Inside Money and Outside Money
The Bitcoin Wars Part VIII
"The cost of freedom is always high, but Americans have always paid it. And one path we shall never choose, and that is the path of surrender, or submission." John F. Kennedy
I write this article now for two reasons:
I have seen discussion during the pandemic about digital currencies being the path to submission to the will of the globalist oligarchs, or something to that effect. Some people believe this to be true about Bitcoin because it uses a transparent public ledger through which all transactions can be tracked and traced (or does it?). I wanted to lay out a perspective regarding digital currencies that may spark discussion, may help some readers understand the situation better, and may help me attract critique needed to update my own understanding.
The excellent Arthur Hayes (whom I recommend for anyone who enjoys quality commentary at a practical economic level with respect to Bitcoin and other cryptocurrencies) wrote an excellent piece that ties in beautifully to this discussion on the level of current events.
Before we get to Arthur's piece, let's have a brief discussion about #1.
Greater and Lesser Dichotomies of Money
There are many potential boundaries for the descriptions of various monies and currencies.
Paper vs. Metal
Fiat vs. Commodity
Centralized vs. Decentralized
Digital vs. Physical/Non-digital (henceforth "the digital dichotomy")
I'm sure that I could come up with more. I could also write all day about any of them, but that's not the plan. You can find vast quantities of discussion from numerous perspectives with respect to the decentralized aspects of Bitcoin all around the internet. There isn't a lot that I could add at the theoretical level.
However, I've noticed a lot of chatter recently—mostly among those who are relatively new to Bitcoin, or at least inexperienced—about Bitcoin being a tool of the globalists in line with a New World Order agenda and the Great Reset. While I could point out that decentralization is a primary attribute of the Bitcoin network, the focal point of thought among those worried that Bitcoin will enhance Klaus Schwab's power to eat babies is that Bitcoin is digital and can be tracked.
The truth is that digital currency has been with us for decades. Did that make it easier to enslave the serfs? In the sense that asymmetric technologies bend along that arc, and efficiency of finances among those interested in technological dominance politics was improved by the rapid transmission of [all] information, then sure. But that's different than an inappropriate logical leap such as, "All that is digital is bad," or, "If it's possible for somebody to connect my identity to a digital address, then they will control me [or even that it's cost-effective to try]."
Aside from pointing at that you can always use multiple Bitcoin addresses with no trace of connection, or that there are numerous ways to launder (ethically or unethically) cryptocurrency to make identity tracing difficult, I'm simply going to shift the focus of the conversation to a different element/dichotomy with respect to money.
Inside Money and Outside Money
I said that already? Right.
In the most recent Arthur Hayes essay, "Energy Cancelled", he confounds with his British spelling (dude went to Hong Kong where they spell English words like English people, which is wronger than it sounds) makes a whole lot of excellent points, but I'm going to focus on one in particular, even if it did not originate with him (he merely synthesizes the idea and puts it into thoughtful perspective).
From his article,
During the unfolding of this new global financial crisis, if you are serious about what the future holds monetarily for the various global factions, reading Zoltan Pozsar’s missives is non-negotiable. He is a money markets and rates strategist for Credit Suisse and pairs an excellent understanding of the intricate plumbing of global money markets with a clear and concise writing style. I don’t know if he coined the terms “Inside Money” and “Outside Money,” but I rather like how simple yet informative these descriptions of money and collateral are.
Inside Money are monetary instruments that exist as liabilities on another player’s balance sheet. A government bond is a liability of the sovereign, but an asset in the banking system that trades like cash depending on the credit quality of the issuer.
Outside Money are instruments that are not liabilities on another player’s balance sheet. Gold and Bitcoin are perfect examples.
If the distinction between centralized/decentralized doesn't hit you, the Inside/Outside dichotomy of money may help you unravel the question as to whether or not Bitcoin is a tool of the cabal or illuminati or banksters or what have you. Inside money is a gate keeper's game. And a highly profitable one. The central banks won't give up their seigniorage or ability to front-run monetary policy (or resulting Cantillon effects) easily.
Arthur's thesis is one that is echoed among numerous finance, econ, and monetary insiders today: the Russian invasion of Ukraine—or more specifically the U.S. response to it—just changed the nature of money globally. Russia was segmented from currency markets through requisition of Russian Central Bank fiat currency reserves and disconnection of the larger portion of Russian banks from the SWIFT network (the digital currency transfer system with more than 11,000 member institutions). That SWIFT network has been used like a social media platform to first suck up participation in information exchanges by reducing the cost of operating on the network, then used as a cudgel to punish a group. Whether or not that punishment is justified or applied consistency is less the point than that it just happened.
As always, my task is to synthesise a wide range of macro economic thinkers who are better informed than I am, place their thoughts into my own vernacular, and relate them back to the crypto capital markets. Regardless of the speed at which this war subsides, the monetary rules of engagement will not go back to the post-1971 Petro / Eurodollar system. A new neutral reserve asset, which I believe will be gold, will be used to facilitate global trade in energy and foodstuffs. From a philosophical standpoint, central banks and sovereigns appreciate the value of gold, but not that of Bitcoin. Human civilization is approximately 10,000 years old, and gold has always been valued as a monetary instrument. Bitcoin is less than two decades old. But don’t worry: as gold succeeds so will Bitcoin. And I will explain why.
