Was reading a passage from this Thomas Friedman book (remember him?) and a number stunned me:
One thing we must not do is try to bring the budget back toward balance by making most, let alone all, of the spending cuts in “nonsecurity discretionary spending” — the 12 percent of the budget that does not include Social Security, Medicare, Medicaid, defense, and interest on the national debt. That is the part of the budget where all the education, innovation, and infrastructure programs, essential to our formula for prosperity, reside.
If this is correct – and a quick glance at the Treasury’s official data confirms this or worse – it means only 12% of America’s federal budget is spent on forward looking programs. Programs like education, infrastructure, job training, technology innovation, and environmental protection.
Of course the defense category (currently also 12%) goes both ways, but much of that investment – especially in recent decades – has been wasted on questionable foreign conflict (cough Iraq).
Most everything else – Medicare, Social Security, interest payments – is essentially backwards looking. Paying IOUs. Much of it is justified, but if you were running a business, would you really only invest 12% to secure your future prosperity? If you earned $10K a month, how would it feel if almost $9K and growing were spent just to pay the bills?
A few highlights from recent reports, including a very thoughtful and informed assessment of crypto post-FTX:
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The late 1980s was “Peak Japan” – the West was obsessed with the notion that Japan was going to overtake the U.S. as the most powerful economy in the world. Instead, Japan entered a period of lost decades, while the U.S. presided over an era of globalization, expanding free trade, technological innovation, and (relatively) unrestrained American military power. These were not the only geopolitical conventions that turned out to be wrong. Germany went from Sick Man of the Euro (we can thank The Economist for that prediction) to center of a European industrial renaissance. China emerged out of Tiananmen as the newest and largest “Asian tiger.”
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It was not until Russia invaded Ukraine in February 2022 that it became clear that the world had changed irrevocably – or at minimum, that global sentiment had changed irrevocably. (Aside: It is ironic that Russia has its fingerprints over the last three major global geopolitical transitions. The Russian Revolution brought us the rise of Communism and the Cold War. The collapse of the Soviet Union brought us U.S. hegemony. Might Russia’s failed invasion of Ukraine now open the door to the multipolar multiverse?)
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Fiat money allows governments and central banks to be more flexible and strategic – they can design policies around interest rates and money supply without being dependent on what mining companies can extract from the ground. The downside of this is that money, whose value for so long had been based on an objective factor (the value of a precious metal), was now officially politicized.
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In that sense, FTX may well be the beginning of the long-awaited clash between cryptocurrencies and governments – not because FTX is in any way representative of cryptocurrencies, but because it gives governments the excuse they need to crack down on them. It is unclear how many people lost money, or even their life savings, in the FTX debacle (an issue to societal stability in its own right), but you can be sure governments will use the FTX example as they aim to regulate cryptocurrencies into oblivion – or at least into becoming similar to other tradeable securities rather than as a fundamental threat to the future of money.
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Max Weber once wrote that the state is defined in part by its claim to the monopoly on the legitimate use of physical force. I think we can add that the state claims a monopoly on the legitimate use of currencies within its borders. When the state decides to use the former to ensure the latter, we will see just how powerful cryptocurrency really is – and based on recent developments, it is a clash soon in the making.
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Start with peak of British Empire
Late 1800s, British start series of wars with Germany (the rising power)
Shooting of archduke Franz Ferdinand —> WW1
After WW1, power vacuum, collapse of Ottoman Empire, the bloodiest global war in history (20M deaths)
Treaty of Versailles – UK, US, Germany, and France – negotiated peace terms
Demand large war repatriation payment from Germany – half a trillion in today’s USD
Germany tries to pay in the 1920s, fail, decide to debase currency —> hyperinflation —> German collapse —> rise of Hitler
Then WW2 happens 70M people die – 3.5x more than WW1
Leads to largest baby boom in history – global population grew by 30%
Transition from British to American dominance
UN, Nato, EU – super infrastructure, centralization of power – all built around America / Pax Americana
New Deal – financial repression + large fiscal stimulus – created 1950s and 1960s boom (golden age, rising real wages, rising living standards)
1960s-70s – baby boomers enter workforce; Massive increase in workforce
Consumption and prices explode
It’s a demographic phenomena, not a monetary one
In 1970s, Nixon move away from gold standard Wages stopped rising in real terms – since 1975, have only risen 0.3% / year
Asset prices and GDP rise, but real wages and living standards don’t —> Poor / lower classes gets angry —> Populism
