I’ll admit its only been the last few months that I’ve taken any real interest in cryptocurrencies. This is partly because I’m not a technology buff (I only got my first smart-phone a couple of years ago) and partly because I think cryptocurrencies are rather ridiculous. However, the more I’ve read about crypto, the more fascinating they have become.
I’ll happily admit that I still don’t understand how this “blockchain” technology works – I’ve read over the Wikipedia page several times, but it largely flies over my head. I’m confident I’m not alone here – whilst a lot of people surely want to pretend they understand it, if they are honest they’ll need to admit that they don’t.
What I do think I have a good grasp on is the mechanics of the monetary system in today’s modern world. Given that the most passionate proponents of cryptocurrencies think they will take over the world, I’ve been thinking about the realistic chances of this from a practical perspective along with the ramifications if they do. Below are some of the thought experiments I’ve been using
Can Crypto be money?
Yes, Crypto can indeed function as “money” and serve as a “medium of exchange.” Money, fundamentally, is a social construct primarily serving as a medium of exchange. It doesn’t inherently possess intrinsic value, and anyone can create money. However, the challenge lies in gaining acceptance and adoption.
Money acts as a “ticket to the game” in an economy. To participate in economic transactions and purchase goods and services, one needs access to an accepted medium of exchange.
The value of money derives from the productive capacity of the private sector. While governments dictate legal tender, this alone doesn’t guarantee value. Instead, value emanates from the private sector’s productivity. Governments aid by fostering an environment conducive to economic growth, such as upholding legal rights and providing infrastructure.
For instance, consider a talented computer programmer faced with the choice of staying in Bathurst or relocating to Silicon Valley. The decision is clear-cut because Silicon Valley offers a framework for success, access to investment, legal enforcement of intellectual property rights, and a conducive environment for collaboration. Moreover, the quality of life and amenities in California contribute to its appeal.
The USA attracts skilled labor, which enhances its economic output and creates demand for its currency, the US dollar. In this context, Crypto can indeed function as money. There’s no inherent reason why Crypto cannot serve as a medium of exchange in economic transactions.
But why would I turn to Crypto?
Indeed, the widespread adoption of Crypto as a “medium of exchange” hinges on a fundamental question: Why would individuals choose to use Crypto over existing currencies?
The modern monetary system, facilitated by banks and payment processing intermediaries, has achieved remarkable efficiency in enabling seamless transactions. With a simple wave of a credit card at a paywave terminal, one can swiftly complete a transaction and be on their way in mere seconds.
Given this convenience, there needs to be a highly compelling reason for individuals to transition to an alternative payment method, let alone a completely new form of currency like Crypto. What would motivate someone to undertake the effort of changing their payment habits?
This question underscores the significant challenge facing Crypto proponents. To achieve widespread adoption, Crypto must offer clear advantages or incentives over traditional currencies and payment methods. Whether it’s enhanced security, lower transaction fees, greater privacy, or other innovative features, Crypto must provide tangible benefits that outweigh the convenience and familiarity of existing systems.
Without a compelling value proposition, it’s unlikely that individuals will embrace Crypto as a mainstream medium of exchange on a large scale. Thus, the success of Crypto hinges not only on its technological capabilities but also on its ability to address real-world needs and deliver practical benefits to users.
By-pass the banks?
The idea of bypassing banks as a trigger for widespread Crypto adoption raises several important considerations.
From a consumer standpoint, while there may be a general distrust or dissatisfaction with banks, the reality is that the payment processing system they operate is highly convenient, efficient, and reliable. Despite any grievances consumers may have with banks, the ease of use and trustworthiness of traditional banking systems often outweighs any desire to seek out alternative payment methods.
For merchants, banks do impose fees on transactions, which can eat into profits. This may lead to interest in alternative payment platforms that offer lower fees. However, convincing customers to switch to a new platform can be challenging, especially if they are satisfied with the current system. Even if merchants are motivated to explore alternatives, the success of these platforms ultimately depends on consumer adoption.