The full article is beautifully laid out, but long, so I'll cut to the chase: Russia begins a new game of transacting in a non-dollar economy. This starts with gold out of tradition and understood value, but will quickly move to Bitcoin because amounts of gold large enough to pay for a tanker of oil are costly and cumbersome to transfer. And how does that work when getting boats through the Panama Canal, anyhow? If payment is made too early, there is a risk of broken trust, but if funds are not available, the toll collectors balk. I'm probably not explaining that fully or clearly, but imagine the difference between the physical effort of putting a banner on your company website and erecting a lit sign above the entryway for your business. Now, rinse and repeat for every economic event.
Gold will be useful to banks, surely, but Bitcoin will take on the role of digital gold. Beginning now. Arthur goes a little poetical:
One, Two, Buckle My Shoe
For a single Bitcoin, my unit is in the millions.
For an ounce of gold, my unit is in the thousands.
I'll call that a short-term prophecy. The endgame may look far crazier. If Thier's law takes over during hyperbitcoinization, the dollar could become a historical collector's item. Or useful during the next toilet paper shortage.
Dedollarization is Now Inevitable
IMHO, it was already inevitable, but we can see the actual path quite clearly now.
Analog vs. Digital
Money can be split into two things. The unit of account, and the network on which this token moves. The network is more important than the unit. Let’s examine.
Beyond the physical costs Arthur covers, it is the completeness of a network that matters most in the end. When two networks battle, either the stronger one wins early by totally crushing all comers, or the incumbent loses to the eventually larger (and thus stronger) pan-network.
How does that model of change look right now?
The petrodollar system is now aligning itself with a strategy to starve the world of energy at a time when fertilizer prices are booming far beyond the levels of the mortgage bond crisis. Many nations could reach a breaking point at which they are forced to realign banking polarity opposite to the U.S. Federal Reserve banking system.'
Russians are already finding willing new economic partners in the Middle East and China.
CBDCs would either prop up the dollar system (I doubt that's possible), or result in a new era of rulers-as-unaligned-robber-barons, each with their own insider currencies. The latter would result in many weak rulers whose citizens would easily route around them with decentralized outsider money. Fiat currencies would hyperinflate rapidly, and militaries would stop working with the banks.
Western politics still engages in broken-window fallacy economics and the bizarre myth of stimulus spending as a solution.
Wall Street is engaged in a new level of regulatory warfare. When an industry gets used to getting away with its crimes, it may commit too many to remain solvent when the investigators start working all the cases. (Mood: working to moderate my instinctual schadenfreude.)
Exxon has jumped on board the "it's stupid if you don't" plan converting excess gas to Bitcoins. In case you're wondering, the result is less polluting than flaring the gas. The honest environmentalists will have a hard time pushing back, and that will bring larger and larger portions of the green movement (who have become exceptional political irritants or excelerants) into the Bitcoin camp.
Despite India's attempt to ban Bitcoin, its citizens have one of the highest adoption rates in the world. It would be foolish to suspect that most nations could or would control movement toward a Bitcoin standard.
Medical authoritarianism threatens to divide and weaken Western economies that dominate world finance (which could be its own three article series).
While you may hear a lot about El Salvador's experiment in Bitcoinization, Vietnam leads the world in Bitcoin adoption, per capita. With a rapidly modernizing workforce, a population nearing 100 million, and a lot of operation ports and container terminals, Vietnam could happily soak up international business traffic transacting in Bitcoin. That could be the spark of the domino effect through all of Southeast Asia.
I will argue in a subsequent essay that the Global South, who lack the ability and access to trade and store gold efficiently, will gravitate towards Bitcoin. El Salvador opened the door to this possibility, and many are watching how Bitcoinification of their reserves helps or hurts their economy.
Arthur does say one thing in his article that I disagree with:
Therefore, if your time horizon is in the years, it’s time. If you mess with the bull, you get the horns. Remember: it’s not gold or Bitcoin that is increasing in price, it’s a decrease in value of the fiat currency in which they are priced.
This is either incorrect, or an oversimplification. Given how smart Arthur is, I'm going to assume the second, but the point is important. During a network switchover where one network bleeds nodes to the other, both are changing in value. If the absolute rates of change are the same, the smaller network accrues value faster than the second loses value if Metcalf's law is any indication.
But What if Russia-Ukraine is a Controlled Conflict?
I don't rule that possibility out. That doesn't mean that Bitcoinization of the monetary system is the goal of the oligarchs. That just means the Dollarigarchs cannot save the dollar. They could fake angry pitchforks, but they have the opportunity to consolidate a lot of wealth while shepherding in a new monetary era that would allow economies to reboot while keeping the pitchforks at bay. If you were them, knowing what all we've just discussed, how would you play your hand?