The Breakdown - Quantitative Tightening and 5 Key Questions for Our Changing World

Episode Date: April 10, 2020

As we wrap up another crazy week - 6.6m more jobless claims, $2.3T more in stimulus - this episode offers a few key themes and questions for bitcoiners and the crypto-minded to think about over the long Easter weekend: Crypto-dollarization: why money is pouring into USD stablecoins and how it could create a future onramp to bitcoin ‘Quantitative Tightening’: why a new brand for the bitcoin halving could help us better capture a unique narrative moment What it takes to get the economy back to work: beyong the political hemming and hawking, how can we force the real, nuanced conversation of turning the economy back on? What it takes to rebuild as a Resilience Economy - and how can bottoms-up networks get started now?  Moments of transition are moments of leverage: what opportunities can each of us take advantage of? 

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Friday, April 10th. And today I'm doing something a little bit different. I'm actually recording this on Thursday, April 9th, right after I just did the Pomp interview, which hopefully by now you've heard. I'm going to be off on Friday and Monday of this week. We're taking some family time.

And so I wanted to record, though, a quick little almost recap episode of what I'm thinking about right now. And so I'm calling it five questions to consider this weekend, five topics to consider this weekend, that is maybe just a little primer on what you can go explore for yourself. So I'm going to talk about one crypto dollarization, second, quantitative tightening, third, what it takes to go back to work, four, what it takes to rebuild a resilience economy, and five moments of transition are much. moments of leverage. So let's do this thing. All right, let's kick it off with something I've been thinking about a lot lately, which is crypto dollarization. Over the last month, as markets in, obviously, both crypto and traditional markets have been extremely volatile as they try to sort out what's happening with the coronavirus crisis and what the impact of economic lockdowns are going to be, one thing that has happened coming out of that is a surge in the supply of

U.S.D-backed stable coins. The supply has grown by billions, right, reaching new highs. And I think that there are some really interesting reasons for that. Effectively, what we're dealing with right now is a world economic crisis in which the U.S. dollar is seen as the only true safe haven, the only true, really stable value store that there is. And what's more, it's also the currency that the world's debt is denominated in. So combine those two factors and you have an extreme demand for dollars. And in some ways, a shortage of dollars as well, right? There aren't physically enough dollars to actually meet all that demand. In that context, it starts to make sense why you're seeing billions of dollars being printed on tether and things like it. Now, this is something

I've been watching, but Max Bronstine, who's currently at Coinbase and Avi Feldman, who works at Block Tower Capital, wrote this phenomenal essay on crypto dollarization, which I will link to, but I actually wanted to read a couple little excerpts from because I think it's so good. So this is a 21 minute long read. So I'm obviously giving you just a tiny little bit of it. It's called crypto dollars and the evolution of euro dollar banking. So this is a section called dollar 2.0. There's a massive supply demand imbalance in the dollar market today, driven in large part by foreign entities without access to the U.S. financial system. The world increasingly needs dollars to trade and to service massive debt payments, but governments have strong incentives to stymie dollar

flows. There's currently a strong worldwide demand for dollars, but it's difficult for individual to source those dollars, so where do they go? Now, they can turn to networks like Bitcoin and Ethereum, which enable novel ways to acquire dollar exposure that are natively digital, globally accessible, and relatively more seizure-resistant. Furthermore, financial services and networks built on top of these crypto dollars give them global distribution and make holding them competitive traditional fiat methods. In a world searching for more free access to capital, crypto dollars are a unique solution that helps service a lot of this pent-up demand. As such, stable coins and crypto-backed synthetic dollars should see massive near-term growth as the world scrambles for dollar exposure.

So that's what we're seeing, right? That's a key, key theme. Now, I want to read from one other part which I think helps make this all make sense. Counter to prevailing mainstream narratives, The new alternative financial system being created on top of crypto rails is increasingly assimilating into, if not starting to eat, parts of the traditional world. The unique aspect is that the assimilation doesn't resemble what everyone previously imagined. Dreams of the world ditching their fiat en masse in exchange for cryptocurrencies have been met with the same stark reality facing the entire global monetary system. Everybody wants dollars.

