Oldie but goodie — Andolfatto is SVP of the Fed Reserve Bank of Louis:
I think that Bitcoin could be the world’s next great safe asset. At least, it certainly seems to have all the properties that are desired in a safe asset. Importantly, it is a “simple” asset. It’s simple in the sense that it’s a pure fiat object–the monetary objects (called /bitcoin/) constitute no legal claim against anything of intrinsic value. Bitcoin is simply a record-keeping technology (and economists have known for a long time that money is memory). It pays no interest. Possession corresponds to ownership (unless counterparties are involved).
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?
Here’s an updated version of my personal bible which is a collection of excerpts and highlights and quotes from my favorite writings.
Recently I added two sources, one is Wences Casares’s bitcoin PDF (original post), some snippets:
If Bitcoin succeeds it may be a global non-political standard of value and settlement. The world already has a global non-political standard of length in the meter, and a global non-political standard of weight in the kilo. Could you imagine a world in which we changed the length of the meter or the weight of the kilo regularly according to political considerations? Yet that is what we are doing with our standard of value.
To illustrate the power of these qualities, consider that today the only standard of value and settlement that the United States of America can be certain that The People’s Republic of China (PRC) will not discriminate access to, censor transactions from or dilute the value of is the Bitcoin Blockchain.
I’m not half done with Rafa Nadal’s 2011 memoir (Amazon link) which is AMAZING, felt compelled to begin adding it to my bible already. Some snippets:
To illustrate the power of these qualities, consider that today the only standard of value and settlement that the United States of America can be certain that The People’s Republic of China (PRC) will not discriminate access to, censor transactions from or dilute the value of is the Bitcoin Blockchain.
Nadal’s mother, Ana María Parera, does not disagree. “He’s on top in the tennis world but, deep down, he is a super-sensitive human being full of fears and insecurities that people who don’t know him would scarcely imagine,” she says. “He doesn’t like the dark, for example, and he prefers to sleep with the light, or the TV, on. He is not comfortable with thunder and lightning either. When he was a child he’d hide under a cushion when that happened and, even now, when there’s a storm and you need to go outside to fetch something, he won’t let you. And then there are his eating habits, his loathing of cheese and tomato, and of ham, the national dish of Spain. I’m not as mad about ham myself as most people seem to be, but cheese? It is a bit peculiar.”
After all he’s accomplished since then — can’t wait for an update.
Wences is widely considered the OG of bitcoin adoption and evangelism in Silicon Valley circles. He bought and began making bitcoin’s case in 2011. Here’s his Wikipedia.
He wrote a 15 page PDF that he shared privately with friends and potential investors. Milk Road kindly published it here.
There were a few passages that I felt compelled to share. Highly recommend reading the whole thing to understand why bitcoin matters, and a practical recommendation for how to invest.
—
HIGHLIGHTS
To illustrate the power of these qualities, consider that today the only standard of value and settlement that the United States of America can be certain that The People’s Republic of China (PRC) will not discriminate access to, censor transactions from or dilute the value of is the Bitcoin Blockchain.
The only innovation of the Blockchain is its sovereignty, the only sovereign Blockchain so far is the Bitcoin Blockchain and the fuel that keeps it sovereign is the Bitcoin currency.
If Bitcoin succeeds it may be a global non-political standard of value and settlement. The world already has a global non-political standard of length in the meter, and a global non-political standard of weight in the kilo. Could you imagine a world in which we changed the length of the meter or the weight of the kilo regularly according to political considerations? Yet that is what we are doing with our standard of value.
However, the history of protocols is very different. Once a protocol gets established it almost never changes. For example, we are using IP (Internet Protocol, or just “the Internet” colloquially) for almost all transport of data (until the late 90s cisco routers used to route dozens of protocols, today they only route IP). We are using only one web protocol and only one email protocol. The email protocol, for example, is quite simple and limited.
Peter Thiel – Stanford + Stanford Law, PayPal cofounder, first Facebook investor
No ticker tape parades in NYC for individuals in 21st century – now it’s for groups like “healthcare professionals”, before it was for individuals like Charles Lindbergh
Prevailing view is heterodox thought no longer allowed, scared of putting individuals on pedestal
Believes in classic libertarian values – but it can be somewhat cowardly way of saying you’re a loser, you wanna be left alone
Acceptable for him to support Ron Paul for president, much more dangerous to support Donald Trump
When do we go from wisdom of crowds to madness of crowds?