We’ve seen a similar scenario play out with the decline of cash as a medium of exchange. Despite some businesses’ dissatisfaction with the dominance of paywave transactions, they still adopt payment terminals because they recognize the risk of losing business if they don’t cater to customers’ preferred payment methods.
Overall, while bypassing banks may be a motivating factor for some Crypto proponents, the practicalities of consumer behavior and the entrenched nature of existing payment systems present significant hurdles to widespread Crypto adoption solely on this basis. To truly disrupt the traditional banking system, Crypto would need to offer clear advantages that address both consumer and merchant needs while overcoming the inertia of entrenched habits and infrastructure.
“Away from the tax man”:
The argument that some Crypto proponents make about avoiding taxes is certainly a contentious issue. While it’s understandable that individuals may want to minimize their tax burden and see tax revenues directed towards beneficial public infrastructure, it’s essential to approach this topic with realism and pragmatism.
Many Crypto enthusiasts may express frustration with government inefficiencies and mismanagement of tax revenues. However, the broader view that suggests one can enjoy the benefits of a prosperous developed country without contributing to its infrastructure through taxes is unrealistic.
Public infrastructure, including roads, public transportation, healthcare, and law enforcement, plays a vital role in maintaining a high standard of living and societal well-being. These services are funded through tax revenues, which are essential for the functioning of a modern society.
While taxes may be perceived as burdensome, they are necessary for funding essential public services and maintaining societal stability. Advocating for tax avoidance as a means of circumventing government responsibilities overlooks the collective responsibility we have towards contributing to the common good and ensuring the sustainability of public infrastructure.
In considering alternatives, such as relocating to regions with lower tax rates like Abu Dhabi, it’s crucial to recognize that the absence of taxes may come with trade-offs in terms of reduced access to certain public services or societal benefits.
Ultimately, while taxes may be unpopular, they are a fundamental aspect of societal governance and contribute to the well-being of communities. Instead of seeking to evade taxes, efforts should be directed towards advocating for responsible governance and effective allocation of tax revenues to benefit society as a whole.
Legislative Risks:
The issue of taxes presents a significant legislative hurdle on the path to widespread Crypto adoption. If Crypto were to become prevalent in Australia, it’s inevitable that the government would intervene, likely requiring businesses to convert Crypto sales to AUD for tax declaration and remittance purposes.
Many Crypto proponents may find the anonymity and decentralized nature of Crypto attractive for avoiding taxes, akin to the shrinking cash economy. However, it’s improbable that the government would tolerate tax evasion facilitated by Crypto transactions, especially given the consensus among the broader population regarding the necessity of paying taxes for social infrastructure and services.
In a democratic system, governments are elected to make decisions aligned with the broader consensus of the population. Most people recognize the importance of taxes in funding essential services, and it’s consistent with community consensus for the government to enforce tax obligations.
Despite the appeal of Crypto for some individuals seeking to evade taxes, it’s crucial to understand that the majority of the population supports taxation as a means of funding public services. Any attempts to circumvent tax obligations through Crypto transactions would likely face opposition and regulatory intervention.
Moreover, if Crypto were to pose a significant challenge to tax collection or have adverse effects on societal infrastructure, governments would have justification to impose legislation restricting or even banning Crypto altogether. In such cases, legislative action against Crypto would align with the general consensus regarding taxation and public governance.
Ultimately, the future of Crypto’s legal status and widespread adoption will depend on the interplay between technological innovation, regulatory measures, and societal attitudes towards taxation and governance.
Evil, Corrupt Government:
This seems to be a relatively popular belief held by Crypto-proponents. That government in most developed nations has been hijacked by the wealthy elite, used solely for their benefit and the inevitable outcome will be a collapse of the “system.” A sense that crypto is “sticking it to the man” – seizing back the control of money by the people.
Are governments and our capitalistic system about to implode? What do you think?
I feel that a big part of this issue is that people really don’t understand how capitalism works. Capitalism has a tendency to create inequality and inequality is close to all-time highs. Humans (all animals for that matter) live in a competitive world of scarce resources and we compete for resources to improve our lives. A side-effect of this is that some people will amass a much greater share of the world’s resources than others. This doesn’t mean that capitalism is broken. It’s fair to say that capitalism has probably resulted in too much inequality, but inequality itself is nothing new – it’s been going on for most of human history.
