Lowe-down

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Lowe Down

As you rise through the ranks of the civil service (or anywhere really) it becomes less and less about talent and more and more about politics. In the case of Australian Reserve Bank governor, Philip Lowe, his time has come. His contract coincides with a difficult economic situation, rising rates, rising prices and constant reminders of the line that will haunt him from 2021.

It wasn’t actually that bad. The speech was laced with “in our judgement” etc but it was still imprudent and ultimately gave his political masters the ammunition they needed to get rid of him. This was his only significant mistake, perhaps along with the Barrenjoey lunch (of which I was intensely critical at the time).

The thing about errors though is to learn from them and not compound them. Getting rid of Philip Lowe is an error. In public officials, what you are really looking for is integrity and incorruptibility. I would wager it would be impossible to bribe Philip Lowe. All his remarks are about getting wages going up for Australians. All his decisions reference unemployment and he has on many occasions referred to the economic damage unemployment can do to households and individuals. Everything points to the fact that he cares very deeply about the consequences of the decisions that the RBA makes and he ignores politics when he makes them.

I don't think much of central banking or central bankers. For some reason though, I do think highly of Dr Lowe.

My assessment of him is quite simple: he isn’t corrupt. It’s particularly disappointing that someone like that should ultimately be dethroned by ugly politics but that is almost always the way.

The depoliticisation of money is essential for the advancement of society. It simply cannot work sustainably when an entire nation trades on the goodwill and embedded integrity of one person. We have done so for a long time (without realising) and soon that person will be gone. I have nothing against the three nominated candidates, but they will need everything they have to resist the siren song of petty political corruption. He had it, but do they?

Nobody uses it

Potential investors in bitcoin often say “nobody uses it”. Some of them have a surprisingly deep understanding of the technology and the offering. Many have done their own research and have understood the weakness of the incumbent model … but “nobody uses it”.

I believe what they mean is “I don’t use it and nobody that I know uses it”.

The thing that drives bitcoin and cryptocurrency usage is necessity. As a wholesale fund, if you are investing with us you likely have money. You likely have bank accounts and technology and access to saving mechanisms that actually reduce your exposure to money printing. It’s not a surprise then that adoption is greatest where the need is greatest; South America, Turkey, Lebanon, Africa, China (still).

If you are interested in tracking usage across the industry, a16z provides some helpful indices that track developers, smart contracts, active addresses and all sorts of other things that might guide you.

This one (which isn’t from the same set) tracks the ratio of active addresses to the overall market cap of the sector. Currently at three year lows. This makes sense compared to what we see, which is vibrant usage and development. Borrowing and stablecoins seem to be doing particularly well. There are still plenty of issues; Binance has just retrenched 1,000 staff worldwide and the clean up from Celcius and FTX will take a while yet.

So is it nobody uses it, or you don’t use it? The distinction is critical. Between the a16z data and these charts you might be able reach a more balanced conclusion. It might ultimately be the same but at least you will have done a little bit of homework.

Money competes

“The most momentous consequence of the new digital money will be the end of inflation and the deleveraging of the financial system. The economic implications are profound.”

- The Sovereign Individual: 1997

On a one, three, five-year (and any longer) perspective you choose, the price of all goods has fallen with respect to bitcoin. Not only is inflation zero, it is negative. That exactly reflects economic reality too. We consistently get better at things and prices fall. Except in the fiat world, they don’t.

Inflation measures rest entirely on two tools; how we measure prices (the basket of goods), and the basis of those measures. Not only do we have a problem with the basket (it’s mostly a fraud), we also have an issue with our basis. Imagine building a house with measuring equipment that changed every day. It would be nearly impossible and the house would collapse which is the ultimate path of central banking.

As this effect becomes increasingly well-known, governments have to innovate. They must, at least optically, try and make their money better. Next month, the US will get FedNow which promises something Europe and the UK have had for a long time; instant payments. In Europe they use SEPA which is excellent, cheap and instant. In the UK they have Faster Payments, again instant and free.

