The Breakdown - Why Fiat is Failing in 2020: Argentina, Turkey, Brazil

Episode Date: October 24, 2020

Today on the Brief: DOJ crypto enforcement a “disaster” for privacy Ant’s blockchain tools pre-IPO Better news around jobless claims  Our main discussion: fiat failures, 2020 edition.  In this episode, NLW looks at a raft of geographies in which bitcoin has recently reached all-time highs, priced in the local currency. The story, he says, is about fiats floundering more than mispriced local bitcoin.  Special focus on economic happenings in Brazil, Argentina and Turkey.

Bitcoin and other non-sovereign digital currencies are an incredible invention for the technologically enfranchised to flee these local currency regimes. And the point is that we shouldn't just be cheering Bitcoin's rise and fiat's fall. We should be championing the companies and projects who are trying to make it easier for people in these ecosystems to figure out how to opt out and preserve some of their wealth. 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, and elliptic, and produced and distributed by CoinDess.

What's going on, guys? It is Friday, October 23rd, and today we are talking about fiat failures this year. First, however, let's do the brief. First up on the brief today, the Department of Justice's crypto enforcement framework is a disaster for digital privacy. This is according to Marta Belcher, an attorney for the Electronic Frontier Foundation. So the DOJ came out with this enforcement framework and people have been spending the last couple weeks

pouring over it, trying to figure out what it means, and what they're coming to the conclusion of is kind of the worst case scenario. Let's look at two different dimensions, one around encryption and then one on private transactions. When it comes to encryption, quote, the framework is making the framework is making these. exact same arguments that you've been seeing made for decades about encryption. These are the same

arguments that are against encryption, and they're coming from the exact same place as the fight against encryption. The DOJ and its allies are overlooking a few basic points about encryption. First, that strong encryption itself enhances public safety and prevents crime by protecting people in their data. Second, that it's impossible to build back doors into encrypted systems without creating extraordinary new cybersecurity risks. And third, that cryptography tools are increasingly open source and can't be easily cabined or controlled at their request. Basically, we've heard this over and over when it comes to tech and messaging apps. The Attorney General in the U.S. right now wants to end end-to-end encryption.

They want law enforcement back doors, and we're seeing the same thing now be requested or demanded be built into crypto networks. A second area of trouble is around private transactions. This is that same legal professional saying, the thing that is so important to me is that you can transact anonymously and you can take the protections of cash and you can transfer that to the online world. The idea that merely by exercising your right to transact anonymously is indicative of you committing a crime is wrong in my view. This is, of course, I think, the central philosophical battle that we have to face when it comes to digital currencies, that somehow just using them using private currencies means you're committing a crime.

Imagine that we assumed every single person who used a U.S. dollar bill, a piece of cash, was trying to commit a crime. It'd be ludicrous, but that's effectively what we're saying in the digital realm. Next up on the brief today is Ant's blockchain. Ant is rolling out a way for content creators to protect their copyrights on things like music, videos, images, articles, essays, etc. Now, Ant is Alibaba's fintech arm, and Ant was just approved by the Hong Kong stock. exchange for what is slated to be the world's biggest ever initial public offering. The fact that they're promoting these new blockchain tools in the lead-up to that just shows you how important they are for their overall pitch. Last up on the brief today, some good news on the jobless front.

Initial jobless claims fell to 787,000 this week, which is the lowest since March. Continuing claims are also down 1 million to 8.4 million people. Now remember, however, when it comes to continuing claims, there's a little bit of challenge in some of these numbers, because it also includes people who are just simply running out of benefits. Still, there were some other good economic indicators as well. In September, existing home sales rose 9.4% to the highest levels since 2006, and consumer spending also rose. Basically, these jobless claims are better than we have before, but are still part of the larger story of what is going to be a very hard one recovery. With that, let's shift to our main

discussion of fiat failures. This was inspired by a tweet I saw from Alistair Milne, who wrote, countries where Bitcoin has hit a new all-time high in their local currency. Brazil, population 209 million, Turkey, population 82 million, Argentina, population 44.5 million. Sudan, population 41 million. Angola, population 30 million, Venezuela, population 29 million, Zambia, population 17 million, soon, Russia, Colombia, than all other fiat currencies. Now, as you might imagine, this tweet blew up with the Bitcoin crowd, and I saw a lot of folks responding to it and engaging as though the only story were the success of Bitcoin. Of course, Bitcoin is up over 100% this year now, so Bitcoin's growth is clearly part of it.

However, Bitcoin is also still $7,000 off its all-time highs denominated in USD, so what is the real story behind the data behind this tweet? It's not that Bitcoin is trading at a premium in these places. I did the same sort of debunking a few months ago when Bitcoin was theoretically selling in Lebanon for about 13 or 14K when it was more like 7 or 8K everywhere else. Sure enough, it turns out that the number that was being quoted was in the official exchange. rate, not the black market exchange rate. What I found when I looked into it is that it wasn't that there was a significant premium on Bitcoin relative to the rest of the world's markets in Lebanon.