What we’ve seen through history is that the wealthy who benefit from the “system” the most will invariably share enough with the rest to keep them comfortable and keep the system going. They have the most to lose and are collectively smart enough to understand that. You can liken it to a casino – if you keep winning you will bankrupt the rest of the players. What’s the point in that? If you want the game to continue, you need to leave enough chips on the table to keep the others happy and playing the game.
I suppose this is a big part of the argument for “the system” crashing – that inequality has become so bad that the system will crash. I’m really not all that concerned about capitalism and our system of government crashing. I do think we will see a continued move towards measures that will reduce inequality, but I believe that this will be done under a democratic, capitalist system (at least in most countries). Perhaps it’s also worth comparing a communist system versus a capitalist system. The very inequality we are talking about is the incentive for people to further themselves and strive to move up the inequality curve. It’s what drives us.
I also feel there’s a touch of irony here… I feel that some of the biggest proponents of Crypto are relatively wealthy people who see crypto as a means of seizing a huge share of the world’s resources when the collapse comes. How very capitalist. I guess they feel they will be a better class of mega-wealthy elite – more sympathetic to the wellbeing of the wider population.
The current monetary system is going to crash!
This is the other key argument. Either in addition to or instead of the governance system crashing there’s a view that our monetary system will crash.
Of course, at the heart of this argument is debt. i.e. debt has reached such prolific, unsustainable levels globally that we’re moments away from an implosion that will make the GFC look like nothing.
Debt plays a major role within economic cycles – increasing debt tends to be associated with a stronger economy whilst decreasing debt is normally associated with economic weakness. I’ve expressed my concerns in recent months about debt. Specifically, I feel that Australian household debt levels may have reached a peak and that the possibility of a period of de-leveraging poses a major risk the Australian economy. I think China could be in a similar situation but the Chinese economy is such an unusual beast that applying developed-economy precedents to it has proven futile.
But it’s important to understand that all debts are not equal. I’ve written about this extensively over the years and I won’t go into detail today, but the key point is that a nation – an autonomous issuer of a floating fiat currency cannot become insolvent with respect to debts denominated in their own currency. The USA has some major economic challenges and their growing debt burden is an issue, but its not about to implode the way a lot of crypto proponents believe.
What’s interesting is that Japan really doesn’t exhibit any of the angst about the system imploding that nations like the USA do. They haven’t suffered any real hit to civic nationalism and popular support for institutions, established political parties, business interests and the media remain as high as ever. And yet with their record-breaking government debt they should be the ones most fretting most over the system imploding.
In the interests of time I won’t go into more detail on this today. Bottom line – it’s incredibly improbable that nations with their own floating fiat currencies (USA, Japan, Australia, UK, etc) are going to see a government debt crisis anytime soon. Europe? Well they are different (I will likely be revisiting that whole saga in detail in coming months).
Crypto as “universal currency”:
Moving on from the likelihood crypto is about to become widespread owing to a collapse of the global monetary system, let consider what a financial world would look like if crypto was king. Let’s try and apply some of the basic terms of trade accounting principles to this new world and see where it leads us…
Desire to run current account surplus = need to run capital account deficit (importer of capital)…
A single currency with global free trade would mean that those areas/nations capable of producing desired goods and services at the lowest price should flourish….and continue to flourish. If lets say China was able to produce significant amounts of goods that the world wanted at lower prices, it would see a huge influx of currency as payment for those goods. Ordinarily, under the (largely) floating fiat currency system we presently have, this would invariably put upwards pressure on the seller’s currency. This would automatically have the effect of making their exports less competitive/attractive. It would also have the impact of increasing the purchasing power of their citizens on a global basis. Without this exchange rate system, provided China continues to be able to produce desirable goods cheaper, they would simply continue to amass more and more of the “universal currency.”