Rather than squander the opportunity for ideological reasons, the crypto industry should rally around this dollar scramble to onboard new users. Unironically, it is demand that spurs growth, and that's one area the crypto space has been lacking. What does a strong dollar and increase crypto-dollar usage mean for Bitcoin? From a macro perspective, there's the argument that deflation induced by a strong dollar will be damaging to Bitcoin because the world perceives it as a risk on asset. That may be true, but it's important to conceptualize that a strong dollar likely leads to widespread currency debasement, and while the dollar is one refuge, there will likely be increasing

demand in general for fiat hedges. Even more, servicing this demand will only further prove that financial alternatives exist for everyone, as Bitcoin has all of the features necessary to be the most democratized store of value. There's also a strong argument for inflation in the United States. A strong dollar undermines the Federal Reserve's ability to keep the global monetary system stable, which in turn pushes interest rates lower to combat deflation. As MMT takes hold and the US government prepares to play a more dominant role in labor markets, labor costs could rise at the same time assets are buoyed by extra liquidity and foreign asset flows. Additionally, passive investing has seemingly distorted the

structures that help keep markets in reality closely tied, making asset inflows the primary determinant of demand. If the government can issue debt to make sure 401k deposits continue unabated, there's real potential for higher asset prices. In the case we do see inflation, expect crypto dollars to be used as a seamless bridge to non-debassable assets like Bitcoin. Basically, what this comes down to is that these stable coins, these USD crypto dollars, are the right asset for this moment as the world is hungry for this dollar exposes. and they just so happen to be the perfect on-ramp for the asset of the potential next moment, which is an inflationary moment, which is Bitcoin.

Which brings me to my second topic or question to consider for this weekend, quantitative tightening. So the narrative of Bitcoin has been a little all over the place in the last few weeks as people look to the correlation with equities markets and the sell-off that happened in tandem with those markets and say, well, that must invalidate the safe haven thesis, right? Now, there's a lot of different responses to that. Pomp talks about it quite a bit on my show yesterday. But one thing that is interesting that's happening simultaneously is that as the proverbial money printer gober of the Federal Reserve, and we see more and more trillions of stimulus in increasingly exotic ways, as Travis Kling predicted, what you have simultaneously

is this asset which is basically the opposite, right? It is an asset that has only 21 million ever that will ever be printed coming up on its halting, which is a supply shock that will make it even harder to acquire at the same time as dollars are getting more and more plentiful, right? Fiat money is getting more and more plentiful. That contrast, the narrative that exists in the space between unlimited cash, infinity cash on the one hand, and reduced by half supply of Bitcoin on the other is a very powerful narrative moment. And I think that this narrative moment finally has the right branding. The halving, the havinning, you know, it means something specific. And so it's useful in that way. But over the last couple weeks, people have started to

discuss the idea of referring to it as quantitative hardening, referring to hard money versus soft money, or quantitative tightening, right, to make it directly contrast to quantitative easing. Now, I think both of these terms are phenomenal and do a much better job capturing this narrative moment. I kind of like quantitative tightening better because I think the parallelism of quantitative tightening to easing is so clear. And QT, not QE, is a very easy slogan. This is a really interesting narrative to watch. It's a really interesting moment to see. I really encourage you to go listen to the interview with Pomp if you haven't. One of the reasons that I wanted to have him on is that he, unlike most of us, Jemokes on Twitter, actually has

the context to talk to institutional investors every day, including many of those who had to sell off last week. His perception of where they are vis-a-vis Bitcoin is not that they've somehow lost faith, but in fact it is on their horizons, on their perspective, as they look across the second and third order effects of all of this new money printing happening now. So quantitative tightening is the second topic or question to consider this weekend. Number three, what it takes to go back to work. So I wanted to give you guys the crypto ones first. We're going to go into now my COVID and policy analysis. Feel free to tune out if you leave.

I appreciate you listening and we'll be back with more good Bitcoin and crypto content next week. But for those of you who are interested, I've spent a lot of time this week with guests talking about the things that we're not talking about. And the one that stands out in glaring, glaring relief is the lack of a plan to turn this economy on. because it is very clear from anyone who is intentional and thoughtful that it's not going to be as easy as just sending people back to work. If we do that, the virus continues to spread, and we have another crisis that overwhelms hospitals.

It's going to be more complex. It is likely going to include massive upscaling of testing capacity, trying to figure out a way to trace people who have tested positive or who are asymptomatic without violating privacy, which is a huge issue on its own. there might be phases where certain demographics of parts of the population are in lockdown while others aren't. We're likely going to need to be able to be incredibly nimble about going into very temporary short lockdowns again as second waves and third waves happen, right? We're seeing even now in Singapore an uptick, a flare-up again.

