The Breakdown - Crypto to Replace Dollar as World’s Reserve Currency? Investing Legend Stanley Druckenmiller Thinks So

Episode Date: May 11, 2021

Last year, hedge fund gurus like Paul Tudor Jones set off the wave of institutional bitcoin buying by cementing the narrative of bitcoin as an inflation hedge. Today, one of those investors - Stanley Druckenmiller - is back with even more dire pronouncements about the likely implication of Federal Reserve policies. The dollar, he says, will lose reserve currency status in the next 15 years. The most likely candidate to replace it? Crypto.  -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

Goldbugs and Bitcoiners are, of course, extremely comfortable declaring that the era of dollar dominance is coming to a close, but this is not a mainstream point of view. It is more than a bit heretical. So to have someone of Drucken Miller's stature, put it so plainly, shows how much the discourse has changed. But then we're back to the question of, if not the dollar or euro or R&B, then what? If you're listening to this podcast, you know the answer. 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 nexor.io and BitStamp and produced and distributed by CoinDes.

What's going on, guys? It is Tuesday, May 11th, and today we are talking about some fiery comments from billionaire investor Stanley Drucken Miller about how the dollar will lose its reserve currency status. First, however, let's talk about why we're dedicating a whole episode to one investors' comments. There is a tendency, thanks to modern media, to overvalorize things that rich guys say. It's easy. It gets clicks and views and downloads. However, Bitcoin and Cryptos show more than basically any other industry and history, how often it is the Anans and the Plebs who have the right of the way the world is changing far before the beneficiaries of the old order feel the sand shifting under their feet. That said, even acknowledging that, we still live in a world

where traditional finance is dominated by trends pointed out by these seminal figures, amplified through traditional outlets, aka financial cable news. For that reason, when a storied investor makes a big proclamation in both the world's most renowned economics newspaper and on whatever you would call CNBC, it suggests that the arguments contained within are more broadly resonant in the markets than we previously knew. Indeed, we saw this all too well last year. 2020 was a huge inflection point for many investors. We had been living with the legacy of the great financial crisis for a decade. And while many were concerned about the long-term fallout of what they saw as artificially low interest rates and perhaps overly involved

Fed, they had to acknowledge that the consumer price inflation that they had feared had failed to materialize. There were, of course, other strange dislocations, asset prices most notably, but up until last year there wasn't a great fear. When the entire world responded to the COVID-19 crisis with massive monetary and fiscal intervention, this started to shift and those concerns came roaring back. Here's how Paul Tudor Jones put it at the beginning of his seminal great monetary inflation note last May.

The depth and magnitude of the economic drop-off took modern monetary theory, or the direct monetization of massive fiscal spending, from the theoretical to practice without any debate. It has happened globally, with such speed that even a market veteran like myself was left speechless. Just since February, a global total of $3.9 trillion, 6.6% of global GDP, has been magically created through quantitative easing.

We are witnessing the great monetary inflation, an unprecedented expansion of every form of money unlike anything the developed world has ever seen. This note was, of course, Paul Tudor Jones' entrance into Bitcoin and set off the wave of institutional buying that has characterized the market since. Another person who came to similar conclusions was Stanley Druckenmiller. Stan Druckenmiller is one of America's best-known hedge fund managers. He ran Soros Quantum Fund for a while.

Last fall, he came on CNBC and talked about how, for the first time and a long time, people needed to take seriously the possibility of significant inflation, something like 5 to 10% he said wouldn't surprise him. He also revealed in that interview that he had taken a Bitcoin position, which, of course, further reinforced the growing institutional inflation hedge narrative. Well, today, Druckenmiller is back and is sounding the alarm bells with even more vigor. He has a new op-ed in the Wall Street Journal called The Fed is Playing with Fire. Here's the opening.

With COVID uncertainty receding fast and several quarters deep into the strongest recovery from any post-war recession, the Federal Reserve's guidance continues to be the most accommodative on record by a mile. Keeping emergency settings after the emergency has passed carries bigger risks for the Fed than missing its inflation target by a few decimal points. It's time for a change. There are a few parts of Drucken Miller's argument. The first is an unexpectedly buoyant recovery. He points out that we are back to pre-recession levels of GDP.

He also points to unemployment that has recovered 70% of the initial pandemic hit after only six months. Four times faster, he says, than normal. Contrast this with Fed policy. The Fed is telling markets that the first rate hike will be in 32 months, two and a half years later than normal. The Fed is buying $40 million a month in more. even though housing is clearly running out of supply. What's more, the Fed indicates no interest

in discontinuing their $120 billion a month in bond purchases. Druckin-Miller also discusses the fallout of fiscal policy. Quote, consumers are spending like never before, construction is booming, and labor shortages are ubiquitous, thanks to direct government transfers. He points out that two-thirds of relief checks were sent out after vaccines proved effective and the recovery was accelerating. But getting back to the Fed, here is the key line. Quote, the emergency conditions are behind us. Inflation is already at historical averages. Serious economists soundly rejected price controls 40 years ago. Yet the Fed regularly distorts the most important price of all, long-term interest rates.

This behavior is risky for both the economy at large and the Fed itself. Looking for the best way to unlock your crypto's liquidity? Nexo.io is exactly what you need. Borrow against your digital assets at just 5.9% APR. earn passive income with yields of up to 12% and swap between more than 75 market pairs with the instant nexo exchange. Try the NXO wallet app to get the whole 360 degrees of crypto banking. Get started at nexo.io. Secure, regulated, and reliable, BitStamp is the cryptocurrency exchange of choice for more than 4 million investors and traders worldwide.

