The Breakdown - A New ‘Bretton Woods’ Moment?

Episode Date: October 20, 2020

Today on the Brief: Chinese citizens less than impressed with DCEP trial Is Filecoin the “Titanic” of ICOs? Mnuchin, Pelosi go one more round on stimulus Our main discussion: A new Bretton Woods moment? In a recent speech, the International Monetary Fund argued that the time to fundamentally re-evaluate the global economic order is here. Goldbugs see the potential to return to the gold standard, bitcoiners anticipate ever-growing stimulus and macro observers are betting on massive disruptions in the wake of central bank digital currencies.

It's not an inflection point in the sense that it isn't so much one moment. It's many moments all combined. It's the slow withdrawal of America from the world leadership role. It's the genie out of the bottle of increased spending and rising debt to GDP. And we shouldn't be waiting for one big inflection point moment. It's the slow accumulation of moments like this that really changes things. However, I do think that it feels like a moment potentially of punctuated equilibrium, where there are more of those moments happening all the time,

and it's poised for a great change going forward. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. The breakdown is sponsored by Crypto.com, nexo.io, an elliptic, and produced and distributed by CoinDesk. What's going on, guys? It is Monday, October 19th,

And today we are talking about whether we are in the midst of a re-evaluation of the global monetary order, whether we are in the midst of a new Bretton Woods moment. First up, however, let's do the brief. First up on the brief today, Chinese citizens are less than impressed with the DSEP tests. I have spoken a number of times about the $1.5 million worth of digital yuan that the Chinese government gave away in Shenzhen over the last couple weeks. According to a Reuters report, while currency analysts were very impressed with this test, citizens were not. So just a reminder, the way that this worked is that about 50,000 consumers were given by lottery 200 digital yuan, which is about $30 worth. More than 3,000 shops

in Shenjin then accepted the digital yuan during this test. We don't have stats yet, however, about how much was spent of that giveaway money or where it was spent. Still, when it comes to the response, it seems that basically people's general opinion was that it was more friction-filled and less convenient than simply using AliPay or WeChat Pay. One shopper said, AlliePay and We-Chat Pay have been out for a long time. The new digital currency is similar to those, so it's quite late to just start the trial. Another user of the online wallet said basically that spending this was just

about getting the free money. Quote, I'm not planning on using it again, unless there is another red envelope, of course. The red envelope being the symbol of those who actually got that 200 yuan giveaway. Now, I don't know how much stock we should put in this. I do think that it shows that digital currencies aren't just going to be some sort of convenience panacea, especially in the context of a place like China, where these private solutions have become extremely used and extremely convenient over the last few years. In fact, in a weird way, this might be more impressive in the U.S., which doesn't have the same sort of electronic payments infrastructure and usage that China does. Next up on the brief today, Filecoin's rocky start.

Filecoin, as we talked about, was one of the last great hopes from the 2017-2018-I-CO era. It was one of the most anticipated launches, and three years later, how is it gone? Not so good. The CoinDesk headline reads, Filecoin miners go on strike one day after Mainnet launch, prompting early reward release. I guess apparently five of the largest file coin miners turned off their machines protesting the project's quote unfair economic model. And basically the idea here is that miners have something called an initial pledge collateral, which is that they have to have a lot of the FIL tokens in advance to even start mining.

So let me just read the description from that Coin-esque piece because it makes it really clear. While Filecoin uses this collateral as a leverage to ensure miners fully deliver their services according to users' contracts, it creates a situation where the miners don't have enough FIL tokens to begin with. There are two ways to get more tokens, but neither of them are desirable. Miners could earn token rewards and put them down as collateral, but Filecoin releases the rewards over the course of six months after building a block. As a result, the miners receive very few tokens at the beginning.

Miners could also buy FIL tokens from exchanges. However, that could be very costly and risky, since many believe FIL is currently overvalued, and there might be a heavy transaction fee. FIL's token price fluctuated wildly on its opening day, soaring to $100 before settling down to almost $40, with many investors arguing it was still grossly overpriced. So what are the takeaways? One, token economics are really hard.

