The Breakdown - The Transformation of Money

Starting point is 00:00:04 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 nexus.io, Arculus, and FTX, and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, March 20th, and that means it's time for Long Reads Sunday. We have a really fun one, kind of a different thing, two Twitter threads from the same. author. But before we get into that, if you're enjoying the breakdown, please go subscribe to it, give it a five-star rating, leave a nice review, or if you want to get deeper into the conversation, come join us on the breakers discord. You can find a link in the show notes or go to bit.com

Starting point is 00:00:49 slash breakdown pod. Also, a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX. Now, if you are a long-time breakdown listener, you will know that one of the All-Stars of Long Read Sunday is the Human Rights Foundation's Alex Gladstein. His essays are always worth reading and deeply considering. He's the author of a new book, Check Your Financial Privilege Inside the Global Bitcoin Revolution, which I am incredibly excited to check out. But this week we're doing something a little bit different. Because in addition to writing his own thoughts, Alex is also an extremely adept synthesizer. And he's had two recent threads that I've really enjoyed summing up other people's work. Now, these are pieces of content that, in their own right,

Starting point is 00:01:36 are probably things that you've heard of. The first is Luke Gromman's appearance on the Grant Williams podcast. Now, you've heard Luke on this show before, and he's an incredibly adept financial historian, as well as market thinker. Alex Gladstein writes, much has been said about this Luke Grumman interview, but it is indeed that good. So much information in history about the international financial system distilled into one conversation, a thread with some highlights. So let's dive in first to Alex Gladstein's summary of Luke's conversation with Grant Williams. One of Luke's most interesting takes is that while Paul Volker raised rates and sacrificed, quote-unquote, the American domestic economy to save the dollar for the world, Ben Bernankei lowered rates and

Starting point is 00:02:20 sacrificed, quote-unquote, the dollar to save the banks, two historically and diametrically opposed actions. Volker, in Luke's view, quote, managed the dollar for the good of the world, whereas Bernanke managed the dollar for the good of financial capitalism. Luke argues that post-1973, the dollar was effectively pegged to oil. In the 80s, 90s, and early 2000s, it traded inside a range below $50 per barrel. Dollars could confidently get you a certain amount of energy, but the system broke around 2005. Oil spiked to $150 per barrel, but instead of tightening into this and trying to re-peg the dollar back to oil, the Fed loosened, dropping rates to zero in the context of the Iraq War in the great financial crisis. This was the beginning of the end for the petrodollars system.

Starting point is 00:03:05 China, which, after its ascension into the World Trade Organization, had stacked more than $1 trillion of U.S. Treasuries, eventually stopped stacking. Luke argues that foreign demand for treasuries, which exploded between 2000 and 2011, is now unwinding. The demand, he said, sterilized the inflation from the post-9-11 era that otherwise would have been noticeable inside the U.S. foreign central banks, he said, have bought three X more gold than U.S. treasuries in the past eight years. An astonishing trend and one that likely intensifies in the wake of the U.S. and Europe freezing Russia's foreign exchange reserves. The CCP, he argues, realized that it was short energy and long U.S. treasuries. They predicted that the dollar would weaken over time and that their

Starting point is 00:03:44 savings would buy less and less oil in the future. This is why, he says, they stopped stacking treasuries. Luke points out that the CCP basically concluded around 2013, in 15 years, we're going to have a pile of debt that used to buy 1,000 barrels of oil, but now that same pile will only buy 10 barrels, and people will starve and cause unrest. So the CCP changed plans. In response, Luke says, we had new regulations in the U.S. forcing banks and money markets to buy more treasuries, as well as, of course, trillions of dollars of QE. This was the U.S. government trying to offset the decreased foreign demand for American debt. Luke says one of the people, Putin's aims with the invasion of Ukraine was to cause an energy spike which would force a U.S.

