Some argue bitcoin wealth is exhausting the world’s productive potential.
This episode is sponsored by NYDIG.
In this episode, NLW focuses on:
- Inflation measures, impacts and who’s to blame
- News out of Paraguay concerning pro-bitcoin legislation
A recent “Wall Street Journal” survey of economists revealed they expect higher inflation rates to persist for years to come. “Money Week” ran an op-ed playing on the increased attention on inflation where they pin bitcoin as an unused hoard of productive wealth and a reason for inflation. Is bitcoin really to blame for expectations of continuing inflation?
El Salvador’s influence continues to permeate other nations hoping to make similar advances in crypto. On Wednesday, July 14, a Paraguayan “Bitcoin Bill” is expected to be introduced. Though the exact contents of the bill are not yet known, Paraguay would be the next country setting a positive stance towards crypto.
Lastly, NLW covers more in bitcoin and crypto news. What does Grayscale’s move to make its Large Cap Fund a Securities and Exchange Commission reporting company mean? Also, can China’s post-COVID economic recovery be an indicator for what will happen in the rest of the world?
Grayscale is owned by Digital Currency Group, which is CoinDesk’s parent company.
See also: Bitcoin’s Investment Value as Americans’ Inflation Fears Reach Another High, Why China’s Crypto Ban Is Different This Time, and Fidelity’s Digital Asset Arm Is Expanding
The Breakdown is written, produced by and features NLW, with editing by Rob Mitchell 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 "Razor Red" by Sam Barsh. Image credit: Devrimb/iStock/Getty Images, modified by CoinDesk.
Transcript
What's going on guys? It is Monday, July 12 and we're gonna kick off this week with one of our sort of "extended-brief" editions where instead of going massively in depth on one topic, I'm gonna hop and skip across a few. One note, if my voice sounds a little janky, I have whatever sickness every kid on the planet Earth has right now, post-COVID as it comes back, but either way, let's dive in with our title story.
The "Wall Street Journal" does a regular poll of economists and you can more or less guess the gist of the sentiment from the headline, quote, "Higher Inflation Is Here to Stay for Years, Economists Forecast." This set of "Wall Street Journal" surveyed economists now expect inflation excluding food and energy to be up 3.2% in Q4 of this year, and they expect the annual rise to hover around 2.3% in 2022, and 2023. If that plays out, it would mean an average annual inflation rate of 2.58% from 2021 to 2023, which would be the highest since 1993. Joel Naroff, the chief economist at Naroff Economics said, quote: "We are transitioning to a higher period of inflation and interest rates than we've had over the last 20 years." As an aside, I've always found inflation measures that exclude fuel and food, two things that are absolutely essential to everyone, to almost willfully make the point about how not particularly useful inflation measures can be. Now, that said, the Fed's preferred measure is called PCE and it includes food and energy and PCE rose 3.9% in May.
Still, in a report on Friday from the Fed, they continue to argue that inflation is based on one, bottlenecks getting the economy back online; two, difficulty hiring; and three, generally, other quote, "largely transitory factors." What has increased is the Fed's uncertainty over how quickly they might have to change interest rates to get inflation back in line. And this, ultimately, is why the inflation discussion has such an impact on Wall Street. It's not about people having to pay a little bit more. That's just a concern for the little people themselves. No, it's about interest rates and how cheap money and credit are. A lot of the concern from economists these days is about how higher inflation could become a self fulfilling prophecy. As the Wall Street Journal puts it, quote, "supply chain bottlenecks, higher shipping costs and labor shortages might prove temporary as the market adjusts to disruptions. However, the combination of plentiful federal stimulus funding an unprecedented stockpile of household savings and the rollout of vaccines is driving a surge in consumer demand, enabling many businesses to raise prices significantly for the first time in decades. If households and businesses start to expect rising prices, that dynamic can become self fulfilling."