Two, these systems are extraordinarily complex, and until you get them into the wild, it's very hard to tell how the market is going to deal with them. But whatever the case, this has some wondering if Filecoin is the Titanic of ICOs. Certainly kind of the opposite of what reputation they wanted. Last up on the brief today, it's the stimulus shuffle. Treasury Secretary Manuchin and Nancy Pelosi are set to talk again this afternoon, Monday afternoon, with the contentious issues remaining the same issues that have been contentious from the beginning. State and local assistance, which Democrats want and Republicans don't. Tax credits for lower income, which Democrats want, liability protections for businesses which

Republicans want and Democrats don't, and a repeal of a credit for past business tax losses that Republicans want to keep. Interestingly, the total number of this stimulus package is not exactly in question. President Trump said at a campaign rally, I want a bigger number than that. and she, i.e. Nancy Pelosi, wants. This doesn't mean all the Republicans agree with me, but I think they will in the end. Trump, of course, wants a stimulus because he wants to be able to talk about stimulus on the campaign trail. All politicians want it, and this, of course, is the challenge of building a system where every party is just trying to get the biggest stimulus, or at least the

stimulus that has the best optics. And that actually segues us, I think, into our main discussion and our main question for today, which is, are we moving to a new Bretton Woods moment? First of all, let's talk about what we mean when we say Bretton Woods. Bretton Woods is a town in New Hampshire where the foundations of the global economic order, as we know it, were laid. Between July 1st and 22nd of 1944, 730 delegates from 44 countries came to this little New Hampshire town to start talking about the post-war economic order. This is where the world's system based on the U.S. dollar as the world's reserve currency was created.

Interestingly, John Maynard Keynes did not actually think that it was the right idea to have a single nation's currency be the world's standard. And for him, it wasn't about the fundamentals of the United States or any other place. He didn't believe that any nation's currency should be the world standard. Instead, he advocated for something he called a bank or,

which would have been an SDR backed by a combination of different things, freely floating apart from any one currency. But as we know, the U.S. was poised for a world order that was led by them and created by them and was not interested in some sort of independent monetary instrument rather than the U.S. dollar itself. Bretton Woods was also where the International Monetary Fund was born as an institution that could bridge temporary imbalances of payments between member nations. Of course, much of this order is being called into question today. We have many proposals for things like the Bankor.

The former Bank of England Governor Mark Carney last year called for something which he named a synthetic hegemonic currency that was basically the bank or that Keynes had proposed, but redone for the modern era. However, the specific question and context for today's podcast is a speech by Kristolina Georgieva, who is an IMF managing director. and that speech was called a new Bretton Woods moment and was delivered just last week.

Let's read a little excerpt from it to give you a sense of the flavor. Today we face a new Bretton Woods moment, a pandemic that has already cost more than a million lives, an economic calamity that will make the world economy 4.4% smaller this year and strip an estimated 11 trillion of output by next year, and untold human desperation in the face of huge disruption and rising poverty for the first time in decades. Once again, we face two massive tasks, to fight the crisis today and build a better tomorrow. We have seen global fiscal actions of $12 trillion.

Major central banks have expanded balance sheets by $7.5 trillion. These synchronized measures have prevented the destructive macrofinancial feedback we saw in previous crises. But almost all countries are still hurting, especially emerging market and developing economies. And while the global banking system entered the crisis with high capital and liquidity buffers, There's a weak tail of banks in many emerging markets. We must take measures to prevent the build-up of financial risks over the medium term. We face what I have called a long ascent for the global economy, a climate will be difficult, uneven, uncertain, and prone to setbacks.

But it is a climb up. We will have a chance to address some persistent problems, low productivity, slow growth, high inequalities, a looming climate crisis. We can do better than build back the pre-pandemic world. We can build forward to a world that is more resilient, sustainable, and inclusive. We must seize this new Bretton Woods moment. The rest of the speech doesn't really say very much. It certainly doesn't go into details. It really reads like a UN wish list of different programs and policies designed to bring people up from poverty and so on and so forth. Now, before I get

to how people reacted or why people are seizing on this speech so much, I wanted to also mention a little bit about Jerome Powell speaking today on an IMF panel about cross-border payments. And digital currencies. So here are a few quotes from this. Powell said, for the Federal Reserve, our main focus is on whether and how a central bank digital currency could improve an already safe, effective, dynamic, and efficient domestic payment systems. There are a number of ways that a CBDC might improve the payment system, and it is mainly this area that motivates our interests. We do think it's more important to get it right than to be first. This episode is brought to you by Crypto.com, the Crypto super app that lets you buy, earn, and spend crypto all in one place