Starting point is 00:04:23 recession, which would cause the U.S. to miss bond and entitlement payments unless it continued to print money. He says the freezing of Russian central bank reserves in the future will be as historic as Nixon closing the gold window. In the Breton Woods framework, there's been a treasury bill standard where nations save in U.S. debt. If this ends, Luke says the U.S. will either have to slash spending, force new regulations forcing banks to buy more treasuries, or force new QE into an inflation spike. However, Luke is not an anti-American doomer. He says a new system of a neutral reserve framework would allow the U.S. to finally re-industrialize an onshore important infrastructure, infrastructure that was exposed as being too reliant on China in the past two years. So he may be critical

Starting point is 00:05:03 of the dollar system, but he's optimistic about a future where the U.S. has a more healthy economy that's more favorable to the middle class as opposed to just the 1%. The re-industrialization of America, he says, was never going to happen, unless you removed U.S. Treasuries as the global reserve asset. America's Dutch dollar disease, where we said to the world, you make all the stuff and we'll give you dollars, might be ending. And that could be a good thing in his view. Where it remains to be seen as how fast this transformation happens. And in my opinion, what kind of role Bitcoin starts to play alongside gold in this new environment of governments wanting to save an outside money that can't be frozen?

Starting point is 00:05:39 Alex's last tweet, I've learned a huge amount from Luke's insights over the past few years. I'd strongly recommend you listen to this whole podcast and follow him moving forward. It's something that I couldn't agree more with. Nexo is the go-to platform for all things crypto. Invest in the hottest coins out there and start earning risk-free interest of up to 20% APR, paid out daily. Need cash, ASAP, but don't want to sell? Use your crypto as collateral and receive a credit line at premium rates. Open your Nexo account by March 31st and receive up to a $100 welcome bonus.

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Starting point is 00:07:23 When you trade NFTs on FTX, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. Obviously, we are having this discussion right now in the context of Russia's invasion of Ukraine. But if you go back and listen to Luke on this show two years ago, it's something that he was talking about even then. For Luke, this fundamental shift in who the buyer of U.S. debt is has a huge amount to tell us about what the future might hold. I'll drop a link to that show in the notes for this one, and you should definitely go check it out. Speaking of former breakdown guests with Long Horizon views, the next thread I'm going to read, again, summed up by Alex Gladstein, is from Lynn Alden. He sums up her piece What Is Money, which he calls an encyclopedic and must read essay about the nature and politics of money.

Starting point is 00:08:16 So here's Alex again summarizing Lynn. On the death of the gold standard, Lynn notes that even though Gold's critical, critics call it a barbarous relic, that it, quote, had to be confiscated and pushed out of use by the threat of imprisonment and hoarded only by the government during a period of intentional currency devaluation. If it were truly such a relic, she says, it would have fallen out of usage on its own and the government would have had little need to own any. Obviously, this wasn't the case. Lynn notes that post-1933, quote, the main release valve that Americans could turn to instead of cash or treasuries as saving assets was made illegal to them. For what it's worth,

Starting point is 00:08:51 Satoshi considered the gold ban and FDR's executive order 6102 in the design of Bitcoin. From 1944 to 1971, she says, the U.S. drew down its gold reserves in order to maintain the Breton Woods dollar system, whereas from 1974 to the present, the U.S. instead drew down its industrial base to maintain the petro dollar system. Never before, she says, in thousands of years of human history, has the entire world been using a money that has no resource cost or constraint. It's an experiment, in other words, and we're five decades into it. The Fiatra dollar standard, she says, is only four times older than Bitcoin, and only two times older than the first internet browser. That's pretty recent when you think about it like that.

