincidence of wants problem. An apple grower may desire trade with a fisherman, for example, but if the fisherman does not desire apples at the same moment, the trade will not take place.”
Money solved this problem by creating a mechanism by which both goods from the example could be priced in a third. This pricing mechanism provided the lubricant that allowed the size and scope of trade to expand. By finding a salable good that all other goods can be priced in, ancient man stumbled upon one of the most important technological innovations, arguably, of all time. Since taking on debt in the first place was rare in ancient times, then how could money, which has been widely adopted and used going back as far as we can decipher, have existed solely for the purpose of extinguishing debt? The answer is clear: Money did not exist to extinguish debt but was instead used to facilitate trade.
Although debt financing has evolved in size and scope over time, it has always existed within the context of a system which used the scarcest goods as money, whether those were bronze, copper, silver or gold. One might be correct in saying the U.S. dollar exists to extinguish debt, but only because we have operated solely under a debt-based monetary system since 1971. Under this system, the bank simply conjures up an asset (dollars) from thin air and loans it into existence, perhaps in the form of a mortgage or car loan. Historically speaking, this is the exception and not the rule. A hard money system has allowed for debt financing as far back as records exist. The only difference is that some form of collateral, usually land, had to be pledged in order for a loan of hard money to be obtained so that the creditor was protected in the case of the borrower’s default.
Debt-based money was used in the 1800s and to great detriment. The onset of numerous banking panics during this century was the direct result of banks increasing the money supply via unbacked banknotes. The way this works is banks would create more banknotes (which are actually just the receipts you would have received after depositing gold at the bank) than they had gold in their vaults, in effect loaning banknotes into existence.
My last comment under this topic that I would like to make is that during his interview with the “Money MBA Podcast,” Green cited the character Wimpy from “Popeye” in order to make his point that money exists to extinguish debt. It must be noted, however, that in the case of Wimpy, he does not have money to begin with and is thus looking for an extension of credit, so I am not exactly sure what Green was driving at there. An extension of credit and money are two separate things. One is an IOU, while the other is not. If Wimpy ever had money, no debt would enter the equation because a straight swap of hamburgers for money would have occured. Money is produced, and behaves, no differently than any other good in an economy and is not debt in and of itself.
Now that we have addressed some key misconceptions about the nature and role of money itself, we are ready to move forward and address some of Green’s arguments against Bitcoin itself.
The Bitcoin Money Supply Is Inelastic and Cannot Expand
The next claim made by Green against Bitcoin is that the money supply of Bitcoin is inelastic and therefore cannot expand, which would be detrimental to the economy. His belief appears to be that the elasticity of money is necessary for growth in a modern economy, despite history indicating to the contrary. To counter his claim, we will need to analyze time periods characterized by both elastic and inelastic money and then focus on the effect that each type of money had on the economic environment.
Periods Of Elastic Money
After the fall of the Roman Republic, and subsequent rise of the Roman Empire, debasement of coins began shortly thereafter with the size and frequency of debasements increasing over time. By the year 241 A.D., the denarius had been diluted to just 48 percent of its original silver content and then, by 274 A.D., contained a meager 5 percent of said silver content. It should come as no surprise that debasement of Roman coins coincided with the decline and collapse of the empire itself.
The collapse of the western part of the Roman Empire led to a period of time called the Dark Ages, which was a time of economic and political weakness in Europe that lasted for centuries. This entire post-Empire period suffered from the rampant debasement of coins, however, it must be noted that the shorts periods of relief came once inelastic money was introduced, such as Charlamagne’s denier or the Byzantine and Arab gold coins. These short periods marked by the use of inelastic money were also periods of economic growth in an otherwise low-growth era.
In China, paper money had been used to varying degrees, beginning in the 7th century, and was initially backed by copper. As with the evolution of any paper money, its lifecycle passed along these four key phases:
1. A banknote is provided as a receipt for deposits of copper
2. Due to the lightweight nature of the banknote, the banknotes themselves begin to be used as a proxy for money
3. Governments/bankers then begin to issue more banknotes than they have precious metal in the vault
4. Inflation follows which leads to a collapse of the paper currency
In the case of China, the final collapse occurred in 1368, while under the Mongol-led Yuan Dynasty, after a period of high inflation.