Since 2011, BitStamp has been a trailblazer in security, head of the class in personal customer service, and dedicated to making buying crypto fast and easy. Whether you are investing on our desktop platform and mobile app or trading on our speedy APIs, BitStamp gives you all the tools you need to reach your crypto goals. Visit bitstamp.net to learn more. BitStamp for all the ways we crypto. Where is this all headed? Well, in Druckin-Miller's estimation, it is a straight line to debt monetization.

He points to congressional budget office projections that in 20 years, almost 30% of all fiscal revenue will have to be used to pay back just the interest on government debt. That's up from 8% currently. In that context, taxes can't possibly fill the gap, so the pressure to monetize the deficit directly will increase dramatically. In Druckenmiller's estimation, there are warning signs that the market sees this coming. He points notably to the dramatic shift of behavior of foreign asset buyers. This set of buyers have historically clung to treasuries as a portfolio hedge, but have now become net sellers, even after the Fed spent trillions to prop up bond markets. Ultimately, Drucken Miller and his co-author Christian Borda argued that the damaging

deflationary episodes of the last decade didn't start because inflation was too close to zero, but because asset bubbles popped. This, they argue, is the real threat right now. Now, Drucken Miller took to CNBC this morning to reinforce these points and add a few more. First, he says that he absolutely supported the aggressive actions taken last year because, as he put it, we were on the precipice of a black hole. However, now, the way that he sees it, the facts have changed while policy hasn't. Quote, what I have a problem with is the Fed is expected to do $2.5 trillion of QE after vaccine confirmation, and after retail sales reached trend and were above trend. We're still acting like we're in a black hole, and in fact, the economy is accelerating.

He also really reinforced the idea that the Fed was going to be forced to monetize the debt, referencing the same 30% 8% statistic from above. The gist of his comments was this. Quote, I can't find any period in history where monetary and fiscal policy were this out of step with the economic circumstances. Not one. There was, however, one other eye-popping part of the conversation, and that has to do with the ultimate implications of all of these policies, and as Drucken Miller might put it, this policy failure. Joe Kernan referenced some recent comments in a speech where Drucken Miller said that the reserve currency status of the dollar would be gone within 15 years. And what's more, with Europe a mess and trust in China almost

non-existent, crypto was the best candidate to replace it. This is a big pronouncement. Goldbugs and Bitcoiners are, of course, extremely comfortable declaring that the era of dollar dominance is coming to a close, but this is not a mainstream point of view. It is more than a bit heretical. So to have someone of Drucken Miller's stature put it so plainly shows how much the discourse has changed. But then we're back to the question of, if not the dollar or euro or RMB, then what? If you're listening to this podcast, you know the answer. Drunken Miller said, quote, five years ago, I said crypto was a solution in search of a problem. Well, now the problem has been clearly identified. It's Jerome Powell and the rest of the world's central bankers. There's a lack of trust. Talk about

a mic drop moment. But of course, it can't be all good. Bitcoiners and frankly Ethereum's and Solanodads and Dogecoin maximalists and pretty much everyone else will not like his take on which crypto is likely to replace the dollar as that vaunted world reserve currency. He says it's probably some MIT or Stanford kid engineering it in their dorm room and it hasn't been built yet, which I guess sort of turns the volume down on our faith in Stan's research and analytical process. That said, I don't think we should throw the baby out with the bathwater on this particular point. I think you have to view Drucken Miller's comments as an evolutionary journey. Where Drucken Miller has gotten to is that the existing reserve currency has, in his estimation, fatal flaws.

The other sovereign candidates, Europe or China, don't qualify for their own reasons, which means it has to be something else. Private, non-sovereign cryptocurrencies have shown viability in market, and so they represent the most likely candidate. So what should we make of all of this? First of all, this is a really interesting tweak to the narrative around inflation. Druck and Miller is in some ways shifting the narrative to say that asset bubbles themselves are the biggest problem versus even runaway consumer inflation.

Indeed, the issue with inflation in his estimation is that it becomes so obvious that the Fed has to move quickly, and that that itself causes the asset bubble to burst. Quote, the longer they wait to move, the bigger the bubble and the bigger the reaction. In other words, he says that the bubble bursting in three months would be less painful than in three years. Quote, that would be the most probable problem is what it always is. The Fed gets mugged by reality. Frankly, I think they've already been mugged by reality, but they're ignoring it.

This in turn, in his estimation, impacts the vice. liability of the dollar is the world's reserve currency. As the Fed is forced to increasingly monetize the debt, the dollar depreciates and the world turns away. What do they turn to? Well, maybe the shift isn't from one sovereign fiat to another. Maybe it's to something totally different, something entirely and natively of the internet. I know that possibility is why many of you who are listening to this now have decided to spend so much time focused on this industry and the possibilities contained within. Today, your argument, my argument, our argument, You got a big credibility boost in the mainstream financial world.

Anyways, guys, let me know what you think about Drucken Miller's comments. Hit me up on Twitter. And as always, I appreciate you listening. Until tomorrow, guys, be safe and take care of each other. Peace. We're witnessing the greatest paradigm shift in finance in modern history. Join thousands of newsmakers and influencers talking the future of money at Consensus by CoinDesk. A live virtual experience of leaders, changemakers, virtual reality meetups,

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