Here's What Keeps Me up at Night

The Second and Third Order Effects of Money Printing

Willy Woo @woonomic

When you steal from the rich and give to the poor the economy collapses. (See Venezuela). When you steal from the poor and give to the rich (money printing), history tells us it always ends in revolution or a totalitarian state. There are no exceptions.

Willy Woo @woonomic

CBDCs is the ultimate fusing of Fiscal and Monetary Policy. What this means is if a government mismanages its fiscal budget, it has the monetary power to steal money from its people via an inflationary tax to continue as if there’s no consequences. https://t.co/usZBBordG5

Willy Woo @woonomic

Money printing is the enemy of democracy.

Willy Woo @woonomic

#Bitcoin at its inception 12.5 years ago encodes a message clearly stating its purpose. “Central Bankers on the brink” It’s more relevant today than ever.

Pomp 🌪 @APompliano

Bitcoin will be more important after central banks increase their control over fiat currencies by creating digital dollars, euros, etc. https://t.co/LAkmS8eY9L

I came across these Tweets from on-chain analyst Willy Woo a few days ago, and they resonated deeply with me. While I don’t entirely agree with all of the statements that Woo makes here (for example, I wouldn’t necessarily say that the government “stole” from the rich in Venezuela; the whole ultra-libertarian notion that “taxes are theft” still seems a bit extreme to me), I do very much agree with the point that he makes about “stealing” from the poor (or the asset-less class) via money printing and how more of this will lead to either revolution or a totalitarian state. We learned such a lesson from how fiat currency was devalued in the Weimar Republic in the 1920s due excessive money printing and how this gave rise to Hitler. We are currently learning such a lesson as the people of Cuba and South Africa have begun to riot, due to the higher cost of goods, services, and housing, which has been caused inflation, which has been caused by money printing. In short, here’s the lesson:

Easy credit = hard times.

I remember moving to Ghana a year or so after the 2008 financial collapse. It was there that I first learned the phrase, “When America sneezes, the world catches cold.” What this phrase means is that when we begin to feel some financial pain here in America (inflation on the rise), you can bet it is much worse in other countries, especially developing countries. And my gut tells me that the types of protests and riots that have begun to occur in these developing countries will begin to occur here as inflation continues to rise and/or after the next financial collapse (which I believe we will see either later this year or early next).

This weekend, I began to read The Price of Tomorrow: Why Deflation Is the Key to an Abundant Future, by Jeff Booth (hands down the best book on our legacy financial system - which is inherently inflationary - and technology - which is inherently deflationary - I have read this year, if not ever) and so much of it reminded me Woo’s words. Let’s set the stage with some of the statistics on debt that Booth shares:

In 2000, the total debt in the world was approximately US$62 trillion. At the same time, the world economy in 2000 was about US$33.5 trillion. Since 2000, the world economy has grown from US$33.5 trillion to about US$80 trillion, but to achieve that growth, the total debt has grown to over US$247 trillion as of the third quarter of 2018, according to the Institute of International Finance. In other words, it has taken approximately $185 trillion in global debt to achieve $46 trillion of global growth. If we stopped adding to that debt and started to pay it back at a rate of $1000 per second, it would take nearly 8,000 years.

I’m sure you noticed that this $247 trillion number is a pre-COVID money printing hysteria number. The question then becomes the following: Given that the U.S., and the world at large, is now in an insurmountable amount of debt, what happens next? Booth cites a passage from Ray Dalio’s Principles for Navigating Big Debt Crises in response to this question.

There are four levers that policy makers can pull to bring debt and service levels down to income and cash flows that are required to service them:

1. Austerity - spending less

2. Debt defaults/restructuring

3. The central bank printing money or other guarantees

4. Transfers of money from those who have more than they need to those who have less (much higher taxes for the rich)

Dalio concludes that in the end, “Policy makers always print. That is because austerity causes more pain than benefit, big restructurings wipe out too much wealth too fast, and transfers of wealth from haves to have nots don’t happen in sufficient size without revolution.”