During the 18th century, France experienced one of history’s most well documented bubbles followed by one of history’s greatest periods of hyperinflation near the end of the century. The Mississippi Bubble occurred in the 1710s and was fueled by the excess creation of bank notes on top of gold deposits, which were then used to buy shares in the Mississippi Company. The inflation of the money supply led to a bubble which subsequently burst, leading to riots. John Law, head of Banque Royale, was eventually forced to flee under cover of night, with his own personal real assets staying behind in an effort to make creditors whole. At the end of the century, during the 1790s, the French had yet to learn their lesson and the assignat was born out of the madness of the French Revolution.
The assignat was made legal tender and allegedly derived its value from the church lands that had been confiscated by the revolutionaries. Suffice to say, land itself is not a good form of money as it lacks the attributes of portability and divisibility. As is always the case, the value of the assignat, like the paper money experiments that preceded it, was destroyed due to over-issuance. This over-issuance fueled even more chaos, during an already tumultuous time, until Napoleon took control in a coup and restored the country to a more inelastic money (gold).
The Bretton Woods system, established in 1944, was by no means a good system but it at least anchored the dollar to a resource, gold, that mimicked the scarcity of the Earth’s resources. Prior to the Bretton Woods system, the world had witnessed the destruction of German paper money during the Weimar hyperinflation and after the Bretton Woods system was abolished, the world has seen the destruction of paper currencies such as the Brazilian cruzeiro, Zimbabwean dollar and Venezuelan bolívar. In fact, an individual on Reddit was kind enough to make an infographic of all the elastic currencies throughout history that have been inflated away, many occuring in the 20th century.
Today, countries such as Argentina, Brazil, Turkey and many others watch helplessly as the purchasing power of their elastic currencies is destroyed. Perhaps it should come as no surprise that those are three of the countries that have seen significant growth within the Bitcoin ecosystem.
On an anecdotal note, I have watched a close friend in Brazil benefit enormously from having owned bitcoin while the Brazilian real has continued to depreciate. In fact, though his family’s business has come under difficult times, the family’s allocation to bitcoin has helped them weather the storm while others in their same situation aren’t so lucky. Friends of his who have no interest in the topic of money have since joined in as well and benefitted accordingly.
Lastly, I would like to provide some evidence as to what happens under an elastic money regime courtesy of Pew Research. In 1970, one year before Nixon closed the gold convertibility window, we had the following shares of U.S. aggregate household income by income tier: upper income (29 percent), middle income (62 percent) and lower income (10 percent).
By 2018, those percentages had changed to record the following: upper income (48 percent), middle income (43 percent) and lower income (9 percent). What this illustrates is that periods of elastic money have a tendency to exacerbate wealth inequality to a significant degree. There are also additional sources of information that substantiate this point, but the key takeaway here is that elasticity of the money supply leads to debasement and debasement is ultimately theft, or in the case above, a transfer of wealth from the poor to the wealthy.
Periods Of Inelastic Money
History has shown that periods of inelastic money were superior to periods of elastic money, whether it was the gold aureus issued by Caesar, the gold solidus used in Byzantium, the florin or ducat of northern Italy, these functioned as early European reserve currencies, or the money used during the time of the international gold standard, beginning in 1871.
All of the aforementioned periods were some of the most productive periods in human history. From the Renaissance to the Industrial Revolution, the inelasticity of money was the key feature that allowed immense amounts of growth to transpire. The inelasticity of money is important because we operate in a world of scarcity where the goods used as money must mimic this finite nature. Resources such as land, gold, oil, timber and water are finite, so pricing them in an infinite good does not make much sense, philosophically speaking. Furthermore, resources must be expended in order to extract other resources or produce goods. Bitcoin adheres to both of these laws of nature due to its scarcity as well as the need to expend resources to produce it while fiat money does not.
Bitcoin Disincentivizes Risk Taking
The last claim that we will cover in this article is the claim that Bitcoin disincentivizes risk taking.
