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Sometimes, I Change My Mind


After "bubbly" action in 2017, a "burst bubble" in 2018, and a quiet 2019, bitcoin has been having a stellar 2020, up ~270% through November 23rd. This leads to an interesting question - "Has anything changed?" After all, writing in September 2017, I largely eschewed an investment in cryptocurrencies, called them "lottery tickets," and said clients could buy a few if they wanted, but I wasn't going to, at least then.

Well, the last few years have been like no other. In particular Covid-19 and the rise of something called "Modern Monetary Theory" have made me reassess my view on cryptocurrencies and caused me to change my thinking on bitcoin and just how big that place could be. Why? It's made me question the role fiat currencies, such as the U.S. dollar, will play in the future. When Congress authorized the spending of $7 trillion in March the world barely blinked. It was an action that was only possible in the U.S. because the dollar is what's known as the world's "reserve currency." This means that foreign central banks hold large quantities of dollars in reserve and use it for international transactions. The dollar has been seen as a safe, stable, and reliable currency for decades. Indeed, for decades the United States has been seen as a beacon of trust, responsibility, and reliability. Foreign investors could count on the steadiness of the United States and they could count on the steadiness of the dollar.

Which brings us to Modern Monetary Theory. Modern Monetary Theory posits that government deficits can largely be expanded without consequences and that a sovereign government, in control of a sovereign central bank, can never be forced to default on its own currency debt. That as long as the people trust in their government and their currency, the government can simply issue (read: print) more of it whenever there doesn't seem to be enough (i.e. times of severe economic hardship, like during a pandemic). But what happens when that trust starts getting eroded? What happens when a country begins to abdicate on responsible management? What happens when a country prints trillions of dollars and literally gives out $1200 checks to all of its citizens? With a fiat currency, that is to say a currency not backed by any hard commodity, but instead backed simply by the faith and trust in the government, there is opportunity for abuse. And abuse it, I now believe we have.

We now have a government, no matter your political affiliation, which doesn't seem to care about deficits. After trillions of dollars of tax cuts in 2017 we spent trillions more in 2020 on Covid relief. And while this article isn't meant to argue whether we should or shouldn't have enacted either of these pieces of legislation the simple fact of the matter is that we did. I believe these spending patterns are likely to continue into the future as well. Politicians have recognized economic recessions are bad for re-election campaigns. Politicians have recognized their constituents like tax cuts and like getting $1200 mailed to them. Make no mistake, when politicians know what it takes to get re-elected, they will do it. To date, the overwhelming majority of constituents haven't thought through just where or how this money is created and what it means. They have become enamored with the idea that when it comes to money, we can always print more. While that's true, it's not without its consequences.

Other countries don't have this luxury. Other countries, especially developing ones, couldn't print ten trillion dollars to respond to Covid-19. They had to suck it up and, great as the economic hardship has been in the United States, face even more hardship themselves. My suspicion is these other countries aren't happy. They've stopped believing the United States and its dollar are a beacon of reliability, responsibility and safety. They've begun to question the idea that the dollars they denominate a debt incurred in will be worth the same dollars when paid off. That's a problem.

Like marital fidelity, once lost, trust in the value of a fiat currency is exceedingly hard to regain. While this process of losing trust doesn't happen overnight, I believe it has started. It will take years, decades even, but I believe by 2050 the dollar will no longer serve as the world's sole reserve currency. Instead, the dollar may become one of a few options. Perhaps it is joined by the Euro, or the Chinese Renminbi, or gold, or bitcoin. Maybe it's two, three, or even all of them? But it's that last idea that has caught my attention the most because, increasingly, I think it makes a lot of sense. If correct, bitcoin is a tremendously, tremendously underowned and undervalued asset. Many still mock it, and many more don't even know how to acquire it. While no one knows the future, and each investor must evaluate bitcoin given their own unique risk tolerance and time horizon, I have revised my bitcoin position and am now approaching it as a much more optimistic possibility.

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