The Breakdown - Powell and Yellen Talk Stablecoins, Inflation and Debt

Episode Date: December 1, 2021

This episode is sponsored by NYDIG. On today’s episode of ”The Breakdown,” NLW follows up on Twitter’s leadership change, covering a new privacy policy that some are saying has big implications for the platform. He also looks at Sen. Sherrod Brown’s letter to stablecoin issuers from last week and discusses Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell’s testimony before the Senate today.  - NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Dark Crazed Cap” by Isaac Joel. Image credit: Alex Wong/Getty Images News, modified by CoinDesk.

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 Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, November 30th, and man, oh man, I cannot believe that November is already over. Today we are talking about Powell and Yellen's testimony, what it means for inflation for stable coins, and much more. but first I want to come back and revisit the Jack leaving Twitter topic from yesterday. Moments after I finished recording yesterday's episode, Jack Dorsey dropped a note about leaving. Now, the biggest thing that's notable about that note is how little is notable in that note.

It gives no real clues to what's coming next and doesn't really identify or even intimate a reason. He does say, quote, there aren't many founders that choose their company over their own ego. So maybe Jack is finally feeling the constraint of running two, public companies, or maybe he's just not caring as much about the battles that Twitter needs to fight as other things he does care to spend more of his time on, which, as many Bitcoiners have speculated, might be Bitcoin itself. Now, notably, he did introduce the next leader of Twitter. Parag Agrawal is the former CTO of Twitter who started as an engineer and came up through the company. It's a pretty cool story, but it didn't take long for people to absolutely dig in.

First, there was a lot of honing in on an October 2010 tweet where the new Twitter CEO said, in quotes, if they're not going to make a distinction between Muslims and extremists, then why should I distinguish between white people and racists? This was a quote as it came out later from a comedian who was on a panel on the Daily Show with John Stewart in 2010 when the tweet actually happened. It was discussing NPR's then recent firing of Juan Williams. And long story short, I don't care about this. I think people that are trying to make it a thing are culture warriors and they're wasting their time. But let's remember what people were legitimately worried about, which is what the state of censorship on Twitter was going to be. I say legitimately worried because it doesn't matter what

your position on this question is. It is undeniable that social media platforms have an inordinate amount of power to shape public dialogue and the decisions that they make about how open, free, what people are allowed to say, et cetera, are going to have major implications. No matter what side you think they should be on. Well, just today we did see some policy changes. Disclose.tv tweeted just in Twitter bans sharing images or videos of private individuals without their consent. And here's the exact quote from the Twitter blog on this change. As part of our ongoing efforts to build tools with privacy and security at the core, we're updating our existing private information policy and expanding its scope to include private media. So basically what they're doing is they're going from a policy

where you couldn't docks people, you couldn't share their phone numbers, their addresses, their IDs, to also include media that is about them but that doesn't have their consent. They say when we are notified by individuals depicted or by an authorized representative that they did not consent to having their private image or video shared, we will remove it. This policy is not acceptable to media featuring public figures or individuals when media and accompanying tweet text are shared in the public interest or add value to public discourse. Now, the issue here is that, of course, this is enormously subjective. people are wondering what this means for protest movements for political dissidents. A kind of standard

response that I saw that wasn't either super inflamed or super passive came from Y Combinator founder Paul Graham, who wrote, this is scary, but the upside is that it could be the final boost of energy needed to enable a Twitter replacement. So if you'd been thinking about creating a Twitter replacement, this could be the time. One other thing worth noting, almost immediately, someone noticed an Ethereum address tip option in testing. So maybe there were, was something to the notion of Jack being a blocker around eth integrations, or maybe this was just a coincidence. Either way, Twitter's too important in a public sphere to not keep an eye on. But let's move over to the regulation space. Now, one of the bigger things to happen over the break

when I was doing my gratitude for Bitcoin series was Senator Sherrod Brown coming for stable coins. Sherrod Brown is the head of the U.S. Senate Banking Committee and sent letters to Circle, Coinbase, Gemini, Binance, U.S., Paxos, Trust Token, and the Center Consortium. It's clear that what has gotten everyone's notice and certainly Sherrod Brown's notice this year is the growth in stable coins, which his letter pins at over 500% in a year. He writes, The complex terms and conditions applicable to digital assets and stable coins, as well as the need for reliable and resilient underlying networks can make it difficult for investors and consumers to fully understand the details of how those assets function and their potential risks.

I have significant concerns with the non-standardized terms applicable to redemption of particular stable coins, how those terms differ from traditional assets, and how those terms may not be consistent across digital asset trading platforms. The letter asked a bunch of questions to these stable coin issuers, including how customers can acquire the stable coins, how they redeem the stable coins, how much has been issued, what might prevent a customer from purchasing it, whether any trading platforms have special arrangements, quote-unquote, with respect to the stable coin, how specific redemption levels might impact the issuer and how an exchange might evaluate forks. Now, I've said before,

that I think the attitude for many regulators around these crypto issues is pretty paternalistic. But at the same time, I do feel it's pretty possible that this sort of letter ends up with regulators coming away with a better understanding. Certainly folks like Jeremy Aller over at Circle have been prepping for a long time for this level of scrutiny. The outcome that we don't want is for only traditional banks that are highly regulated to be able to issue stable coins. We want, or at least I want, I don't want to speak for other people. I want competition in the marketplace, though. I want people to have the freedom to be and build better financial institutions. Still, I kind of think that right now, the more nitty-gritty it gets in terms of the details,

the better I think we end up on the other side. There's no way that stablecoins aren't going to be fit into the U.S. regulatory system in some way, shape, or form. Having these conversations in advance of actual systemic risks being realized is frankly better. That might be overly Pollyannish, we certainly have some pretty worrying examples of language around stable coins, but still, I have to be optimistic right now. The more there's a chance for the actual long-duration democratic process to go through around regulation, I think the better that regulation's going to end up. NIDIG, the sponsor of this podcast, provides banks, corporate treasuries, pensions, and hedge funds with ironclad Bitcoin custody and white-gloved service. Learn more at nidig.com

