The unprecedented levels of stimulus debt will haunt our global economy for decades to come — in a post coronavirus landscape, can cash still be used to keep score? Or should we be banking on Bitcoin instead?
The alarm on Timothy Lansing’s alarm buzzed noisily — it was 5 am. His eyes weary with sleep, Tim switched off the alarm on his clock and rubbed his face before heading off into his bathroom to wash up and get ready for his daily soccer training ritual.
Every morning, without fail since the age of four, Tim would wake up at 5 am, no matter how tired he was, or how late he had slept the night before, to head down to his backyard, run laps, do practice drills and dribble his well-worn soccer ball.
Tim ate, breathed and slept soccer.
And in an age when kids hardly kept posters on their wall anymore, Tim had three posters proudly dedicated to his favorite soccer players of all time — David Beckham, Cristiano Ronaldo and Pele.
So when Tim entered first grade, he was one of the first to sign up for soccer tryouts and quickly made it into the team.
On this particular autumn morning, Tim had a little extra spring in his step and he set himself a far more challenging practice routine — today was the big autumn friendly match against another elementary school.
Sporting his lucky “Number 7” jersey with “Lansing” embroidered in bold fonts across the back, Tim could hardly wait for school to be over so he could get down on the soccer pitch.
And when the match whistle finally blew, Tim performed like someone had set him on fire, weaving and darting between the opposing team’s players, Tim scored five goals, helping his school to a 7–2 victory.
His proud parents standing on the sideline were euphoric as he ran up to hug them tightly.
“What do you think Mom? I know it’s just a friendly match but do you think they’ll give us a trophy? Oh, I so want a trophy.”
“Now son, you know that the key to the game is participating right? It’s not about who wins or loses.”
“But we won! Look at that score. It was amazing Mom, all my practice paid off.”
So when both teams lined up to receive their trophies, imagine Tim’s surprise to see that the other school received the exact same trophy that he did.
And consider Tim’s shock when the announcer declared both teams “winners” for doing their best on the field.
Tim was enraged — surely both teams can’t be winners! What an outrage!
Indignant, he ran up to his coach, tears welling in his young idealistic eyes,
“But coach! It’s not fair! We beat them fair and square! Why do they get a trophy too?”
Tim’s coach, a twice-divorced volunteer who only signed up because he was interested in dating one of his team member’s recently-divorced mom, just shrugged his shoulders and said,
“What can I tell you son? It’s not whether you win or lose, but that you all played the game.”
“Yes, but we won! Look at the scoreline, what’s the point in keeping score if we all get the same trophy.”
In a fit of pique, Tim threw his trophy down on the ground and stomped on it hard with his soccer cleats, sending bits of cheap “Made in China” gold-colored shards of plastic splintering in many different directions.
And that’s really the point isn’t it? What’s the point in playing if the score doesn’t matter?
Which is precisely the problem that the global economy will need to deal with at some stage.
Money For Nothing & Your Chicks For Free
Whilst no one is suggesting for one minute that both monetary and fiscal policy measures are needed to shore up the global economy because of the coronavirus pandemic —that stimulus has created a problem that will plague us for decades down the road because it fundamentally distorts established incentive structures and undermines our global system of capitalism.
To be sure, the global economy was in pretty bad shape even going into this pandemic.
Global debt levels were already beyond historical record, but with inflation so low, it almost felt as if the global economy had left the demons that had caused the last financial crisis behind.
Maybe we really could have our money for nothing and our chicks for free.
After all, companies were issuing more debt than ever before, using that debt to fund share buybacks, causing stocks to soar in value, enabling them to issue more debt, in what can only be described of as a Ponzi scheme that would have made even Bernie Madoff blush.
But it’s not just corporate debt, it’s sovereign debt as well and there is every indication that all of this debt will come back to haunt us.
Speaking with the Financial Times during an interview (online of course), OECD secretary general Angel Gurría noted,
“We are going to be heavy on the wing because we are trying to fly and we were already carrying a lot of debt and now we are adding more.”
Gurría who has run the Paris-based OECD, a club of mostly rich nations, for 14 years now, said governments may eventually need to “capitalize” some of this extra debt load by bailing out companies or writing off some of the vast loan guarantees that they have extended to keep banks lending — both of which are anathema to what it means to run a capitalist system.
According to traditional capitalist economics — it’s the market that decides winners and losers — but by essentially handing out money to everyone, there are technically no losers.
If governments need to convert some of their debt to equity, essentially they will be using the word that is almost never uttered in conservative capitalist circles — “nationalize.”
Blasphemy I hear you say.
Nationalization is right up there with socialism and capitalism’s arch-nemesis — communism.