The trade surplus nation then has the enviable position of deciding what to do with all its money. Under this universal currency model, it could lend it out anywhere in the world easily. It would do it at a rate that was satisfactory to them. If say, Greece, had a desire to borrow meaningful amounts of money and the rates offered by China were very attractive to them, then you see an explosion in debt in Greece.
All this money now flowing into Greece will likely have some sort of inflationary impact as its spent – some even sent back to China in order to buy more of their stuff. The Greek Central Bank might need to raise interest rates in order to… hold on a minute…
If you have the same currency, you necessarily need to have the same monetary policy. If I’m a Chinese bank I can lend out this universal currency to anyone around the world at a rate satisfactory to me. Barring any new government-imposed restrictions (i.e. the exact things proponents of crypto say will disappear), currency will gravitate towards those parts of the world where there is demand for capital to “fund” trade deficits.
We’ve seen this recently in the Eurozone. Pre-GFC, trade surplus nations (i.e. Germany) were amassing meaningful Euro surpluses and investing them back in other areas of the Eurozone where the exchange rate and interest rate regime didn’t really fit. This fuelled speculative bubbles (Spain and Ireland property) in some areas and the accumulation of unsustainable debt burdens in others (Greece, Portugal and back with a vengeance – Italy!).
Similar to governments, central banks as a key feature of the supposedly-broken system, are copping a lot of criticism. I’m not about to say that they are perfect – I feel that they have made some poor decisions over the past decade since the GFC. But the “system” they are part of isn’t broken.
In essence, when I think about what a financial world dominated by crypto would be like, I cringe. I see a world of massive inequality, massive trade imbalances, massive debt problems… and what makes me think the problems would be “massive” is because there’s nothing anybody could do about it!
That’s the supposed beauty of crypto – a decentralised currency separate from any individual or government. A currency for the people. So when the new era of “banks” have leant too much money to some other country and the debts are going bad and the “banks” ready to implode…I guess we all just sit by and watch. Hopefully our crypto-savings are safe because there isn’t any sort of government deposit insurance!
Some of you will be thinking “…no, it won’t happen as there won’t be any banks in this new world!” Lets briefly explore this idea in the simplest senses. What if I want to buy a home. How do I get a loan? Or do I have to save up and pay “crypto-cash?”
You might respond, “…no the “system” will have features whereby people can lend out their excess savings to others.” Okay – so how does that work? Do I need to find one individual with heaps of savings and enter a contract with them? There would be an opportunity for an entrepreneur to set up some form of investment organisation – soliciting savings from multiple people, paying them a return and lending their savings on their behalf to worthy borrowers on a pooled basis. Something akin to, well, a bank!
Yes, I get that the banking industry would be different in the world of crypto – banks unable to create money via lending activities. But the risks to savers/investors are worse – without a central bank and ability to provide liquidity bank runs are real for the first time in over a century. And if the bank runs out of crypto reserves, I’m stuffed! How do I get money? The bank lent it to a bunch of Venezuelans over the past 5 years because they were keen borrowers willing to pay good interest rates.
Conclusions:
Here’s where I presently stand on crypto:
I feel that it’s a solution to a problem which presently does not exist. There’s nothing fundamentally “broken” with the current payments system.
Further, I don’t feel that “the system” is about to implode. I just don’t.
I feel that a world dominated by crypto has the potential to be vastly more financially unstable than under the current system.
I feel that investors in crypto in general have little understanding about the monetary system.
I feel that crypto investors are rather confused with their objectives – they are buying into the idea that crypto is the future of money but they are ultimately buying it as a short-term speculative investment.
My thoughts are evolving in this area and as always I reserve my right to change my views at any time. Suffice to say Aviator does not presently own any crypto assets and has no intention of taking any positions (short or long) at the moment.
So, the potential value of Crypto may not be as money, but rather provide other useful benefits such as registering of Intellectual Property (through open source blockchain technology), or an alternative mechanism to SWIFT for international transfers to reduce fees and improve speed (Ripple), or data storage that’s harder to hack because it’s not stored centrally. At the moment a lot of Cryptos are a solution in search of a problem, but that problem probably won’t be the global financial system.
