In early March 2012, three years after the biggest financial disruption in 80 years, with 8% of the U.S. workforce unemployed, with four million American homes foreclosed and with Europe tearing itself apart over fiscal austerity measures to contain a debt crisis, someone forked over $119 million for a painting.
The price, paid by an anonymous bidder at a Sotheby’s auction for Edvard Munch’s “Scream,” smashed the record price for fine art set when Pablo Picasso’s “Nude, Green Leaves, and Bust” sold for $106.5 million two years earlier.
What was striking when I wrote about this eight years ago, was that the trend in the consumer price index was then extremely soft. The scourge was not inflation but employment-killing deflation. The Federal Reserve had slashed rates to zero and was spending hundreds of billions of freshly created dollars on government bonds in a mostly failing bid to recharge investment and consumer spending and drive CPI inflation up to its target rate of 2%.
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Meanwhile, rare art prices were soaring – a powerful illustration of the inequitable payoffs from monetary and fiscal stimulus.
An April 9 viral tweet showed that a similarly stark contrast is already playing out in the even harsher crisis of COVID-19. With its unlimited “quantitative easing,” or QE, campaign throwing trillions of dollars not only at Treasury debt but at risky “junk bonds” too, the Fed is handing Wall Street an asset inflation payoff while Main Street stares down the barrel of deflation.
As investor Preston Pysh points out in the first episode of The Breakdown’s “Money Reimagined” limited podcast series, the absence of mainstream inflation seems incongruous, even frustrating, to people – including many in the crypto community – who assume rampant central-bank money printing will destroy consumers’ spending power. They are looking, he says, in the wrong place: QE inflation will manifest not in the prices of everyday things but in assets owned by the wealthiest in society.
Like stocks. And Picassos.
“That’s where I think the ‘money printer go brrrrr’ meme is confusing a lot of people,” Pysh said, referring to a Crypto Twitter favorite inspired by this tweet from investor and Consensus: Distributed speaker Meltem Demirors “Because they are looking at the CPI bucket and you’re not going to see it there.”
The vicious dollar cycle
There’s a lesson here for bitcoin investors but before I get to that, let’s be blunt about society’s core problem. It is not consumer inflation, not for now, at least. It is the failure of a Wall Street-dependent monetary policy framework that socializes the losses and privatizes the profits of wealthy financiers while disenfranchising everyone else. As Pysh explains, the world economy is stuck in a broken cycle that stems from the world’s heavy addiction to dollars.
The reserve-currency dollar’s dominance of global credit markets ensures that during crises, it almost always experiences a self-fulfilling appreciation that helps nobody other than holders of U.S. financial assets. Overseas debtors scramble for greenbacks to make payments in response to skittish creditors’ margin calls, only to face even bigger problems as their depreciating local currencies make their dollar debts even harder to pay. The Fed has no choice but to flood the world with dollars to prevent markets from seizing up.
In the U.S., meanwhile, foreign inflows and the Fed’s emergency measures lead to lower interest rates, which lets the government roll over debts and make stimulus payments despite a dangerously expanding deficit. Washington’s loyalties being what they are, very little of those politically directed bailouts make their way into American consumers’ pockets. What they get – courtesy of the stronger dollar – is lower inflation, or even income-depleting deflation. Right now, burdened with student loans and credit card debt, that’s the last thing they need.
Digital asset inflation
What ordinary people most want, presumably, is a share in that sweet asset inflation that wealthy art collectors and stock investors enjoy.
One strategy for achieving that may lie with a brand new digital asset class, one that barely existed during the previous crisis but which now stands alongside rare art, gold and stocks as a potential beneficiary of the Fed’s unlimited stimulus spending. I’m talking, of course, about cryptocurrencies and, in particular, bitcoin.
Some of the logic behind demand for 19th century expressionist classics at times like this could apply to bitcoin. A key, but not only, reason why the price of rare works of art rises in crises – as well as Manhattan real estate, exclusive yachts, and stocks subject to company buybacks – is because, relative to the ever-increasing supply of stimulus dollars in financial asset owners’ bank accounts, these things are scarce. They have a measurably finite supply. It’s the luxury lifestyle version of Venezuelans dumping unwanted bolivars in return for cans of soup.
Now, for the first time, we have digital scarcity – assets whose supply cannot be randomly increased by someone who controls them even though they exist within the cut-and-paste world of the internet. Scarcity is the real problem that bitcoin solves. In fact, as odd as it might sound in a capitalist society that equates value with productive utility, bitcoin’s core value proposition is really just that it is provably scarce.
Next week’s anticipated halving in bitcoin’s issuance rate, an event no one can stop, reinforces this idea of provable, measurable scarcity. As investment firm Grayscale, a unit of New York-based Digital Currency Group, CoinDesk's parent company, puts it, bitcoin is undergoing “quantitative tightening” while central banks are doing “quantitative easing.”