But, what about evidence? Is there evidence that consumers are thinking like this? Well, yes, some. Consumer inflation expectations, which is the rate of inflation the median consumer expects five to 10 years from now rose to 2.8%, which is the highest level in seven years. I've seen a lot of commentary on Twitter, particularly from the traditional sector of FinTwit that says things like: "Oh, come on, does it really matter if prices go up a couple of percent for a year?" I think they fail to understand how many different parts of people's lives could be impacted. First, inflation tends to rise faster than wages, meaning a real squeeze on household budgets and when you're living paycheck to paycheck that matters. Second, when interest rates rise that increased the price of borrowing, you might say "boohoo stock prices are already too inflated." But that also hits housing and the availability and cost of mortgages. Then, of course, there's the challenge of planning in businesses like for example, construction. A commentator in the "Wall Street Journal" said: "It's disruptive. You can't be sure what your costs are, whether you can get supplies or what the cost will be six months from now, I hate to be in the construction business trying to bid on a job when you don't know what the cost of steel will be 18 months from now."
I often find when people reject some position they find extreme, aka 3% inflation means hyperinflation is around the corner, they completely dismiss the real lived impact of what's actually happening as well. Put differently, you don't have to be a Bitcoin er to have meaningful concerns about a sustained period of even moderately high inflation.
Speaking of Bitcoiners and inflation, we got perhaps the weirdest FUD we've ever had. "Money Week" last week ran an op-ed titled "How a Bubble in Bitcoin Could Lead to Hyperinflation," and if you're already shaking your head or dropping your favorite confused meme, you are correct. This piece is a staggering work of theoretical "what-if-ism" that totally detaches from the reality of the world. Here's a choice excerpt: "As with equities, cryptocurrencies have no terminal date, so a bubble can be rational in the same way. However, once the macroeconomic context is considered, it becomes clear that the bubble must pop. Why? Either the market price of bitcoin for example, can become infinite or it cannot. If it cannot, then at some point, the only possible change in the market price of bitcoin is negative. At that point, all holders would want to sell, unless central banks, as with bonds, were expected to support the bitcoin price indefinitely. If instead, the price can and does move towards infinity then the use of an infinitesimal amount of a single person's bitcoin wealth would exhaust all the world's productive potential. That is, each holder could command all the world's resources by being the first to sell and spend. The rise in the general price level towards infinity as bitcoin holders competed for resources would impoverish everyone else."
Now, hold the side for a second the absurd extremes of that argument. The real point I think that he's trying to make is that investing in Bitcoin isn't investing in more productive capacity for the future. The author's central beef is with investing in things that create, in his terms, illusory wealth. In other words, wealth that doesn't increase future productive capacity versus real wealth, i.e. wealth that does increase future productive capacity. The singling out of bitcoin here is crazy. What about exotic swap instruments and derivatives? How do those increase future productive capacity? All that said, there are lots of versions of this argument that lurk around in not just Bitcoin. Think of the Founders Fund Manifesto, we wanted flying cars, we got 140 characters. You can also see it when people lament venture capitalist funding a million copycat startups and food delivery companies. So, if that point is that a lot of money goes to chasing stupid things for the sake of making more money not making society better and more productive in the future, well, yeah, that's sort of part of the tail when it comes to free market capitalism. It's fine to call out but it's inevitable. And with that, I think it's a fundamental type of financial Luddism to take this point of view too far, and certainly to apply it to Bitcoin. In fact, I think one could pretty compellingly argue that bitcoin's main function for many of its users, and yes, HODLing is using, is to preserve the capital available to be deployed for future productive purposes. If a person is holding to preserve their wealth in the face of inflation, that means they're going to be able to deploy that capital to other things, instead of seeing its value evaporate to the benefit of no one. If they're using it for things like remittances and faster, cheaper global settlement, it means that more capital is available to end people and companies rather than now redundant rent seeking intermediaries. How productive is economic rent?
Anyway, I'm not super worried about this argument right now, but I do think it's worth not totally dismissing the possibility that some people at some point will point to Bitcoiners effectively as hoarders, taking productive wealth away from others. That said, things like the experiment in El Salvador could make that argument a lot harder to argue.