It's that the black market exchange rate of the Lebanese pound had basically halved. It was half as much as the official exchange rate. So the official exchange rate was still saying you could get a dollar for 3,500 lira or whatever it was, whereas the real exchange rate, the black market exchange rate was close to 7,000, and of course, Bitcoin was being sold in the real exchange rate on the black market. So what's happening then when we look at all these other currencies is that they've seen significant devaluation. In other words, these are countries that are experiencing some amount of inflation. This is extraordinarily painful for consumers who often see their life savings evaporate overnight, and who can have a whole host of other issues

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First, Brazil. Brazil, like the rest of the world, has been spending, spending in the COVID-19 era. However, unlike many parts of the developed world, markets are punishing it for it. There was a Reuters piece that just came out called Brazil GDP to shrink 4% this year, economy at inflection point. I'm just going to read a little bit of it to give you a full. economy minister Paulo Gueres said on Monday that transitory spending must not morph into inexcusable permanent spending in coming years, adding that the economy is likely to shrink

by a smaller than expected 4% this year. In an online event hosted by the Milken Institute, the head of Brazil's central bank said Brazil is being penalized by financial markets for the uncertain fiscal outlook following unprecedented spending this year to cushion the economic impact of a COVID-19 pandemic. Quote, we are at an inflection point right now that if we spend more money, the cost and credibility coming from the fiscal side, is far bigger than the benefit of the spending itself. If you want to induce growth, it is better to spend less than to spend more, because we are getting penalized by markets, he said, referring to the widening gap in recent months between short and long-term market interest rates. This steepening of the curve

reflects investor unease over the government's ability or willingness to rein in its record debt and deficit, according to Campos Nato, the head of the central bank, and is holding back private sector investment. So basically the story here is that spending is not equal, and while we might be debating MMT in the U.S., a country like Brazil simply doesn't have the privilege of printing unlimited money without serious consequences in the markets. Now let's shift over to Turkey. The Turkish lira this year has been extremely painful. It's fallen more than 25% against the dollar, and there's a huge host of reasons why. But just for a little bit of color, let's look at the new lows that came on Thursday. A Bloomberg piece titled,

Lira Tumbles after Central Bank defies rate hike expectations. The lira sank to a record low after Turkey's central bank unexpectedly held back from raising its key interest rates. Traders had been holding out for a fresh increase on Thursday after policymakers hiked rates at their previous meeting. The current slump of more than 2%, the biggest decline in emerging markets, underscored their disappointment as the Lira weakened toward $8 per dollar. The central Bank raised the upper bound of its interest rate corridor and doubled the gap with the central bank's overnight lending rate. Winding the rates corridor is, quote, a smoke and mirrors trick that is worse than useless if the central bank wants to have an ounce of inflation-flighting

credibility, said Nigel Rendell, an analyst at Medley Global Advisors in London. So basically, right now, the Turkish central bank is absolutely throwing the kitchen sink at trying to prop up this currency and it is simply not working. It keeps going down, causing huge problems for the local and I think that this story is one that is still firmly in its middle rather than coming close to its end. Now let's shift over to Argentina. From the Wall Street Journal last week, an article called Argentina running low on dollars faces fresh economic turmoil. Fears of a financial meltdown grow as the government curbs imports and restricts the purchase of dollars.

Nervous Argentines, who have endured repeated financial blowups in the past, have been steadily buying dollars or withdrawing them from bank accounts. Since mid-August, the country's liquid reserves, dollars it holds in cash or near-cash, have fallen to about $1.6 billion from $6 billion, according to economists who monitor Argentina's central bank. Another sign of financial stress is the growing gap between the official value of the peso at about $82 per dollar, and what Argentina's pay in caves, as black market exchange houses are known in Argentina.

In mid-August, caves charged about 130 pesos per dollar. This week, the black market dollar stood at 167 pesos. Rising demand for dollars could force the government to allow an abrupt devaluation of the official exchange rate that is used, among other things, to import goods, even though President Fernandez has promised that won't happen. But letting the currency find its market price fuels inflation, which is at 37%, even as the country's economy is expected to contract more than 12% this year. I just gave you the number of the number of the number of that the Wall Street Journal was quoting last week, but I also asked friends who are in Buenos Aires right now what the actual blue market rate, as they call it, was versus the official rate.

What they told me is that the official rate is at 83.78 pesos to the dollar, but the blue market rate is all the way up to 190 pesos to the dollar. I was last in Argentina at the beginning of last year, and it was closer to 60 to the dollar. Think about that. Imagine every dollar in your bank account being worth a third of what it was 18 months ago. That's absolutely insane. And that's the point of all this, to remember that there is a much larger economic context in each of this situations, that the rules for the developing world are different than the rules for the countries who have the most global power. And there are real people's lives at stake here. Bitcoin and other non-sovereign digital currencies are an incredible invention for the technologically

enfranchised to flee these local currency regimes. They're a tool for people to avoid the worst of this type of inflation and currency volatility, which as I mentioned can destroy people's lives practically overnight. And the point is that we shouldn't just be cheering Bitcoin's rise and Fiat's fall. We should be championing the companies and projects who are trying to make it easier for people in these ecosystems to figure out how to opt out and preserve some of their wealth. Fiat failures may be in many places inevitable, but that doesn't mean that we have to concede the pain that will come from them, at least not in full. But with that, guys, I hope you're headed to a really fun fall weekend, and until tomorrow, be safe and take care of each other. Peace.