If you win 99% of election, you’re in North Korea – you haven’t arrived at absolute truth but you’re in an insane totalitarian place
West has 2 philosophical traditions – Greco Roman and Judeo Christian
Covid – all kinds of things were asserted too dogmatically – and took hairpin turns
Science fights 2 front war against excess skepticism and excess dogmatism
Science thinks of itself as more fighting against dogmatism – “choose your enemies well because you’ll soon be like them” – now “science” can seem like a dogma, post-modern
Case of Jay Bhattacharya – example of sheer insanity – tenured Stanford professor, libertarian and heterodox thinker
He wrote article saying “there’s no high quality studies that prove wearing masks is effective” – triggered people, crazed campus reaction
Nuanced nature made it dangerous – supposed to think in clean bright line ideological terms If you’re not allowed to say something, he has suspicion that not only should you say it, it’s simply true
Fauci: “When people criticize me, they’re really criticizing science because I represent science”
Science has become quite opposite from the exploration, open-debate that it should be Real science doesn’t need to be called “science” – real chemistry, physics, etc – but eg “climate science” is like a tell in poker, exaggerating because it’s not quite there
Science with capital S seems like antonym of science lower case S
20 years of telling ourselves lies about Afghanistan – that it’s going wonderful, we’re nation building, form of epistemic closure
Believes Trump had a fundamentally correct view of Afghanistan – Trump said “Afghanistan is a shit country” – not rigorous or nice thing to say, but “when you limit yourselves to saying something that’s very nice, you can’t actually talk about anything at all”
Political correctness as misdirected form of politeness
Saying anything you want to — but remain civil
Fed Reserve
Inflation is common sense and everyone can see it – gas bill, grocery bill
Another case of epistemic closure – Fed seemed like last institution to register that inflation was accelerating
One of our most sacred institutions
MMT – everyone’s gravitated towards it at precise moment it should be questioned and challenged
Economics risks being very politicized – can twist the answers and go in strange direction
Not very precise a science, but when you violate everything, things will eventually go wrong
The hour is late for fiat money – clear signal is Bitcoin / Satoshi Nakamoto
Bitcoin is revolutionary anti-fiat money thing, a late warning like Trump’s warning on Afghanistan
Broken market
Fed buying all the bonds
Inflation showing up in assets, crypto, art, stocks, bonds
If inflation is 6% and rates are 0%, that’s still 6% confiscation of your cash / earnings
Davos – he stopped attending – people are only there as representatives of corporations and governments – it hit him that there are no real individuals in the room
Davos as sense of global government, participate as part of larger structure
Wisdom of crowds – center left politically correct thing Not a truth seeking place, not maximum surface area of debate
It’s a world with no dissenting views
Doesn’t believe we’re at end of history
China
Ray Dalio says it’s like family with strict parents
He frames China since 2013 as Putin is positive role model (vs when they used to believe Soviet Union was a negative role model)
China works for one individual – Mr. Xi
Doesn’t work for anyone else anymore
Jack Ma as remarkable example
Tech companies have been clobbered
No individuals allowed, no wealthy people allowed
Back to totalitarian playbook
Quite different from China in 70s, 80s
China like much worse version of Japan – for many decades it had great model of copying and catching up, and then hit the wall – China seems like stranger more dysfunctional version of Japan
For most part, China has not overtaken us
2021 – feels like China has gone haywire, more Marxist economy, totalitarian escalation
Friend said “Xi as best thing happening to West”
Why are we in such a collectivist moment (in America)?
Something went wrong, not an idiosyncratic thing, symptomatic of bigger problem
Should have ticker tape parade for Satoshi – so much healthier sign for country – just symbolic but symbols are important
Is renewable possible? Or is it just historic decline
He believes it’s not historicism, inevitable trends – it’s individuals that matter
Advice to new grads:
Can start companies
Shortage of talent in government
Society feels increasingly on auto-pilot — but he would take opposite bet