There is a lot of discussion that FedNow is a central bank digital currency. That’s just wrong. It’s not even the precursor to one, it simply brings the dollar into line with other currencies so you can use it instantly in the digital world. We are witnessing money competing here. The next phase will be the launch of CBDCs. That too has to happen because other money is now programmable; government money also needs to have those features.

All of this is forced by market competition. No central bank really wants to have to innovate like this. They would much prefer the status quo and it's quite remarkable that open source software is bringing banks around the world to heel. They have no choice but to try and compete.

Full details on CBDC projects around the world are on nearly every central bank website. The Euro project is here, the Federal Reserve here, Digital Pound, Digital Canadian Dollar. I could go on and on through every central bank but I tried a few more niche ones; Brazil, Norway.

They are literally everywhere and will be an attempt to arrest the decline of fiat currency. They all have distinct features of traceability and programmability which is both helpful for them and sinister for us.

All of this was predicted by Economist Frederik Hayek who said back in the 1970s that private money should be allowed to compete with State-derived solutions. That has never been allowed to happen until now. This excellent paper (which is surprisingly hosted on the Federal Reserve’s website) is short and worth a read. It sets out Hayek’s view which is now coming to fruition, although perhaps not in the way he envisaged.

For the “bitcoin is going to zero” gang, you have to ask yourself why central banks are suddenly innovating like never before. Who is the market leader here? Which currency has the most possibility for growth?

To me it seems so obvious that I can scarcely believe the opportunity before us. For naysayers, I am open to your arguments, genuinely. Send them in for consideration.

BRICS

Nobody has paid much attention to the BRICS for a long time. We get force-fed G7 meetings in the West, in particular how important they are to us all but there hasn’t been a meeting as important as the BRICS in August for a long time. South Africa will play host from 22-24 August.

The suggestion is that the BRICS might launch their own currency for trade. It would be a hybrid of China’s Yuan, Indian Rupee, Russian Rouble and some gold. I rather hope they call it the BRIC.

The questions around the currency will be how much gold backing will it have? Is it for state level use only? Will Saudi Arabia join in too? In which case oil priced in BRICS becomes a real possibility?

That this is even being spoken about is incredible. Such notions even 10 years ago would be a death sentence via an American drone. It all coincides with Indian Prime Minister Modi's recent trip to the USA where he was given extremely high status by his US hosts. No way it wasn’t discussed there. Modi is 10x the player Biden is, so I doubt he was under too much pressure that he couldn’t handle.

All these things contribute to the slow decline of the US Dollar. Bitcoin eats away at it; the BRIC will eat away at it; inflation and debt eats away at it. But it won’t die. Like the British Pound, it will just fade into less and less relevance over the course of the next 50 years.

My guess is that the BRIC doesn’t happen this year; that in August they agree to settle more trade in their own currencies while investigating their own currency layer. I think they are just rattling the American cage to see what happens.

Whatever they do, it will be short dollar; long everything else. If you wanted to know how currencies ultimately die, then you’re watching it happen in real time.

Euro-Trash

It’s “your money”. Kind of. If you pass KYC, don’t want to send it to Iran, don’t withdraw more than €2,000 at any one time and can provide explanations for your transactions when we request them … then it’s yours.

Anyway, it is a little bit exciting to be getting new Euro notes and now we can play banknote bingo. What insane images of ‘relatability’ will the ECB dream up for their overwhelmingly white audience of Christian background. Almost certainly no white Christians is my bet.

I have completed the survey and made some suggestions:

1. A German engineer trying to smelt iron ore with a rechargeable battery and a wind farm

2. A French rioter, storming barricades with ‘Made in China’ stickers

3. Christine Lagarde eating cake

You can complete the survey here. It was a source of maximum pain to read and I’m certain most of you will give up.

Further information

Read our bitcoin news wrap-up on Livewire: Laying the foundations for increased flows into digital assets.

Our June 2023 report to investors can be found here.

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