This document contains information which is the copyright of Aviator Capital Pty Ltd (AFSL 432803) or relevant third party. Any views expressed in this transmission are those of the individual, except where the individual specifically states them to be the views of Aviator Capital Pty Ltd. Except as required by law, Aviator Capital Pty Ltd does not represent, warrant and/or guarantee that the integrity of this document has been maintained nor is free of errors, interception or interference. You should not copy, disclose or distribute this document without the authority of Aviator Capital Pty Ltd. Aviator Capital Pty Ltd does not accept any liability for any investment decisions made on the basis of this information. This information is intended to provide general information only, without taking into account any particular person’s objectives, financial situation, taxation or needs. It does not constitute financial advice and should not be taken as such. Aviator Capital Pty Ltd urges you to obtain professional advice before proceeding with any financial investment.
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Crypto: Can it be ‘Money?’
Cryptocurrencies
I’ll admit its only been the last few months that I’ve taken any real interest in cryptocurrencies. This is partly because I’m not a technology buff (I only got my first smart-phone a couple of years ago) and partly because I think cryptocurrencies are rather ridiculous. However, the more I’ve read about crypto, the more fascinating they have become.
I’ll happily admit that I still don’t understand how this “blockchain” technology works – I’ve read over the Wikipedia page several times, but it largely flies over my head. I’m confident I’m not alone here – whilst a lot of people surely want to pretend they understand it, if they are honest they’ll need to admit that they don’t.
What I do think I have a good grasp on is the mechanics of the monetary system in today’s modern world. Given that the most passionate proponents of cryptocurrencies think they will take over the world, I’ve been thinking about the realistic chances of this from a practical perspective along with the ramifications if they do. Below are some of the thought experiments I’ve been using
Can Crypto be money?
Yes, Crypto can indeed function as “money” and serve as a “medium of exchange.” Money, fundamentally, is a social construct primarily serving as a medium of exchange. It doesn’t inherently possess intrinsic value, and anyone can create money. However, the challenge lies in gaining acceptance and adoption.
Money acts as a “ticket to the game” in an economy. To participate in economic transactions and purchase goods and services, one needs access to an accepted medium of exchange.
The value of money derives from the productive capacity of the private sector. While governments dictate legal tender, this alone doesn’t guarantee value. Instead, value emanates from the private sector’s productivity. Governments aid by fostering an environment conducive to economic growth, such as upholding legal rights and providing infrastructure.
For instance, consider a talented computer programmer faced with the choice of staying in Bathurst or relocating to Silicon Valley. The decision is clear-cut because Silicon Valley offers a framework for success, access to investment, legal enforcement of intellectual property rights, and a conducive environment for collaboration. Moreover, the quality of life and amenities in California contribute to its appeal.
The USA attracts skilled labor, which enhances its economic output and creates demand for its currency, the US dollar. In this context, Crypto can indeed function as money. There’s no inherent reason why Crypto cannot serve as a medium of exchange in economic transactions.
But why would I turn to Crypto?
Indeed, the widespread adoption of Crypto as a “medium of exchange” hinges on a fundamental question: Why would individuals choose to use Crypto over existing currencies?
The modern monetary system, facilitated by banks and payment processing intermediaries, has achieved remarkable efficiency in enabling seamless transactions. With a simple wave of a credit card at a paywave terminal, one can swiftly complete a transaction and be on their way in mere seconds.
Given this convenience, there needs to be a highly compelling reason for individuals to transition to an alternative payment method, let alone a completely new form of currency like Crypto. What would motivate someone to undertake the effort of changing their payment habits?
This question underscores the significant challenge facing Crypto proponents. To achieve widespread adoption, Crypto must offer clear advantages or incentives over traditional currencies and payment methods. Whether it’s enhanced security, lower transaction fees, greater privacy, or other innovative features, Crypto must provide tangible benefits that outweigh the convenience and familiarity of existing systems.