As financial markets have evolved, there has been a corresponding proliferation of debt instruments as well. The majority of these developments in debt markets occurred under a hard money system, so the argument that Bitcoin disincentivizes risk taking, ostensibly due to its high value, is false.
Even though debt wasn’t as common during ancient Greek or Roman times, purchases of land and sea voyages were sometimes financed through debt. Typically, a precious metal was loaned out to the borrower and in exchange the borrower would pledge security, in the form of the land being purchased or even in the form of the sea vessel being used for the voyage itself. Therefore, risk taking was present even under an ancient, hard money system.
In late medieval times, Florentine banks saw fit to risk a loan to the English king, Edward III, during the Hundred Years’ War. These bankers were ultimately bankrupted when Edward defaulted but nonetheless, this is another example of credit being issued in the form of a hard money good (likely the highly-valued florin, in this case) and risk being taken. The point of these examples is to show that risk taking has only increased with time and that the loans denominated in highly-valued money were not impediments to commerce.
Loans in general are repaid through careful investments into efficiency-creating technology which frees up capital, allowing repayment of the loan. For example, in the latter decades of the 19th century, John D. Rockefellers’ Standard Oil was able to reduce the prices on its petroleum-based products to one-eighth of their original price.
This cost efficiency would have no doubt enabled Standard Oil to repay any of its outstanding creditors with ease. It is also no surprise that this efficiency occurred under the inelastic international gold standard previously mentioned. Much to the contrary, debt today is often rolled over and never repaid under our current elastic monetary regime. The mere fact that debt continues to expand should tip people off that the current system is untenable. It is also worth noting that if people would prefer to save in bitcoin rather than lending it out, then perhaps their risk assessment of the economic environment is one where alternatives to holding bitcoin are poor by comparison. This has nothing to do with the monetary unit itself, but with the economy.
Lastly, Green made a comment that those unable to pay their debts were thrown into debtors’ prison, often for indefinite periods of time, according to him. The first thing that needs to be noted is that unpaid debts are a form of theft by the borrower. When people engage in theft of resources under any other circumstance, it is a criminal offence and often leads to prison time. Should debt be treated differently? If so, how? If anything, the risk for the creditor of not being made whole, in the event of the borrowers default, would be a perfect example of a circumstance that would disincentivize risk taking, rendering the monetary good being lent out as immaterial in this case. In the case of Bitcoin, despite the nascency of the technology, there are already opportunities for lending and borrowing, for example by opening an account through BlockFi, so the claim that Bitcoin disincentivizes risk taking is false.
Conclusion
Over the duration of the podcast, Green went on to make additional comments such as “Bitcoin is unfair,” but as with most of his claims, he did not go through much trouble to explain himself, so the ultimate thinking behind them is unknown to the listener. Additionally, he referred to the stock-to-flow model as “nonsense” but provided no evidence to support that claim either. As someone who enjoys listening to Green outside of Bitcoin, I expected much more. His audiences have a tendency to fawn over him, so it comes as no surprise that his claims were left unchallenged.
As far as providing a solution to the monetary mess we find ourselves in, his response was simply to “vote better.” Again, I expected far more. A quote often ascribed to Einstein provides the best response to Mike’s solution:
“The definition of insanity is doing the same thing over and over again and expecting a different result.”
There is no need to open a tangential discussion on the topic of democracy within the context of this article, but it is enough to say that if democracy worked so well, then why do places like Argentina, Brazil and Kenya find themselves in a consistent state of dysfunction?
In closing, people struggle with paradigm shifts and understandably so, however, it is my perception that Green is not acting in good faith in these debates, perhaps because Bitcoin does not comport with his worldview or perhaps because he is salty for having missed the boat when the opportunity arose.
Whatever the case, his use of statist rhetoric to attack Bitcoin undermines any constructive analysis he might otherwise lend to the space. Perhaps Bitcoin threatens his business model, much like Peter Schiff’s, though it is difficult to say. Conjecture aside, I do want to be clear about one thing: Bitcoin critiques are always welcome, but please, do your homework first or at least approach the subject with an open mind. Ultimately, any critiques, whether substantive or not, will only serve to strengthen Bitcoin in the long run.
This is a guest post by Kent Polkinghorne. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