Starting point is 00:09:30 One of the results of fiat currency, she says, especially towards the latter stages of this five-decade experiment since the 1970s, is that more people have begun to treat cash like a hot potato, end quote. As cash loses its store of value properties, people begin to use other things as stores of value. Quote, we instinctively monetize other things like art, stocks, home equity, or gold. The ratio of home prices to median income has gone up a lot, as well as the ratio of the S&P 500 to median income, or a top-notch piece of art to median income. For lack of good money in this fiaturrency petrodollar era, she says, especially in the post-2009 era with interest rates below inflation rates, we monetize other things with higher stock-to-flow

Starting point is 00:10:10 ratios and treat them as stores of value. We plow a percentage of each paycheck into broad equity indices without analyzing companies or doing any sort of due diligence, treating that basket of stocks as simply a better store value than cash regardless of what's inside. From 1792 to 1913, dollar purchasing power oscillated mildly around the same value, with over 120 years of relative stability. From 1913 onward, the policy changed and the dollar has been in perpetual decline, especially after it completely dropped the gold peg in 1971. And it's actually worse today, she says, than during most of this 1971 to 2022 Fiat petrodolar period, because interest rates aren't keeping up with inflation

Starting point is 00:10:47 rates anymore. End quote. In the U.S., today's official CPI is around 8% and the bedrock interest rate is around 0%. Financial repression. Quote, the Fiat system is getting less stable due to so much debt being in the system, which disallows policymakers from raising interest rates higher than the prevailing inflation rate. From a developing market standpoint, the Fiat and Petrodollar Standard contributes to massive booms and bust because a lot of the debt is denominated in US dollars, and that debt fluctuates wildly in strength depending on the actions of U.S. policymakers. The fiat petrodollars system can be considered a form of neocolonialism. We push most of the costs of the system out into the developing countries in order to maximize the stability for the developed

Starting point is 00:11:26 world. Fiat currency, Lynn, points out, tends to incentivize running bigger deficits, since spending doesn't necessarily need to be taxed for, and generally requires some degree of hard or soft coercion in order to get people to use it over harder monies. Although that coercion is often rather invisible to most people most of the time until things go wrong. Its ability to be diluted can allow for longer wars, selective bailouts for influential groups, and other forms of government spending that aren't always transparent to citizens. Another point she makes is on the events of the last few weeks. Quote, the vast majority of sovereign official reserves are permissioned assets rather than permission less assets. They are non-sovereign, able to be frozen by foreign nations.

Starting point is 00:12:04 War crystallizes this fact. Europe froze 400 billion plus in Russian fiat assets in response to Russia's invasion of Ukraine, which is equivalent to over 20% of Russian GDP and over five years of Russian military spending, an utterly massive economic confiscation. The weaponization of foreign exchange reserves is historic. Lin looks at digital assets on the rise as a result of the flaws in the fiat system. With regard to proof of stake cryptocurrencies, she notes their risk is that, quote, they tend to centralize over time into an oligopoly. Quote, since it doesn't require ongoing resource inputs to maintain your stake and to grow it over time, wealth tends to compound into more wealth, which they can use to influence the system to give themselves even more wealth and so on.

Starting point is 00:12:43 What makes proof-of-stake blockchains inherently equity-like is that they require some form of ongoing governance, whereas proof-of-work blockchains, especially ones decentralized enough that they can't really change their monetary policies, they're more commodity-like. Back to Alex, Bitcoin's proof-of-work system, on the other hand, is beyond politics. This allows and will continue to allow it to be used as Lynn notes by people even in places like Venezuela, Syria, Iran, Nigeria, China, Ukraine, and beyond. quote, at the end of the day, Bitcoin is more of an anti-authoritarian monetary technology than it is a left or right monetary technology.

Starting point is 00:13:15 Alex Gladstein concludes, I couldn't agree more. You guys don't need me to tell you that Lynn Alden is one of the best thinkers on money and monetary theory at this point, and her perspective is informed by a deep historical knowledge. I'll put a link to not only this thread, but also her essay, What is Money, so that you can go check it out for yourself. For now, I want to say thanks again to my sponsors, Nexo.io, Arculus and FTX. Thanks to Alex Gladstein for these great summary threads on top of all the other great original work he does as well.

Starting point is 00:13:44 And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners, come join CoinDesk's Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain,

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The Breakdown - The Transformation of Money

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