Without a compelling value proposition, it’s unlikely that individuals will embrace Crypto as a mainstream medium of exchange on a large scale. Thus, the success of Crypto hinges not only on its technological capabilities but also on its ability to address real-world needs and deliver practical benefits to users.
By-pass the banks?
The idea of bypassing banks as a trigger for widespread Crypto adoption raises several important considerations.
From a consumer standpoint, while there may be a general distrust or dissatisfaction with banks, the reality is that the payment processing system they operate is highly convenient, efficient, and reliable. Despite any grievances consumers may have with banks, the ease of use and trustworthiness of traditional banking systems often outweighs any desire to seek out alternative payment methods.
For merchants, banks do impose fees on transactions, which can eat into profits. This may lead to interest in alternative payment platforms that offer lower fees. However, convincing customers to switch to a new platform can be challenging, especially if they are satisfied with the current system. Even if merchants are motivated to explore alternatives, the success of these platforms ultimately depends on consumer adoption.
We’ve seen a similar scenario play out with the decline of cash as a medium of exchange. Despite some businesses’ dissatisfaction with the dominance of paywave transactions, they still adopt payment terminals because they recognize the risk of losing business if they don’t cater to customers’ preferred payment methods.
Overall, while bypassing banks may be a motivating factor for some Crypto proponents, the practicalities of consumer behavior and the entrenched nature of existing payment systems present significant hurdles to widespread Crypto adoption solely on this basis. To truly disrupt the traditional banking system, Crypto would need to offer clear advantages that address both consumer and merchant needs while overcoming the inertia of entrenched habits and infrastructure.
“Away from the tax man”:
The argument that some Crypto proponents make about avoiding taxes is certainly a contentious issue. While it’s understandable that individuals may want to minimize their tax burden and see tax revenues directed towards beneficial public infrastructure, it’s essential to approach this topic with realism and pragmatism.
Many Crypto enthusiasts may express frustration with government inefficiencies and mismanagement of tax revenues. However, the broader view that suggests one can enjoy the benefits of a prosperous developed country without contributing to its infrastructure through taxes is unrealistic.
Public infrastructure, including roads, public transportation, healthcare, and law enforcement, plays a vital role in maintaining a high standard of living and societal well-being. These services are funded through tax revenues, which are essential for the functioning of a modern society.
While taxes may be perceived as burdensome, they are necessary for funding essential public services and maintaining societal stability. Advocating for tax avoidance as a means of circumventing government responsibilities overlooks the collective responsibility we have towards contributing to the common good and ensuring the sustainability of public infrastructure.
In considering alternatives, such as relocating to regions with lower tax rates like Abu Dhabi, it’s crucial to recognize that the absence of taxes may come with trade-offs in terms of reduced access to certain public services or societal benefits.
Ultimately, while taxes may be unpopular, they are a fundamental aspect of societal governance and contribute to the well-being of communities. Instead of seeking to evade taxes, efforts should be directed towards advocating for responsible governance and effective allocation of tax revenues to benefit society as a whole.
Legislative Risks:
The issue of taxes presents a significant legislative hurdle on the path to widespread Crypto adoption. If Crypto were to become prevalent in Australia, it’s inevitable that the government would intervene, likely requiring businesses to convert Crypto sales to AUD for tax declaration and remittance purposes.
Many Crypto proponents may find the anonymity and decentralized nature of Crypto attractive for avoiding taxes, akin to the shrinking cash economy. However, it’s improbable that the government would tolerate tax evasion facilitated by Crypto transactions, especially given the consensus among the broader population regarding the necessity of paying taxes for social infrastructure and services.
In a democratic system, governments are elected to make decisions aligned with the broader consensus of the population. Most people recognize the importance of taxes in funding essential services, and it’s consistent with community consensus for the government to enforce tax obligations.
Despite the appeal of Crypto for some individuals seeking to evade taxes, it’s crucial to understand that the majority of the population supports taxation as a means of funding public services. Any attempts to circumvent tax obligations through Crypto transactions would likely face opposition and regulatory intervention.