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Visit elliptic.co slash coin desk to talk to a cryptocompliance expert today. That's elliptic.com slash coin desk. The wire headlines around this, Powell, Fed evaluating benefits of a digital currency. Powell, Fed has not yet made a decision to issue a digital currency. So as you'll see in a minute, this conversation about CBDCs and Powell's thoughts thereof have a part of the larger Bretton Woods moment story. But people have really seized onto this concept of a new Bretton Woods moment. And I think it has to do with this broad sense that we're at some sort of inflection point, where things can't stay the way that they are. And there's a competition happening. for what comes next. In terms of specific interpretations, it's really fascinating to see. Gold bugs are

screaming that this means a new gold standard. They say when they see those words a new Bretton Woods moment, they think a return to the gold standard that the Bretton Woods system originally had. Because remember, until 1971 and the U.S. deciding to decouple from gold, the whole idea was that the world would be based on the U.S. dollar and the U.S. dollar would be based on gold. There is absolutely nothing to suggest this or anything like it in the speech from the IMF, but that is the way that I'm seeing a lot of interpretation in gold circles. Bitcoiners, on the other hand, have a sense that this means ultimately more spending. They see it as the sort of institutions of the old global economic order trying to reclaim or claim forward authority and power by virtue of spending. And I think

probably this is a little bit closer to reality. One representative tweet came from Ben Prentice who tweeted, oh, IMF, claiming a new Breton Woods is upon us without a single mention of a fundamental shift towards sound money. Instead, vague allusions to Jet Jubilee, investing in youth, help reform, and climate virtue signaling. IMF equals irrelevant. So really, I think there are a couple things going on here. First, there is a shift in thinking at a high policy level about how much can be spent. Another quote from I of MF meetings today came from former Fed Chair Janet Yellen who said, we can afford to have more debt than previously thought. That, I think, sums up a lot of the shift in thinking from policy makers on both sides

of the aisle. And part of what I think Bitcoiners and some gold folks too are reading into these conversations at a high level about a new Bretton Woods moment is an increase in spending with all the consequential things that come from that. Second, I think there is a question of what the power looks like of these international institutions in the world going forward. There is a vacuum of global institutional leadership being left by the U.S., and it's unclear where it leaves these institutions that were created as a proxy of U.S. power and international ambition. The economic issues herein are just one dimension,

which is why there's probably so much other focus on other challenges and other things that the IMF is relevant for in this speech. So we have a broad shift in thinking around how much can be spent, an ongoing and unanswered question about the power of international institutions in a post-US era, and then there's a question of what tools, bankers, and economists have to implement new potential policies. And this is where we reconnect with the idea of central bank digital currencies. I'm going to read now a long thread from Raoul Paul, who talked about exactly this last night. He writes, important thread, if you don't think central bank digital currencies are coming, you're missing the big and important picture. This is going to be the biggest overhaul of the

global financial system since Bretton Woods. Speaking of Bretton Woods, this IMF article alludes to a huge change coming but lacks real clarity outside of allowing much more fiscal stimulus via monetary mechanisms. And tomorrow, the IMF holds a conference on digital currencies and cross-border payment systems. But it's not just the IMF. This was first floated by Mark Carney at the Bank of England over a year ago and set the course for a new system. His big idea is to move away from the dollar, using central bank digital currencies so it affects on world trade, flows, and debts was not so pronounced. The ECB weighed in many times in the last year, but the latest is clear. CBDCs are coming and soon.

