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Bitcoin is Dead, Long Live Bitcoin | by Patrick Tan

Whether you’re a believer or a cynic, the bigger question is not whether you’d want to have cryptocurrencies in your portfolio, but whether you’d rather have the dollar instead, twenty years from now.

You should see what it used to look like. (Photo by Swapnil Bapat on Unsplash)

When Chinese immigrant Ng Teng Fong first set out to make his fortune in the steaming tropical port city of Singapore, few would have predicted what the urban landscape would one day look like.

Having barely any formal education, Ng finally raised enough capital to establish Far East Organization in 1960 and proceeded to snap up land and real estate as if he was playing monopoly.

Few would have bet big on Singapore at the time.

With the British having vacated the city after both Malaya (as it was then called) and Singapore received independence, the city’s future looked anything but certain.

Caught between communist insurgencies and simmering racial tensions, Singapore in the 1960s was a powder keg waiting to implode — few would have predicted, let alone bet, on the eventual success of the island.

But Ng saw something special in Singapore, and wanted to snap up as much of it as possible.

Betting his future on the city, Ng famously lead a frugal and miserly lifestyle so that by the 1980s he saved and bought enough land to become Singapore’s largest private land owner.

According to anecdotal evidence, Ng would survey a piece of land and declare in his native Fujian dialect that he would buy as much as was available, picking up what would go on to become some of Singapore’s most prime plots at pennies on the dollar.

Those early bets on real estate eventually paid off and Ng’s Far East Organization would come to control over a quarter of Singapore’s housing market.

Ng saw well into the future and knew that Singapore was a growing city and the thing that would be most scarce would be land, which he wanted to own as much of as possible.

Never mind the location, never mind the cost, Ng saw something that others at the time failed to see — control of a key asset that was diminishing.

In similar fashion and despite the recent correction in Bitcoin, most investors should look past the current volatility and ask themselves what they want to see in their portfolio two decades from now — dollars or Bitcoin?

Free Money

Ever since the U.S. abandoned Bretton Woods, which ensured convertibility of the dollar to its equivalent in gold, central banks and their governments have colluded to progressively debase the value of fiat currency, led by the U.S.

A pure, fiat international monetary order centered around the dollar has provided the flexibility and liquidity to drive global trade and finance, powering unprecedented economic growth beyond the gold standard, but it has also wrought some negative consequences.

Having a fiat dollar-based financial world order has led to a yawning income-wealth divide, not just in the U.S. but globally, and the world continues to subsidize American largesse because of the absence of alternatives.

As the world lurches from one crisis to the next, American households are more resilient now than they were in the run up to the 2008 Financial Crisis and that is no coincidence.

U.S. household debt has declined considerably since 2008, even though consumption as a percentage of GDP has remained constant.

American consumption has remained constant despite the pandemic because household debt has moved from personal balance sheets to national ones.

U.S. fiscal stimulus in response to the pandemic was a staggering US$5 trillion, the bulk of which was in the form of direct cash handouts to households, and indirectly funded by the rest of the world.

For as long as foreign investors were willing to snap up U.S. debt, Washington had carte blanche to spend as much as it liked.

And Washington’s spending lavished Americans with better living standards and job employment, all of which was indirectly sponsored by the rest of the world’s willingness to buy ever-increasing amounts of U.S. debt at very low interest rates.

So desperate is the rest of the world to fund American profligacy that, a massive US$6.4 trillion in additional U.S. Treasuries were issued during the pandemic years between 2020 and 2021.

For any other country, such a massive debt issuance would typically raise the risk premia investors would demand except for the privilege of the dollar serving as the world’s reserve currency.

Green Privilege

Because the dollar remains the ubiquitous settlement currency for international trades and financial transactions, countries have been compelled to accumulate the greenback as reserves, which in turn served to limit fluctuations in their own domestic currencies.

That vicious cycle has kept countries in an almost unbreakable poverty cycle as export earnings in dollars are ploughed back into U.S. Treasuries instead of domestic investments in healthcare, education and infrastructure.

Like it or not, the world, especially emerging markets, fund American growth, raising U.S. living standards, while entrenching global inequality and inequity.

But the dollar doesn’t just prejudice the rest of the world, it keeps the American poor in their place as well.

An artificially strong dollar (relative to share of labor) leads to the hollowing out of manufacturing jobs in the U.S. as well as stagnating wages for a large swathe of lesser-skilled workers.