Moreover, if Crypto were to pose a significant challenge to tax collection or have adverse effects on societal infrastructure, governments would have justification to impose legislation restricting or even banning Crypto altogether. In such cases, legislative action against Crypto would align with the general consensus regarding taxation and public governance.
Ultimately, the future of Crypto’s legal status and widespread adoption will depend on the interplay between technological innovation, regulatory measures, and societal attitudes towards taxation and governance.
Evil, Corrupt Government:
This seems to be a relatively popular belief held by Crypto-proponents. That government in most developed nations has been hijacked by the wealthy elite, used solely for their benefit and the inevitable outcome will be a collapse of the “system.” A sense that crypto is “sticking it to the man” – seizing back the control of money by the people.
Are governments and our capitalistic system about to implode? What do you think?
I feel that a big part of this issue is that people really don’t understand how capitalism works. Capitalism has a tendency to create inequality and inequality is close to all-time highs. Humans (all animals for that matter) live in a competitive world of scarce resources and we compete for resources to improve our lives. A side-effect of this is that some people will amass a much greater share of the world’s resources than others. This doesn’t mean that capitalism is broken. It’s fair to say that capitalism has probably resulted in too much inequality, but inequality itself is nothing new – it’s been going on for most of human history.
What we’ve seen through history is that the wealthy who benefit from the “system” the most will invariably share enough with the rest to keep them comfortable and keep the system going. They have the most to lose and are collectively smart enough to understand that. You can liken it to a casino – if you keep winning you will bankrupt the rest of the players. What’s the point in that? If you want the game to continue, you need to leave enough chips on the table to keep the others happy and playing the game.
I suppose this is a big part of the argument for “the system” crashing – that inequality has become so bad that the system will crash. I’m really not all that concerned about capitalism and our system of government crashing. I do think we will see a continued move towards measures that will reduce inequality, but I believe that this will be done under a democratic, capitalist system (at least in most countries). Perhaps it’s also worth comparing a communist system versus a capitalist system. The very inequality we are talking about is the incentive for people to further themselves and strive to move up the inequality curve. It’s what drives us.
I also feel there’s a touch of irony here… I feel that some of the biggest proponents of Crypto are relatively wealthy people who see crypto as a means of seizing a huge share of the world’s resources when the collapse comes. How very capitalist. I guess they feel they will be a better class of mega-wealthy elite – more sympathetic to the wellbeing of the wider population.
The current monetary system is going to crash!
This is the other key argument. Either in addition to or instead of the governance system crashing there’s a view that our monetary system will crash.
Of course, at the heart of this argument is debt. i.e. debt has reached such prolific, unsustainable levels globally that we’re moments away from an implosion that will make the GFC look like nothing.
Debt plays a major role within economic cycles – increasing debt tends to be associated with a stronger economy whilst decreasing debt is normally associated with economic weakness. I’ve expressed my concerns in recent months about debt. Specifically, I feel that Australian household debt levels may have reached a peak and that the possibility of a period of de-leveraging poses a major risk the Australian economy. I think China could be in a similar situation but the Chinese economy is such an unusual beast that applying developed-economy precedents to it has proven futile.
But it’s important to understand that all debts are not equal. I’ve written about this extensively over the years and I won’t go into detail today, but the key point is that a nation – an autonomous issuer of a floating fiat currency cannot become insolvent with respect to debts denominated in their own currency. The USA has some major economic challenges and their growing debt burden is an issue, but its not about to implode the way a lot of crypto proponents believe.
What’s interesting is that Japan really doesn’t exhibit any of the angst about the system imploding that nations like the USA do. They haven’t suffered any real hit to civic nationalism and popular support for institutions, established political parties, business interests and the media remain as high as ever. And yet with their record-breaking government debt they should be the ones most fretting most over the system imploding.
In the interests of time I won’t go into more detail on this today. Bottom line – it’s incredibly improbable that nations with their own floating fiat currencies (USA, Japan, Australia, UK, etc) are going to see a government debt crisis anytime soon. Europe? Well they are different (I will likely be revisiting that whole saga in detail in coming months).