Early Friday morning UTC, this new store-of-value asset, described by many as “digital gold,” jumped over $10,000 for the first time in two and a half months, though it couldn’t surpass the 2020 high of $10,598 from mid-February. (Notably, prices for physical gold, the world’s traditional scarce-supply safe haven, have regained all their lost ground and are now pushing toward the record highs they reached in 2011.) Either way, bitcoin’s strong gains through April and early May have revived the conversation around why, in this digital era, an asset of this kind holds value.
Bitcoin’s mathematically determined scarcity offers a direct counterpoint to the unbounded QE issuance of fiat currency, whose numbers are now so huge, writes Bloomberg’s Jared Dillian, that money is losing its meaning. And while there are forks of bitcoin that seek to compete with it, the oldest cryptocurrency’s two-third stake of all crypto market cap gives it, much like gold, a cultural status as the digital store of value.
Hugely influential hedge manager Paul Tudor Jones II seems to get the now. But you know what, unlike buying a Munch painting, you don’t need to be as rich as a hedge fund titan and be on an auctioneer’s privileged bidder list to buy bitcoin.
To infinity and beyond
Speaking of how the Fed is quantitatively easing while bitcoin is quantitatively tightening, check out this chart. Under its unlimited, unending asset-buying program – sometimes dubbed “QE Infinity,” the Fed is essentially buying everything its mandate allows it to buy. Between Feb. 26 and April 29, it has added an unprecedented $2.5 trillion to its balance sheet of bonds and other securities. For comparison, the previous most aggressive expansion period, between Sept. 10 and Nov. 12, 2008, when the Fed was backstopping banks and dealing with the swirling fallout from Lehman Brothers’ collapse, it added $1.3 trillion to its balance sheet. The scale now is mind-boggling.
The global town hall
There are signs of surging African interest in bitcoin. In this tweet thread, data scientist Matt Ahlborg uses interactive charts from Useful Tulips, the data visualization site he founded, to highlight sharp recent gains in the value of daily SubSaharan African transactions on peer-to-peer exchanges LocalBitcoins and Paxful. Volumes on those sites – which allow people to exchange bitcoin for fiat currencies directly with each other – reached a record dollar-equivalent volume exceeding $10 million on May 3. Part of that reflects the higher bitcoin price, but the extent and multi-country breadth of the move hints at bigger factors than market impact. Ahlborg declared, “Africa may have already taken over Latin America as the epicenter of utility Bitcoin usage globally. If you aren't paying attention to this market, you are WRONG!”
CoinDesk columnist John Paul Koning suggested Ahlborg’s definition of “utility” could be a stretch, as it might include normal speculation, scams and fraud. Even so, something is making Africans, across multiple countries, trade more bitcoin. Is this crisis related? A response to dollar shortages? I’m inclined to agree with Ahlborg on this: pay attention to Africa.
COVID-19 economic stimulus measures have varied greatly worldwide. Much like public health policy, they have been hastily delivered on a go-on-your-own-way basis because there simply was not time to coordinate internationally. (National coordination was hard enough.) The upside of all this is that in a year or so’s time, economists will have a nice pool of comparative data to measure what works and what doesn’t. When they get around to that, the COVID-19 Economic Stimulus Index developed by Ceyhun Elgin, Gokce Basbug and Abdullah Yalaman, could prove pretty useful. The three economists rapidly pulled together an analysis of 166 countries to produce a database of measures that cover six variables under three categories: fiscal policy, monetary policy, and balance of payment/exchange rate policy.
After a barrage of regulator criticism upon its launch last year, Libra’s leaders vowed to take note. It’s now clear they listened. After last month shifting the corporate consortium’s digital currency model away from its controversial basket-pegged system to one of single-currency stablecoins, Libra this week announced the appointment of a CEO with a resume that’s hard to beat if you need someone who can talk the talk with regulators. Before his appointment, Stuart Levey was Chief Legal Officer at HSBC, which had hired him explicitly to clean up the mess left by its massive money laundering scandal, for which it ended up paying a $1.9 billion fine. It’s pretty clear why HSBC had hired Levey: his previous job was as Under Secretary of the Treasury for Terrorism and Financial Intelligence under both the Bush and Obama presidencies. Libra knows where its biggest battles lie.
Correction 5/10/20 1:40 p.m. UTC: This piece originally misspelled the name of the founder of Useful Tulips. The correct spelling is Matt Ahlborg.
Could a new currency challenger the dollar’s supremacy in the international system? Airing May 8, episode 2 of The Breakdown: Money Reimagined examines a set of challengers – from Libra to the Chinese DCEP – seeking to reshape the global monetary order in their image.
The Breakdown: Money Reimagined is a podcast crossover micro series exploring the battle for the future of money in the context of a post COVID-19 world. The four-part podcast features over a dozen voices including Consensus: Distributed speakers Niall Ferguson, Nic Carter and Michael Casey. New episodes air Fridays on the CoinDesk Podcast Network. Subscribe here.
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