At the same time, the increasing financialization of the U.S. economy massively enriches asset owners and disenfranchises the have-nots.

Far from liberating its masses, the dollar actually creates a two-tiered America where rich asset owners lord over laborers.

For almost eight decades and counting, the U.S., through Bretton Woods, engineered and sustained dollar hegemony and thus far, the world has been complicit in supporting this endeavor.

Global governments and investors remain willing to hold dollar assets as a store of value and reserve currency due to the size and strength of America’s economy, its openness to capital flows, the convertibility of the greenback, network effects and the lack of realistic alternatives.

But will the dollar’s hegemony be indefinite?

Nothing Gold Can Stay

As evidenced by the recent decline in both stocks and bonds, more investors are turning to hording the dollar in the face of increasing uncertainty, and shoring up the perception that the greenback is a store of value.

Nature’s first green is gold,

Her hardest hue to hold.

Her early leaf’s a flower;

But only so an hour.

Then leaf subsides to leaf.

So Eden sank to grief,

So dawn goes down to day.

Nothing gold can stay.

— Robert Frost

But that the dollar is a reliable store of value is more perception than reality.

Comparing the dollar price for key commodities and goods and services between 1970 and today, what is immediately apparent is that the dollar has been losing value — purchasing power — regularly over time.

Since 1970, a bushel of wheat has seen an annual inflation rate of 3.7%, while live cattle prices have grown 3.0% every year.

The price of gold has grown by around 8.0% while lumber, 4.7% per annum.

While a new car cost around US$3,500 in 1970, the equivalent would set a consumer back US$47,000 today — an annual inflation of around 5.1%.

The median price of a single family home in the U.S. has also increased at the rate of around 5.7% since 1970.

Put another way, it requires more dollars today than it did in the 1970s to buy the same amount of anything that makes life livable, and that’s because America keeps printing more dollars which the rest of the world keeps buying.

But will there come a day when record-high U.S. debt will undermine faith in the greenback as it did in the late 1960s which led to a run on U.S. gold reserves and ultimately forced Washington to end dollar-gold convertibility?

The more America borrows, and it has been working the proverbial money-printing machine overtime for over a decade to fund growing budget deficits, the greater the debasement of the dollar.

In the early 18th century, John Law, a one-time convicted murderer and self-schooled Scottish economist wrote,

“I maintain that an absolute prince who knows how to govern can extend his credit further and find needed funds at a lower interest rate than a prince who is limited in his authority.”

Today, total outstanding U.S. Treasuries have more than tripled to nearly US$30 trillion, from US$9.2 trillion at the end of 2007, the bulk of which are held by the U.S. Federal Reserve which magically conjures up money to pay for Washington’s spending.

But global investors may be catching on to the game.

Fool Me Once, Please Fool Me Again

Since reaching a high of 34.1% in 2014, the percentage of foreign ownership to total U.S. Treasuries outstanding has been steadily declining — America is writing more checks than the rest of the world is willing to cash.

The U.S. is racking up debts faster than global economic growth and demand, with the U.S. Federal Reserve having no choice but to print more dollars to buy up a seemingly never ending amount of U.S. debt.

But conjuring up dollars out of thin air to buy U.S. debt doesn’t make the greenback any more valuable the way minting more LUNA to buy up UST doesn’t make an algorithmic stablecoin any more stable.

From the eve of the pandemic till now, the Fed’s balance sheet has more than doubled, from about US$4 trillion to nearly US$9 trillion, with U.S. government accounts owning another 22% for a combined 41% of all U.S. Treasuries.

But perhaps most critically, Washington has overreached in its increasing willingness to weaponize the dollar.

In the aftermath of Russia’s invasion of Ukraine, America and her allies cut Russia’s banks from the crucial SWIFT financial messaging system that facilitates global wire transfers, effectively cutting Russia off from the global financial system.

Making matters worse, Washington also cut off Russia’s access to its dollar-denominated reserves, in an attempt to starve Moscow’s source of funding to wage war.

Overnight, ruble-cryptocurrency pairs soared by as much as 8 to 10 times in trading volume, as ordinary Russians raced to secure the value of their assets and spirit money beyond the now incapacitated Russian banks.

The freezing of Russia’s U.S. dollar reserves will surely serve as a valuable lesson for the rest of the world.