Crypto as “universal currency”:
Moving on from the likelihood crypto is about to become widespread owing to a collapse of the global monetary system, let consider what a financial world would look like if crypto was king. Let’s try and apply some of the basic terms of trade accounting principles to this new world and see where it leads us…
Desire to run current account surplus = need to run capital account deficit (importer of capital)…
A single currency with global free trade would mean that those areas/nations capable of producing desired goods and services at the lowest price should flourish….and continue to flourish. If lets say China was able to produce significant amounts of goods that the world wanted at lower prices, it would see a huge influx of currency as payment for those goods. Ordinarily, under the (largely) floating fiat currency system we presently have, this would invariably put upwards pressure on the seller’s currency. This would automatically have the effect of making their exports less competitive/attractive. It would also have the impact of increasing the purchasing power of their citizens on a global basis. Without this exchange rate system, provided China continues to be able to produce desirable goods cheaper, they would simply continue to amass more and more of the “universal currency.”
The trade surplus nation then has the enviable position of deciding what to do with all its money. Under this universal currency model, it could lend it out anywhere in the world easily. It would do it at a rate that was satisfactory to them. If say, Greece, had a desire to borrow meaningful amounts of money and the rates offered by China were very attractive to them, then you see an explosion in debt in Greece.
All this money now flowing into Greece will likely have some sort of inflationary impact as its spent – some even sent back to China in order to buy more of their stuff. The Greek Central Bank might need to raise interest rates in order to… hold on a minute…
If you have the same currency, you necessarily need to have the same monetary policy. If I’m a Chinese bank I can lend out this universal currency to anyone around the world at a rate satisfactory to me. Barring any new government-imposed restrictions (i.e. the exact things proponents of crypto say will disappear), currency will gravitate towards those parts of the world where there is demand for capital to “fund” trade deficits.
We’ve seen this recently in the Eurozone. Pre-GFC, trade surplus nations (i.e. Germany) were amassing meaningful Euro surpluses and investing them back in other areas of the Eurozone where the exchange rate and interest rate regime didn’t really fit. This fuelled speculative bubbles (Spain and Ireland property) in some areas and the accumulation of unsustainable debt burdens in others (Greece, Portugal and back with a vengeance – Italy!).
Similar to governments, central banks as a key feature of the supposedly-broken system, are copping a lot of criticism. I’m not about to say that they are perfect – I feel that they have made some poor decisions over the past decade since the GFC. But the “system” they are part of isn’t broken.
In essence, when I think about what a financial world dominated by crypto would be like, I cringe. I see a world of massive inequality, massive trade imbalances, massive debt problems… and what makes me think the problems would be “massive” is because there’s nothing anybody could do about it!
That’s the supposed beauty of crypto – a decentralised currency separate from any individual or government. A currency for the people. So when the new era of “banks” have leant too much money to some other country and the debts are going bad and the “banks” ready to implode…I guess we all just sit by and watch. Hopefully our crypto-savings are safe because there isn’t any sort of government deposit insurance!
Some of you will be thinking “…no, it won’t happen as there won’t be any banks in this new world!” Lets briefly explore this idea in the simplest senses. What if I want to buy a home. How do I get a loan? Or do I have to save up and pay “crypto-cash?”
You might respond, “…no the “system” will have features whereby people can lend out their excess savings to others.” Okay – so how does that work? Do I need to find one individual with heaps of savings and enter a contract with them? There would be an opportunity for an entrepreneur to set up some form of investment organisation – soliciting savings from multiple people, paying them a return and lending their savings on their behalf to worthy borrowers on a pooled basis. Something akin to, well, a bank!
Yes, I get that the banking industry would be different in the world of crypto – banks unable to create money via lending activities. But the risks to savers/investors are worse – without a central bank and ability to provide liquidity bank runs are real for the first time in over a century. And if the bank runs out of crypto reserves, I’m stuffed! How do I get money? The bank lent it to a bunch of Venezuelans over the past 5 years because they were keen borrowers willing to pay good interest rates.
Conclusions:
Here’s where I presently stand on crypto:
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