Before we get to the latest from Eric Peters, allow us to quote ourselves because happily, a lot of what you’ll read below from Peters echoes some of our commentary on cash bans and crypto.
From earlier this year, on cashless societies and central banks:
Much has been made over the past several years about the so-called “death of cash”.
How many articles have you seen circulating (pun fully intended) with titles that contain the words “cashless” and “society”?
Indeed, the notion that “society” is on the fast track to becoming “cashless” has become almost ubiquitous and although we here at HR have a deeply ingrained aversion to conspiracy theories (it’s a “once bitten, twice shy” kind of thing), we have to admit that the prime beneficiary of a move away from hard currency is government. Or, perhaps more precisely, policy makers.
First of all, a fully digitized system means there’s an accessible transaction ledger. The benefits of that for government are clear: tax collection is easier and oversight of citizens’ economic activities is streamlined.
But beyond that, think about it from the perspective of policy makers constrained by the zero lower bound. If you’re a central banker operating in a ZIRP or NIRP regime, cash is a real pain. Why? Well, because it constrains your ability to cut rates. At a certain point, savers will simply put their money under the proverbial mattress if they believe they are being penalized for keeping it in the bank. Importantly, the effective lower bound isn’t zero. There’s a risk to holding your life savings in cash and storing it in the closet. That risk means savers will likely put up with interest rates at or even below zero before they’ll pull everything out of the bank. But that patience starts to wear thin beyond a certain point.
Well, if you do away with cash, there is no effective lower bound for rates. If you’re a policy maker you can centrally plan the whole economy. Consumer spending too low? No problem. Just make rates negative 20% and force people to either spend or take a haircut. Economy running too hot? Again, no problem. Raise rates to +20% and force people to choose between spending and earning a huge return on their digital wealth. If there’s no cash, those are choices consumers would have to make because physical bank notes would no longer exist.
And from Sunday, on the fate of Bitcoin after central bank cryptocurrencies:
The last thing we’ll say here is that this is just one more reason to believe that Jamie Dimon is probably right.
What government is going to do is shut these things down, steal the idea, and then, in the final insult, make you use it in its government-sponsored form.
Now to the latest from Peters…
By Eric Peters, CIO, One River Asset Management, as originally posted on LinkedIn
“The global economy will recover, but the timing and strength of the recovery are highly uncertain,” said Ben Bernanke, the experiment’s architect. “Government policy responses around the world will be critical determinants of the speed and vigor of the recovery,” he explained, in January 2009. Lehman failed the previous September 15th. On that day, the Federal Reserve’s balance sheet was $905bln, roughly 6% of US GDP. By December 2009 it had surged to $2.1trln, and has since doubled again. A multitude of monetary manipulations have accompanied this balance sheet expansion. Not just here, but overseas, nearly everywhere. Of course, this experiment has only just begun, such is the history of economics and the enduring mystery of money. For every action is a reaction, within each solution lurks a new problem, the chain reaction has no end. In decades to come, Nobel Prizes will rain down on those who explain the unintended consequences of having avoided a 2009 great depression. Their ivory tower observations will appear in sharp contrast to ours, which require self-reflection within an ongoing experiment that we feature in. And dizzy, chasing our tails, we’ve noticed that our economic models have largely failed. The inflation we forecast remains absent. An assumed interest-rate inspired investment boom eludes us. To restore faith in our understanding of how the world works we point to technological innovation, globalization, demographic decline and over indebtedness as the combined cause. But the truth is we don’t know the truth. It may be the case that our policies, in the extreme, created the conditions we sought to avoid. And if the experiment is itself the source of deflation and anemic capital investment, its end may spark the opposite. Which is something to consider as the Fed prepares to shrink its balance sheet.
Wampum: James Marshall discovered gold at Sutter’s Mill on Jan 24, 1848. The California gold rush sparked the largest mass migration in American history; 300k dreamers flocked west between 1848-1855. They toiled to unearth 750,000 pounds of yellow metal in those 7yrs; worth $15.4bln at today’s price. Satoshi Nakamoto invented Bitcoin on Halloween 2008, and released his creation into the ether. $100bln of cryptocurrency has been magically mined in these 9yrs; equivalent to 4,860,000 pounds of gold. And both are at once valuable despite being valueless.
Wampum II: The US government holds 8,133 tons of gold reserves, larger than the next three largest nations combined (Germany 3,381 tons, Italy 2,452, France 2,437). Most of ours is held at Fort Knox, the most secure safe on earth. In today’s dollars, America’s metal mountain is worth $335bln. Which pales in comparison with the $1.2trln of US currency in circulation, and a small fraction of the Fed’s balance sheet, which exceeds $4trln, most of which – like cryptocurrency – was magically mined since 2008.
Wampum III: On Friday September 8th, US Federal debt jumped by $318bln, roughly equal to America’s entire gold reserve. Total Federal debt surpassed $20trln that day. Like our $1.2trln of currency in circulation, it’s backed by nothing but a promise. And in truth, that promise is to repay bondholders with freshly minted promises. Naturally, with such an abundance of circular pledges swirling, it is worth asking what money really is? We quite obviously don’t know. Or perhaps the nature of money is not fixed, but rather, forever evolving.
Anecdote: “Any other thoughts on the matter?” he asked. We’d spent quite some time discussing Bitcoin, Ethereum, and copycat cryptocurrencies popping up faster than North Korean nukes. I mostly listened, he knew far more about the subject; blockchain, distributed legers, mining, halving, hash rates. Unlike the S&P 500 realized volatility’s collapse to 8%, these new creations are realizing at 90%. Which makes them attractive to day-traders, adrenaline junkies, who launched 100 crypto hedge funds just last month. It’s the millennial’s wild west. Like all generations, they’ve discovered a new frontier, with few rules, seedy saloons, gunfights, corpses. As our earthly unknowns disappear, we find new ones in the ether. Which is where money belongs; it’s not real, it’s an abstraction, an age-old illusion. As a golden myth captured mankind’s imagination, we built our societies upon a rare yellow metal. For 2,500 years we fought, killed, conquered. Until governments tired of the arbitrary spending constraints imposed upon them by a scarce element. So they invented today’s fiction, a printed promise, fiat currency. Seigniorage is the difference between that currency’s market value and its cost of production – that spread is a source of vast wealth and power.
And in all human history, not a single government has willingly forfeited such a thing. Nor will one ever. Only after a hyperinflationary depression, confronted with revolution, do governments sometimes relinquish their power to print (Zimbabwe most recently). Consequently, the future of cryptocurrency is not as it seems. Once private markets perfect cryptocurrency technology, governments will commandeer it, killing today’s pioneers. Then with every cryptodollar, yen, euro and renminbi registered on their servers, they’ll have complete dominion over money, laundering, taxation. They’ll track every transaction. Imposing negative interest rates in an instant. There will be no hiding, no mattresses. And in a deflationary panic, they’ll instantaneously add an extra zero to every account, their own especially.