Next up was the regulatory changes in the U.S., allowing for bank custody of digital assets, especially Bitcoin, i.e., the acceptance that digital assets are not going away and, in fact, are the future. On Monday, Jay Powell gives his input on central bank digital currencies at the IMF talk listed above. Central Bank digital currencies are coming and they will change everything. They are coming under stealth of cross-border payments, it means so much more. They allow the central banks to circumvent the banking and fiscal system and give or take money, tax or transfer payments directly. That completely changes monetary

versus fiscal policy forever. Central banks will now be able to manage fiscal policy outside of government balance sheets. They can give, for example, restaurant owners direct payment or stimulus whilst at the same time charging negative interest rates on larger savers. They can create direct tax payments, too, in the rails of the payment system. No more IRS? multi-interest rates set centrally will be the norm. No one needs to allow the banks to set interest rates based on capital availability or risks. Central banks can now create a defined cost of capital to whomever they please if they can get the powers by the governments which will come. Don't forget, it absolves any spending responsibility in a crisis from governments and after 2008

and 2020, they are desperate for it. It will also push behavioral economics to the forefront based on big data and real-time activity data. Central banks can now create incentives directly as rewards or punishments. They can affect human behavior in a way that is much less blunt than traditional monetary or fiscal policy. There are enormous downsides and there are enormous upsides, too, to all of this. Many will say it's taking even more freedoms away and in some ways it is. It also gives those disadvantaged by lack of capital a better chance, a key problem. Right now it has to be via debt at punitive rates, but this changes all of that. Poor can get direct transfer payments with the debt and the central bank balance sheet.

It's the key step towards UBI, which too is good and bad. And the reality is we don't really have any freedoms from governments or central banks if we operate in the main system, i.e. Xgold and Bitcoin. And the big tech firms already have perfected behavioral economics as a way of changing human behavior. But the key part here, outside of a totally revolutionary way to collect taxes, give incentives, and overhaul the entire system, is an implicit agreement at the IMF level that central banks can run unlimited balance sheets if they combine forces. The move eventually, in late, say, three to five years, away from the dollar towards a basket of currencies, the Libra idea, which was the light bulb moment, then they can all agree to increase balance sheets together to avoid single countries getting penalized via foreign exchange.

Again, there will be huge benefits to the new system, but it can only mean a further debasement of the entire fiat currency system. Can it create structural inflation? I don't know. I'm sure that debate will be huge, but I doubt it due to secular pressures, but Fiat globally will be worth less versus hard assets, and that means that gold and in particular Bitcoin will become the way to circumvent the system of even lower value. It will also create incentive systems for other nations to opt into a hard currency system to attract capital.

This paves the way for global regulatory arbitrage. Yes, there is a chance that central banks will try to suppress Bitcoin, and in the further future, but much like suppressing gold, it is highly unlikely to work due to the incentive value of owning it. In the end, we have lived with gold as an opt-out for millennia, and we will live with Bitcoin, too. I'm not concerned and it is a story for another day. Right now, the positive impact on Bitcoin and gold is extraordinary. Regulation globally is opening up to acceptance. This is bad news for the banks who are about to be attacked by central banks, fintech and crypto. They are losing their role in the financial system over time. Short the banks long, Bitcoin is A. Pompliano

likes to say, and he is dead right. The wall of money is coming. Bitcoin is protection as a pristine reserve asset. Bitcoin is freedom. Bitcoin is future value and Bitcoin is the future. Everything is changing and it's changing fast. I'm irresponsibly long and it's seeming more and more responsible by the day. So the question becomes, are we actually at an inflection point? I think it's a yes and a no. Yes, in the sense that there are some major rubicons that have been breached. Yes, in the sense that there are certain paths now that can't be turned away from and are potentially poised to increase. You'll notice again with these stimulus conversations that no party decided to fight for no stimulus, They're just squabbling about the specifics of where the money goes, but not the amount.

It's a foregone conclusion that the government will spend trillions and trillions more. But no, it's not an inflection point in the sense that it isn't so much one moment. It's many moments all combined. It's the slow withdrawal of America from the world leadership role. It's the genie out of the bottle of increased spending and rising debt to GDP. And we shouldn't be waiting for one big inflection point moment. It's the slow accumulation of moments like this that really changes things. However, I do think that it feels like a moment potentially of punctuated equilibrium,

where there are more of those moments happening all the time, and it's poised for a great change going forward. What exactly the new system changes to? Who exactly are the people who benefit and lose from it? Those are going to be the subtext and underlying challenge of so many of the debate that we have going forward. I, for one, am glad you are here hanging out with me as we try to figure it all out. But until tomorrow, be safe and take care of each other. Peace.