But it’s not just nationalization that threatens to upend what every grade school child learns about the American system of capitalism — by backstopping a large swathe of companies — the government is essentially taking risk out of the capitalist system.
No Risk, Only Reward
To the uninitiated, here’s how a capitalist system was originally designed to work.
And essentially every investor, entrepreneur and firm is saying to the market, “F*ck you, pay me.”
The government pays no matter what.
“Business bad? F*ck you, pay me.”
“Oh you had a fire? F*ck you, pay me.”
“Place got hit by lightning huh? F*ck you, pay me.”
“Business got hit by the coronavirus? F*ck you, pay me.”
But this approach has long term consequences whether we like it or not, because it fundamentally removes all of the incentives and disincentives that allow for the capitalist system to function.
Suddenly investors are not penalized if their bets go bad.
Firms don’t go bankrupt during tough times.
But wait, isn’t it the job of the government to step in when the market seizes up, otherwise how do we prevent another recession?
You’re right — the swift work of both central bankers and governments everywhere may have helped to stave off what would otherwise have been a far more immediate and deeper recession.
But as with all things — there is a spectrum of intervention.
Needle’s Broken, Do Not Fix
While students of the Great Depression will no doubt note that central banks and governments did too little during that time, it’s entirely possible that the needle has swung far too hard to the left during our current time.
Because when the incentive mechanism that underpins our very capitalist system is undermined — can we even call it a “capitalist system” anymore?
And it’s not as if central bank intervention is new — not by a longshot.
Central banks have been muddying market waters for the better part of almost two decades already.
Just consider that since the last financial crisis, every time markets threatened to tank, what did the U.S. Federal Reserve do?
Whether it was through cutting rates, making policy statements, or opening the spigot on the Fed’s overnight lending window — investors have been drenched in the Fed’s firehose of liquidity, whereas savers have been left hanging to dry.
But when governments and companies pile on the debt, with either no ability or intention to ever pay them down, except with the issuance of more debt — at some point the logical conclusion must be that the very thing that we’re using to keep score on that debt — the dollars — don’t matter anymore.
Because just like the trophy that everyone gets for playing grade-school soccer — the points don’t matter if the outcomes don’t either.
And therein lies the biggest risk from all this debt that we’re piling on — that the very thing we use to keep score no longer matters.
Banking On Bitcoin
Going back to Bitcoin’s origin story (gotta love a good origin story), many interpreted that appended to Bitcoin’s genesis block (the very first Bitcoin block ever mined) was the raison d’etre for Bitcoin’s very existence — a response to the debasement of fiat currencies with a cryptic message to a newspaper article in The Times, which read simply,
“Chancellor Alistair Darling on brink of second bailout for banks.”
The Times article reads in its second paragraph,
The Chancellor will decide within weeks whether to pump billions more into the economy as evidence mounts that the £37 billion part-nationalisation last year has failed to keep credit flowing.
Options include cash injections, offering banks cheaper state guarantees to raise money privately or buying up “toxic assets”, The Times has learnt.
Now there were plenty of headlines in major newspapers that day in 2009, but given the content of the Bitcoin whitepaper and Bitcoin creator Satoshi’s Nakamoto’s penchant for paucity in choosing words, we’re going to go out on a limb and assume that the headline he appended to Bitcoin’s genesis block was not random.
And The Times article selected by Nakamoto has aged incredibly well — given our current situation, the text of that article could just as easily have been taken from a newspaper printed today.
Is it any wonder then that even legendary macro hedge fund investor Paul Tudor Jones has announced that he has almost 2% of his assets in Bitcoin, calling it a “great speculation”?
But Tudor Jones went even further. Speaking to CNBC’s Squawk Box, he said,
“Every day that goes by that Bitcoin survives, the trust in it will go up.”
By all reasonable measurements, Bitcoin ought to have been dead by now, but it’s not, and in fact trading volumes have only been increasing.
By all reasonable measurements, Bitcoin should be worth zero dollars by now, but it’s not, and in fact at the time of writing, it’s trading around US$9,300.
By all reasonable measurements, Bitcoin would have been forgotten by now, but it’s not, and in fact it still regularly hogs headlines.
Bitcoin survives not because it’s an unreasonable measurement, but because in unreasonable times, it’s the only reasonable measurement — an algorithmically, computationally sacrosanct method of keeping score.
No other representation of value in that sense comes even close.
Not the yen, not the Swiss franc and not the dollar.
According to Paul Tudor Jones,
“If you take cash, on the other hand, and you think about it from a purchasing power standpoint, if you own cash in the world today, you know your central bank has an avowed goal of depreciating its value 2% per year.”
“So you have, in essence, a wasting asset in your hands.”
Because especially unreasonable times call for the consideration of especially unreasonable assets.
Nullum magnum ingenium sine mixture dementia fuit.
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