Bearing in mind that in the Second World War, Russia fought on the side of the U.S., one-time friends can very quickly become foes and Washington’s weaponization of the greenback demonstrates the risks associated with an over-reliance on a dollar-based global banking system.

The freezing of Russia’s dollar reserves also undermines one of the key pillars of the dollar’s reserve currency status — the sanctity of property rights — but what good is holding on to a dollar if it can one day be disavowed?

Former Reserve Bank of India Governor Raghuram Rajan noted,

“When fully unleashed, sanctions too, are weapons of mass destruction. Following the action taken against Russia’s central bank, China, India and many other countries will worry that their foreign exchange holdings may prove unusable if a few countries decide to freeze their assets.”

Unlike domestic bank deposits, which are to a point, guaranteed by a country’s central bank, international dollar deposits remain susceptible to the political whims of Washington.

Dollar Assets Domesticate Washington Foreign Policy

Although not every country agrees with Washington’s foreign policy, by holding the dollar, they aid and abet the U.S. in the execution of its objectives.

By cutting off Russia from global markets, America, which is self sufficient in many of the things that Russia exports anyway, has crippled other countries that rely on Russia for a vast variety of commodities.

As one of the world’s largest producers of nickel, fertilizer, natural gas, oil and agricultural commodities, the world beyond America has suffered as a result of Russia’s exclusion from global markets.

And while no one is suggesting that sanctions were not warranted, they come at considerable economic cost, often borne by those who had little say about imposing them to begin with.

Regardless of one’s political leanings, sanctions have exacerbated the soaring cost of energy and food staples hitting billions of people everywhere, who are struggling to make ends meet and who are starving as a result.

Dollar Down but Never Out

Although America’s share of the global economy has continued to decline, from a peak of 40% in 1960, to around 24% currently, past predictions about the dollar’s demise have only seen it strengthen further.

While it’s logical that the greenback’s use as a medium of exchange should decrease alongside America’s global economic significance, that simply hasn’t happened in the absence of viable alternatives.

As the U.S. Federal Reserve starts raising interest rates, dollar-denominated loans will hit emerging markets hardest, at a time when their coffers have already largely emptied because of the pandemic.

Recent spreads for gold at the Bank of England, which holds and stores bullion for large financial institutions and sovereign countries, seem to suggest that governments are having to sell gold to buttress national currencies in the face of a soaring dollar.

In the long-term, hewing to a dollar-based world favors the few, at the cost of the many, especially the most feckless.

So it’s no surprise that Bitcoin maximalist and President of El Salvador Nayib Bukele was able to convince 32 central bankers and 12 financial authorities from 44 countries to meet in San Salvador to ostensibly discuss financial inclusion, but in reality talk Bitcoin.

The list of countries who attended the Digital Financial Services Working Group and the SME Finance Working Group event in San Salvador are also those at the short end of the stick in a dollar-denominated world.

Countries such as Paraguay, Angola, Ghana, Namibia, Uganda, Guinea, Madagascar, Haiti, Burundi, Swaziland, Jordan, Gambia, Honduras, Maldives, Rwanda, Nepal, Kenya, Pakistan, Costa Rica, Ecuador, Egypt, Nigeria, Senegal, Dominica, Mauritania, Congo, Armenia, and Bangladesh, have all fared poorly in a dollar-denominated world, and look set to continue doing so should things not change.

But unseating the dollar as the center of global finance will likely take more than a couple of conventions or events, it will take time.

Over the past two decades, the dollar’s share of aggregate foreign reserves has gone from 71% in 2000, to 59% today.

Asians, who have taken to cryptocurrencies and digital payments in a big way are also the biggest holders of U.S. Treasuries, led by Japan with US$1.3 trillion and China, with US$1.1 trillion.

Taiwan (US$249 billion), Hong Kong (US$206 billion), India (US$200 billion), Singapore (US$193 billion) and South Korea (US$122 billion) round off the biggest backers of American profligacy, but for how much longer?

Smart central bankers will no doubt already be thinking of alternative reserve holdings — not just in terms of currencies, but wholly different asset classes, including corporate bonds, stocks, gold, special drawing rights, and yes, even Bitcoin.

Whereas El Salvador has been relatively public in its push to add Bitcoin to the national treasury, sovereign wealth funds which operate more discretely may also be doing so on behalf of their governments, albeit covertly, in preparation for the possibility that one day the dollar will no longer reign supreme.

And if governments are doing so, what more individual investors?

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