The problem with crypto is not that it is a scam. Or a bubble. Or used in any significant way today to evade taxes and finance terrorism.
The problem with crypto is it presents a viable alternative to monetary monopolies by national governments. A viable alternative to banks and other financial institutions. A viable alternative to intermediated exchange.
The real problem – for politicians, nation-states and the less tech-savvy and affluent within their borders – is that holding non-sovereign, algorithmically scarce digital assets today may be a better vehicle to protect one’s future purchasing power than fiat backed by nation-states. The sky-rocketing prices of BTC and ETH are evidence of many reaching a similar conclusion. The shift in power between hierarchy and networks is underway.
“But Pondering,” you plead, “Divorcing monetary sovereignty from nation-states is a bit far-fetched, don’t you think? Surely, you don’t mean to suggest we are heading for a cliché ‘sovereign individual-esk’ world where nations lose control of their own monetary policy to … distributed algorithms? I mean, sure – the internet has challenged faith in institutions and boosted the relative power of networks and polarized populations. But Pondering, let’s be real. The power of governments has never been more secure. Please, stop the hyperbole”
To which I respond: EXACTLY. Which is why this crypto stuff is so wild. It’s why Act 3 of the internet may be the most dramatic yet.
In a way, the demise of the current financial system was embedded within its own creation. The real question was always: “What comes next?”
The Triffin dilemma
Robert Triffin was a 1960s economist who highlighted the paradox of a single nation’s currency serving as the reserve currency for the globe. In short, the inflated international demand for the reserve currency (U.S. dollars, in this case) to conduct trade and host FX reserves will lead to structural trade deficits for the issuer.
While an inflated value for the dollar makes imports cheaper, the cost is less competitive exports and mounting deficits. In its effort to supply the world with needed dollars, the U.S. has squeezed many of its own industries offshore, propelled inequality within its borders and fostered the return of more extreme politics.
In many ways, the deficits of the U.S. are structural in nature. The U.S. now accounts for about 15% of global GDP, but the dollar still accounts for more than 50% of international trade. With a population of abouty 330 million on a globe of approximately 7.9 billion people, the writing was on the wall from the start. It took until 2021 but the petro-dollar system is starting to show cracks.
A decade of stimulus, accelerating deficits and $6+ trillion in COVID-19 relief spending are bringing questions of sustainability to the forefront. Just last week, Bridgewater’s Ray Dalio penned: “Why in the world would you own bonds when … bond markets offer ridiculously low yields?”
The sad reality is real returns on government debt have gone negative – you are literally guaranteed to lose purchasing power holding these assets. International demand for Treasury bonds is drying up at the exact moment governments are accelerating new issuances. With over $75 trillion in U.S. debts outstanding and rising by the day, buyers are beginning to flinch.
If you are a boomer, the status quo of inflated asset prices and entitlement spending is someone else’s problem. Just a few more kicks of the can. However, millennials are taking in this macro portrait and quietly asking: “Does this rickety scaffolding really have another 30-40 years? How does this play out?”
Looking at my social media feed, I…