This is not a silver bullet type of moment where there's all of a sudden going to be some vaccine or some cocktail of medicines that makes it all work. And what we have to keep our eye on is just making sure that the health system doesn't get flooded and overwhelmed while also still enabling our economy to move on. That's a much more important conversation than the tit for tat right now or the politicization of health outcomes versus economic outcomes. And the reason that I say I added this to five questions to consider this weekend is that it's very clear that our leaders are not going to lead this conversation. So we have to do it from the bottom up. We have to start having the conversation and then force it into the mainstream. So spend some time thinking about what you think it actually looks like to turn this economy on in a meaningful way that respects the fact that we live in a society where we care about people not dying and where we have an incentive in not seeing our health system overwhelmed. I think it's a really important space to play in nuance and let's do it.

All right, my number four question or theme to consider for this weekend is scaling this conversation up to the highest level. What does it take to rebuild a resilience economy? Last weekend, Pomp's podcast with Chimath, many people consider him our generation's Warren Buffett. Chimath talked a lot about the fact that our economy had been designed for efficiency rather than resilience. It'd be designed to maximize gains, as we've seen, at the expense of being able to actually weather hard times. What does it look like to actually rebuild for hard times? This is a really important question that's going to involve all of us because there's no world in which we redesign and rebuild for a resilience economy where there aren't implications to our personal lives, right? We have all benefited from just in time supply chains and from extraordinary organization of the global economy around competitive advantage and comparative advantage that will be things that we have to give up.

Certain things that we buy may get more expensive. We may have to downscale our consumption in certain ways for the good of the larger resilience economy. Now, the good news to me is that I think that the most resilient part of the economy is individuals and peer networks and small businesses that are rooted in communities right now because they're scrappy. They're not designed for resiliency in terms of business model, but they're designed for resiliency in terms of the spirit of the people running them. And so I think that those ground-up changes that we need to make are going to be easier, even if painful, than some of the top-down changes that need to be made structurally

in terms of how we organize business and markets. But I do think that if I had to guess a theme, an economic theme for the next few years, it's going to be what it takes to rebuild a resilience economy. So let's start to think about that now. Let's start to think through these second and third order implications and effects that may happen. and ask what we can do to get out ahead of it and design it, which I think brings us to my fifth and final question or theme to consider for this weekend. Moments of transition are moments of leverage.

On Monday, I had Emerson Sparts on to talk about the collaborative crowdsource project that he was doing around second and third order effects from the coronavirus crisis. Emerson started by talking about how he was a hunter for the mother of all leverage, right? these moments where you can actually change things in a significant way. These kind of transitional moments that we're in right now, where things are so up for grabs in ways that we never would have expected, are moments that have the greatest leverage for us as individuals and as a society. Now, there are a lot of downsides to these high leverage moments.

This is where power gets consolidated on the highest levels. And if you need an example of that, look at the extraordinary powers that governments are trying to grant themselves in the name of solving the crisis. Some of it we may decide is necessary. Some of it we may agree to. More likely, though, unfortunately, will be just power claiming more power, and we have to hope we don't all turn into Hungary. And if you need an example of this, go look at what's happening in Hungary right now. But there's another dimension to this, which is the individual dimension. moments of transition are moments of leverage for us as individuals as well. Right now we have this mass scale shutdown where everyone is sitting at home and even the people who are working from home and in some cases working even harder still have this different context to ask themselves what they're

going to do at this moment, what they value that they didn't know that they valued before, what they want their life to look like going forward. I think that a lot of the second and third order effects that you will see come to fruition in terms of how people work and how people live will be from people deciding that the way that they did things before, they don't want to do anymore. The way that they designed their jobs, their economic lives is not something they want to do anymore. This is a moment for each of us to ask how we get to use that leverage for ourselves and for the future that we want. And I really believe that if every person in the world right now had that conversation with themselves about what they want out of this moment, we'd be in a very different time.

Now, I don't want to be glib about the huge numbers of people for whom this is so scary and economically devastating that the idea of clearing out mental space for something as ridiculous as asking about how to make sense of and take advantage of a moment of transition being a moment of leverage is just ridiculous. There are, there's a huge amount of that out there too. But I do think that if you're in a spot to be sitting and thinking and listening to this podcast maybe, ask yourself what you can do to fulcrum your way to the world and the life that you want coming out on the other side of this. That is as self-helpy as I will ever get on this podcast, I promise, but I do think that these extraordinary moments create extraordinary opportunity as well. And like I said, I got to do

a quick little podcast for you guys for the weekend, so here it is. Listen, I appreciate all of the listens. I appreciate all the downloads, all the comments. I hope you enjoyed this week's set of interviews and this conversation. Next week, we'll have more kind of expansive thinking about Bitcoin, about business and beyond. So until then, guys, stay safe and take care of each other. Peace.