In 1980s, Reagan + Thatcher
Thatcher – council houses (cheap / free housing for low income) – genius political move
But turned all of poor into debtors – now they’re slaves
Reagan does same, but for credit
Massive de-regulation for credit, financialization explodes: 401k, housing
Process accelerates, more retail borrowing, more asset price growth, but real wages still not growing
Leads to liberalization of Wall Street, power of free market
Politicians don’t think explicitly about currency debasement – they kinda delude themselves – it’s about incentives
1987 – Alan Greenspan cut rates to stabilize economy, becomes tool for Central Bankers, believe they can control business cycle
1990 – Berlin Wall falls, Communism falls, China opens and begins to reform
1996 – change from GATT to WTO – globalize and liberalize markets, reduce tariffs Now American worker is competing against global worker
Baby boomers now facing debt burden, rise of tech, global labor competition
1998 – lots of leverage in emerging markets, first Thailand, Asian currencies crash against USD; too much USD lent to these countries
Good for American influence
Late 90s – growing financial speculation especially in housing and stocks
Banks making record margins, then LTCM blows up
Greenspan cuts rates, world stabilizes – now people think “Central Banks have got your back”
Start of largest stock market bubble in recorded history (2000s crash)
Rates cut again
Housing begins to boom
Leads to 2008 crash
Labor force participation rate begins to fall in 2000s – exactly maps velocity of money; similar to birth-death rate
When you retire, you spend less
When your population is growing less, there’s less economy activity
Hyper-financialized system
Weakest balance sheets are households, backstopped by banks
QE starts – it’s printing money but “magic sleight of hand”
In debt crisis, collateral can’t go to zero
Didn’t think it would debase currency, most people didn’t notice Fed is papering in cracks of demographics – all trying to offset an aging population
Debasement is making us poorer – eg, S&P 500 prices aren’t rising when divided by money supply
It’s an “everything bubble” – everything follows the Central Bank balance sheet – same with many developed countries
Only 2 asset classes have outperformed (money supply growth) since 2008 – bitcoin, and Nasdaq (tech) – when incorporating this money printing / QE
Rise of the Internet
People are angry – “people realize they weren’t going anywhere”
Facebook is perfect place to divide everybody
Rising education costs, healthcare costs
2010s – 4th turning
Transition of power from one demographic (the boomers) to another (the millennials and younger)
After 2008 housing bubble, new bubble is corporate debt bubble – especially since rates are low
Could have fixed things as late as late 90s, Asian financial crisis – last unforced error – but now it’s too late
2020 – Pandemic
Fed + government = fiscal stimulus, no defaults
Fed even buys corporate bonds “Horror story but it worked” – world saved (for now)
Asset prices go up, but not when accounting for money printing
Now they’re (Central Banks + govs) incentivized to do even more
China’s GDP will collapse with shrinking population
Japan has same
Financial repression = inflation > bond yields
Bonds = GDP growth + inflation
“No one knows who the hell owns what in an overly levered financial system”
At the top (eg, the DTCC) – assets aren’t segregated (between government / Central Banks and private holdings) – thus a collapse means everyone’s assets are at risk
2008 – Satoshi whitepaper – function of all the money printing, financialization, debasement
Debasement hides reality
Bitcoin changes the equation – ubiquitous global scarcity – the migration begins to a parallel financial system
People don’t trust financial intermediaries anymore
What you’ll see
-Ongoing gradual debasement (of fiat)
-Ongoing gradual migration (to bitcoin and crypto)
Corporate cash
What can you do with it: share buybacks, M&A, real estate
But only earn 3% on that cash while assets rising 15% / year
So next year you can buy ~12% less
Population is reducing everywhere – self balancing mechanism of humanity, can’t afford to have kids Peak around 9.5-10B people globally
Robots will replace humans
Where this is going
-Bitcoin
-Online nation states
-Metaverse – everyone will live in different worlds
RB: Real world is becoming a video game
Next 15-20 years will be very hard transition – currency debasement, gov debt, demographic shift, rise of crypto
CBDCs – will let governments fiscally stimulate in more targeted ways
Programmable money – all govs will do it How do you stop people revolting – you have to give them money
Redirect from capital to wages
86M millennials are pissed at what’s happening – and are more progressive – will force progressive policies Big 4th turning – everyone shifts Left
If deflationary world – what happens?
You’ll stop spending as much – velocity of money could go to zero if you’re not careful
In long run, crypto price growth could settle around eg, demographics / GDP growth – but what happens from here to there?
Could in theory stop allocating capital to everything else (eg, real estate, stocks, bonds)
Digital ID will become important – right now we’re being exploited (eg, Facebook, Google, Twitter) – that revenue should go to you, could become basis for UBI
Everything digital goes to 0 in costs of production – electricity costs will go to zero
Positive shock – what happens?
Lower population, more robots, energy costs trending to zero – everyone is rich?
Where does the power go? Who owns the AI & robots? If world run by AI, can it be distributed?