Now, uber-capitalist Ray Dalio is just about the polar opposite of let’s say Che Guevara, so when he starts throwing around the word “revolution”, you know things are bad. So, here’s where we are at: I would wager that central banks in conjunction with major governments around the world (please keep in mind that central banks are not part of governments; they are staffed with completely unelected people who make financial decisions that affect every single person on this planet) continue to push for more and more money printing, maybe even as they raise rates due to potentially even higher inflation numbers. Taxing the rich would hardly even put a dent in either the national debt or the financial woes we will face when the next financial collapse happens - and we can see that that isn’t going to happen even with Democrats in control of all three branches of government right now. So, we will continue to suffer from the second and third order effects of money printing - which include inflation and increased inequality, which leads to populism, nationalism, and xenophobia. So if you think that the Trumpist mentality will dissipate now that Trump is out of office, you are dead fucking wrong. If Trump doesn’t run in 2024, the far right populist mentality will become embodied by a new politician, a new leader who can play upon the rage of the economically disenfranchised, and of a middle class who continues to watch their former way of life slip away. And what’s worse is that on the left, we’ll probably get more cult leaders like Robin DiAngelo who do nothing to actually solve problems of economic inequality, which disproportionality affects the Black and Latino populations in this country, and who try to convince all of us white people that we are all eternally racist, which is the real cause of inequality in this country. The real cause of inequality in this country is spineless politicians - Republicans and Democrats alike - in conjunction with an unelected body of bankers who put band aid upon band aid on a systemic problem. In the process, these leaders continue to kick the can down the road. There is no long-term plan. There are only flailing, desperate responses to a problem that has grown out of control.

I watched what I believe was Fed chair Jay Powell’s congressional hearing a few days ago, and one of the politicians who questioned him said something quite profound, which surprisingly didn’t immediately go viral on Twitter. I forget who the politician was, but he said something to the effect of the following:

I hear a lot of people here talking about the importance of Keynesian approach to economics, the approach in which we print money when needed instead of allowing for U.S. citizens to feel the financial pain of a downturn in the economy. That’s all well and good, but the part of the Keynesian approach that I don’t hear people citing is the part where we pay the debt down during the good times. We’ve only been doing the former, printing money to alleviate pain. All the while, the debt has become unserviceable.

And so here we are near the end of a rope, barreling forward toward either a revolution or totalitarianism. I won’t even pretend to romanticize what a revolution would look like (though, it’s the option that I would opt for). Some call Bitcoin a “peaceful revolution”, but I wouldn’t give it that much credit just yet. Don’t get me wrong, I’m a big fan, but it’s still too new; most people still just see it as a speculative asset. My gut tells me we likely continue to move more towards totalitarianism from here (though, I don’t think totalitarianism wins in the long run). The combination of entrenched bureaucracy and a vulnerable, frightened, and easily swayed populace that we currently have is a dangerous one.

Some are calling for a “great reset”, but to me, that translates to “fast-track to totalitarianism”. A real “great reset” would be too painful. It would mean allowing for the current system to fail and for the market to be more of a reflection of the economy again. This might have been possible in 2008, but it would likely make the Great Depression look like a walk in the park at this point. Booth cites an analogy from Nassim Nicholas Taleb, author of Antifragile (which I’ve also read and highly recommend), a term I wrote about in this edition of the newsletter, to further his point about how the Fed won’t allow for corrections to happen in the market, because corrections now have the power to lead to utter catastrophe. Below is the analogy from Taleb:

Small fires periodically cleanse the system of the most flammable material, so this does not have the opportunity to accumulate. Systematically preventing forest fires from taking place ‘to be safe’ makes the big one much worse.

The small forest fires are the natural market corrections. Because the Fed has stopped allowing them to occur, it is setting the stage for an unprecedented conflagration.

My hope is that through this continued technological revolution, we find new answers, but I still do not believe in any system that isn’t predominantly market-based (not that every aspect of it needs to be market-based and not we shouldn’t have some sort of social safety net). I have yet to finish reading Booth’s The Price of Tomorrow, but the premise of the book is that the deflationary nature of technology may offer a way out of this mess. However, Booth also reminds the reader that Keynes, in an essay from the 1930s, said that (back then) technology would soon allow for a fifteen-hour work week. Almost 100 years later, a full time job plus a number of side hustles is the norm for many.

Best,

Frank

Twitter: @frankcorva

Busta Rhymes @BustaRhymes

Mike, i’m right there with you. Spent the last 30 min reading the comment section. https://t.co/bKcGGwkg2r

Mike Tyson @MikeTyson

Which do you prefer, BTC or ETH?