That's nydig.com slash nLW. With that, let's shift to our main topic. Today's hearings with Yellen and Powell. These are their regular reporting back to Senate and the Congress about the state of the economy. They include prepared statements as well as a chance to be questioned. Now, the timing is, of course, interesting because central bankers right now face two very competing forces. On the one hand, there is, of course, inflation, which is pushing a policy shift to the hawkish

much faster. That conversation in the U.S. is manifesting as pressure to accelerate the taper of bond buying purchases, which has already started. At the same time, there is just newly on the scene a different force that potentially points in the other direction, which is, of course, the Omicron COVID variant. Depending on what that leads governments to do in terms of shutdowns or new types of mandates, will markets need more support due to further dislocations? Those could be very competing forces. Bloomberg puts it this way. They write, Omnocron risks new inflation headache for world central bankers. The advent of the Omicron variant of the coronavirus risks posing new challenges for central bankers by threatening economic

growth while adding to inflation pressures. That's the initial analysis of economists who warn that possible new restrictions on activity risk derailing plans to withdraw monetary stimulus while reinforcing the same imbalances that have fueled the current wave of surging consumer prices. So how did this actually play out in the questioning? Well, certainly, inflation was high on the agenda. Ranking Democrat Sherrod Brown focused his opening statements on getting tough regulators in the remaining three Fed slots and focusing on issues of diversity and climate change. But ranking Republican, Pat Toomey, was all about inflation, going so far as to say that the Fed should have discontinued bond purchases last year. Interestingly, some of that was echoed in the Q&A as well. Powell said, and this is

perhaps the most notable headline from the whole affair, that it's time to retire the word transitory. Now, if you were listening last week to this show when we were discussing Powell's renomination, this is exactly what we talked about, that renomination, being a chance for the Biden administration and Powell himself to shift the narrative to move into a new phase, the post-transitory phase. Powell also said that he expects inflation to subside in the second half of the next year, pushing his estimate out. This is an outlook he said. said is shared by many outside economists. Janet Yellen was asked a lot about the debt ceiling and just the debt in general and what might happen if money wasn't artificially low,

and she kind of actually said the quiet part loud at one point. From Bloomberg's live feed, quote, Yellen notes that real interest rates remain low, which helps keep the big federal debt manageable, touching on an issue that doesn't get much talk in Congress. Inflation shrinks the value of the debt, and interest rates are well below inflation. Next, on Omicron, Powell is definitely open to the threat, but he's very much in wait and sea mode, saying that they need more information that this is just coming to light, and that in any case, quote, I'm not thinking that the effects on the economy will be remotely comparable to what happened last March. Perhaps the big macro story was the taper. There seems to be large and growing bipartisan support for faster tapering. Notably, Mark Warner, a Democrat, came out in support of faster tapering, which is big because it's,

shows that you not only have all the Republicans, but also some Democrats as well, and markets are now strongly pricing in an acceleration of the bond purchase tapering. Still, it was super notable how much stable coins and digital currencies more broadly were a topic of conversation throughout this whole hearing. The language was frankly pretty mixed. Yellen said stable coins could result in some greater efficiencies in the payment system, but that they of course had to be adequately regulated, that they wouldn't be able to have that benefit if they weren't adequately regulated. Sherrod Brown certainly didn't mince words when he compared the regulation of stable coins to the regulation of subprime mortgages. Pat Toomey, on the other hand, had a very different

point of view. He asked Yellen and Powell why all stable coins should be treated the same way and said that we needed to think things through and that different regulatory approaches might be right for different stable coins. This came up almost immediately in the discussion which shows how significant it was. Now, on digital currencies more broadly, someone asked Powell why there was a delay in their report on digital currencies, to which Powell responded that the Fed is, quote, trying to get it right, but that this could be coming soon. Elizabeth Warren, perhaps Jerome Powell's biggest enemy in the Senate, said that new threats had emerged in recent years and cited climate change and crypto, an industry that she said had been growing without quote-unquote guardrails.

The crash scenario here writes itself, she said. I've given much time to my thoughts at Elizabeth Warren in her perspective on crypto, and I'll only add that this adds something of a normalization in a weird way. Crypto is now just part of the set of things that she brings up to be angry or concerned about. It is also part of the things that other people are trying to defend. So it's a pretty fascinating moment to see this wasn't a crypto hearing. This was just a normal hearing where they were asking. about the debt and inflation and all of these standard macro issues, and crypto and stable

coins were everywhere. They came up across numerous questioners and in various contexts. It doesn't mean that we necessarily know much more, and frankly, as I've pointed out, I think the Fed's role in regulating all of this is going to be relatively limited. In some ways, what matters more is trying to get a beat on what different senators think, and of course what different folks in Congress think. That will be the subject of tomorrow's conversation when Yellen and Powell face questions from the House Financial Services Committee, so we'll have to check back in then. For now, until tomorrow, guys, be safe and take care of each other. Peace.