And, on that topic, Paraguayan lawmaker Carlos Rejala says that he's working with Senator Fernando Silva Facetti to introduce pro-bitcoin legislation on July 14, he tweeted: "I am here to unite Paraguay and that's why we decided with Senator Fernando Silva Facetti to present together the Bitcoin Bill on Wednesday, July 14. Stay tuned, there will be a mega surprise for Paraguay in the world, something giant is coming." Now, from what Rejala has told "Reuters" it sounds like it won't be a bill to make bitcoin legal tender like in El Salvador. Instead, it seems like Paraguay is wading into the competition for global tax revenue and economic benefit from attracting digital asset businesses. Rejala said: "We want the regulators and banks to also participate so the Paraguayans or foreigners can operate with these assets legally, because we know that illegal transactions exist here in and in other countries, we want to be a crypto-friendly country."
One interesting note about Paraguay is that Rejala may be the loudest but he's certainly not the first or only person on the scene. The Paraguay and FinTech chamber has a Blockchain Business Development Group that has spent the last three years helping the Paraguayan government around related issues. To the extent that something happens there, it will likely be in part from that work that has been in development for years.
All right, a few more stories from the bitcoin and crypto world. Grayscale's Large Cap Fund has become an SEC reporting company, 93% of the fund holds BTC and ETH and the other 7%, well, a whole bunch of other stuff. So, why is Grayscale doing this? First, it's a play for legitimacy in the eyes of both regulators and investors. It's a voluntary increase in the amount of requirements and disclosures. It also has some practical changes in liquidity as the holding period of private placement shares gets reduced from twelve to six months. But yeah, I think the big thing is legitimacy and playing nice with governments. It seems to me that all the biggies are going to increasingly play the game of being good faith actors. And even if you'd personally don't care, one argument for supporting moves like this is that a group of good actors makes it harder for politicians to paint everyone with a bad brush. This seems especially relevant as the "crypto is for criminals" narrative returns with a vengeance.
Also, when it comes to regulators and crypto, it seems clear that the Fed is paying a little bit more attention. I discussed last week, the potential meeting between Coinbase CEO Brian Armstrong and Fed chair Jay Powell. And, on top of that, that same report that was released on Friday that I referenced earlier with regard to inflation actually discussed crypto, it's just a small mention, saying that a surge in crypto prices reflects increased risk appetite, but the interesting thing is that for the first time the Fed is using crypto as a barometer for broader market conditions.
Finally, let's close out with one more story from the macro world. Because the pandemic started earlier in China than in the West, watching post-COVID recovery in that country has been, for economists, sort of like having a window into at least one potential future. Increasingly, that is cause for concern. One of the most-read articles on Bloomberg today is "China's slowing V-Shaped Economic Recovery Sends Global Warning" growth in Q2 was at 8% which is down from 18.3% in Q1. In response, the People's Bank of China cut the amount of cash banks must hold in reserve, hoping to stimulate more lending.
It's not that the slowdown in growth wasn't anticipated. It's just that it happened faster than many people thought. The two consequences of this issue are potentially one, how it might model future slowdowns and other recovering economies; and two, the practical reality of China itself slowing down given global trade. The head of global markets research at Nomura Holdings told Bloomberg "There is no doubt that the impact of a slowing China on the global economy will be bigger than it was five years ago. China's first-in, first-out status from COVID-19 could also influence market expectations, that if China's economy is cooling now, others will soon follow. However, there is a flip side of this, and that's that China's slowing could ease inflationary pressures. A slowdown could mean less pressure on factories, and that could mean commodity prices continue to come down from their historic highs. In short, the summary of today is that no one in economics ever knows anything about anything and that's why it's such rich, fertile ground for debate. But, whatever you think, I appreciate you listening and hanging out. I hope you're headed into a great week. So until tomorrow guys, be safe and take care of each other, peace!