It is always amusing to hear people dismissively claim that
Bitcoin is a ‘bubble’ or that it isn’t backed by anything. What most tend to
overlook is that the ‘real bubble’ exists with all fiat currencies, which are all backed by nothing. As of this writing, the total cryptocurrency market cap
is approximately $300 billion (down from last month’s high of around $800
billion). When compared to the global
money supply and global debt markets, the cryptocurrency space is
miniscule. As I’ve
said a few months ago, the current system of central banking will end and
the only remaining question is what will replace it.
There is no better example of a fiat currency bubble than
the US dollar. While the tax cut just signed into law has provided immediate
benefits to the US economy, few have attempted to address the enormous national
debt burden.
Here are some basic facts on the US fiscal condition:
- Over $20.6 trillion (and rising) debt balance (in addition to the $46.7 trillion of unfunded liabilities which some say is closer to $210 trillion)
- Interest payments of over $400 billion per year even with interest rates on these payments at historical lows (approximately 2.3% in 2017)
- $666 billion deficit for fiscal year 2017, an increase of $80 billion over the previous year
- Revenues of approximately $3.3 trillion for fiscal year 2017
- Increased projected budget deficit of over $1 trillion in fiscal year 2019
- US Debt to GDP ratio (includes public and intra-governmental held debt) of over 100%
Historically, the Federal Reserve has raised interest rates to
prevent inflation. For example, during the prior ‘tightening cycle’
(2004-2006), the fed
funds rate was increased by 400 basis points (~1% - ~5%). Today, the
current fed funds rate is 1.5%. A recent CNBC
report forecast a 2.24% fed funds rate at the end of 2018, up about a
quarter point from the prior survey. The Federal Reserve can in no way deviate from these projected
increases. If it did, interest payments on newly issued debt and on maturing
debt would skyrocket which would further exacerbate the national debt
problem. Massive reductions in government expenditures to reduce the deficit
would lead to societal chaos. Discounting some windfall capital recovery (not likely
even from this executive
order), the only way the US
Treasury can realistically continue to pay interest on this massive debt is by
keeping rates near historic lows with small yearly increases. Optimistically,
low interest rates would enable the US to grow its way out of its debt.
Perhaps, that is why the President has maintained such a close relationship
with major banks (reversing his campaign
promise). In December, the Trump administration waived
punishment for these banks over prior crimes.
Last Friday, the 10-year
Treasury yield surged to 2.845 percent, the highest since January 2014. Yields
closed lower on Monday as the historic selloff in stocks sparked
demand for low risk debt. Conversely, some have attributed the major drop
in the stock market to long term concerns over bond yields. Since 2009, the
Federal Reserve has engaged in massive money printing (i.e. QE1, QE2, etc.) to
‘stimulate the economy’. If this were sound monetary policy, Venezuela and
Zimbabwe would be beacons of economic success (which they are not). The US is
the beneficiary of the US dollar’s role as the world’s reserve currency.
Multiple iterations of QE (money printing) have enabled the Federal Reserve to
purchase treasuries and effectively keep interest rates low while capital has flowed
into assets such as real estate. A future ‘black swan’ event (like the Chinese
selling off their US treasury holdings or a bank run) may occur when bond yields
rise suddenly. In that case there must be yet another iteration of QE.
So, we have established two points:
- The US can only gradually raise the fed funds rate over the next three years.
- The US must print money to remain solvent in case of rising bond yields.
Cryptocurrencies have exhibited massive volatility losing 30% of its combined value over the past
24 hours and 60% over the past month.
Lately, there has been a slew of negative news in the cryptocurrency space. This
past weekend, most major US credit card issuers including Bank of America, JP Morgan
and Citigroup banned
the use of their cards to buy Bitcoin or other digital currencies. Prepared
testimony for Securities and Exchange Commission (SEC) and Commodity Futures
Trading Commission (CFTC) chairmen was released
yesterday and suggest that the US government could slap further regulations on cryptocurrencies
in the near future.
Still, the unprecedented rise in cryptocurrency prices (part
of the ongoing global
currency reset) has enabled an effective stealth devaluation of the US
dollar. There has also been evidence of positive benefits to Japan’s economy
from cryptocurrencies. Nomura analysts estimate
a wealth effect from unrealized gains on Bitcoin trading by Japanese investors and
a potential boost to real GDP growth to Japan’s economy of about .3%.
One of the characteristics required for a cryptocurrency to
be defined as money is to act as a medium of exchange. There have been all
sorts of rumors that major Internet and traditional retailers will start
accepting cryptocurrencies as payment in the US (they already do in Japan). Recently,
Starbucks chairman Howard Schultz said
he believes digital currency will catch on with consumers, though not
necessarily Bitcoin. While there is plenty of speculative
and unsupported euphoria, any chief executive of a public retail firm has a
fiduciary duty to their shareholders to investigate the acceptance of other
types of payment methods. As of a week ago, interest remained strong as over
1 million people joined a waitlist to register for cryptocurrency trading
with Robinhood.
For a great perspective on the practical use of cryptocurrencies,
I highly recommend watching Mike Maloney’s video on the crypto
revolution. Note that there are other amazing technologies like holochain and
hashgraph that may compliment or even compete with blockchain platforms. For
those concerned about a future ban on cryptocurrencies, please watch this video from Andreas Antonopoulos
(well-known speaker on bitcoin). An outright ban on cryptocurrencies in the US is
highly unlikely. It would be a mistake to think the US government will accept some
kind of market crash just to prevent a rise in cryptocurrency prices. In addition to any economic ‘wealth effect’, the
US economy can benefit from the efficiencies in industries that use blockchain
technologies. One of those areas is social media where censorship
issues with Facebook can be avoided. Steemit,
a social media platform with virtual currency rewards that runs over the Steem
blockchain, is an alternative that has garnered attention recently.
In case there are any who doubt the efficacy of cryptocurrencies, please review this quote from J. Christopher Giancarlo, Chairman, Commodity Futures Trading Commission
ReplyDelete"We are entering a new digital era in world financial markets. As we saw with the development of the Internet, we cannot put the technology genie back in the bottle. Virtual currencies mark a paradigm shift in how we think about payments, traditional financial processes, and engaging in economic activity. Ignoring these developments will not make them go away, nor is it a responsible regulatory response. The evolution of these assets, their volatility, and the interest they attract from a rising global millennial population demand serious examination."
https://www.banking.senate.gov/public/_cache/files/d6c0f0b6-757d-4916-80fd-a43315228060/A2A6C1D8DDBB7AD33EBE63254D80E9E3.giancarlo-testimony-2-6-18b.pdf
Great post by Chris Hamilton via Econimica blog which validates concept that US must print in order to maintain low bond yields:
ReplyDeletehttps://econimica.blogspot.com/2018/02/who-is-it-that-wants-to-buy-trillions.html
Good stuff Alan. You might want to integrate Kartik Gada's ATOM/DUES proposal that details how QE is inevitable but could be used to actually fuel the ATOM, phase out ALL taxation and provide a 'DUES' to all "citizens": http://atom.singularity2050.com/ (Where I break company with Kartik is the necessity of having a centralized administrator (the Fed /or/ Treasury).
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