What is Money? and why blockchain is the future.
I listened to the Ultimate Macro Framework with Raoul Pal and condensed it into this 5 min must read thread. Get ready to have your mind blown.
If you have the time, I highly recommend watching/ listening to the whole interview between @RaoulGMI and @Breedlove22. It is one of the best interviews I have listened to this year.
Thread will be broken down into the following sections....
WW1 and WW2
Baby Boomers
Dotcom/ GFC
COVID
BTC is the answer
The Future
Summary
1. WW1 and WW2
World war one precipitated the start of a 100-year boom/ bust money cycle. It all started with the fine that Germany received due to the war crimes of WW1. In todays money, the fine was approx. $500 billion... an unpayable amount of money.
The only choice that Germany had was to debase their currency to pay this debt. This led to the collapse of Germany and the rise of Hitler/ WW2. Governments around the world could not pay for this expensive war, so they printed money and created debt to fund it.
After WW2 finishes, there was euphoria and humans did what they do best- have sex and procreate. Over the next 20 years in the USA, 78 million people were born (40% increase). The combination of massive post war stimulus + cheap labour led to the golden age of the 1950s.
In the late 1940’s, a series of agreements were made by governments around the world (Bretton woods, UN, NATO, EU). This rules based global order system was put in place to avoid WW2 ever happening again. The major beneficiary was the USA who emerged as the global leader.
2. Baby Boomers
1967- 1975 the baby boomers start entering the workforce which causes prices of goods and services to explode along with wages. This demographic led boom caused the massive inflation that was experienced in the 1980’s.
Promised the American dream of the 1950s, boomers had been given a pretty bad deal. Real wages stayed flat from 1975- 2020 (average 0.3% per year)... while asset prices and GDP continued to trend higher.
In a political move to win conservative seats, Margaret Thatcher sold commission houses at ridiculously low prices. What this did did was turn all the working class into debt slaves - accelerating the increased financialisation of the monetary system.
Prices rose, forcing everyone to borrow more and maintain their standard of living- Fiat money incentives indebtedness. This massive debt bubble led to the 1987 crash. To stop the crash, central banks cut interest rates and avoided a recession- adding that trick to the toolkit.
In the 1990s, the Berlin wall fell and so did the concept of communism. China realised this and started opening up to the world. In 1996, the WTO was created which encouraged globalisation through reduced trade tariffs. Leading to global labour arbitrage.
Now the massive glut of boomer labour in the US was up against a much cheaper global workforce from China and other Asian countries. They were also competing with technology which was making their jobs cheaper and more automated.
3. Dotcom/ GFC
In 1998 there was huge leverage built up in these emerging markets- Thailand, South Korea, Hong Kong and when these Asian tigers started collapsing, Long Term Capital Management blows up. To stabilise markets, the Fed cuts rates.... again.
Low interest rates and an inflow of capital into US markets led to the biggest stock market bubble in history- the Dotcom boom. After the debilatating crash, the boomers all lost faith in the stock market and moved into the property market- with massive amounts of leverage.
Double income households became the norm to keep up with cost of living. This hyper-financialization and junk mortgages lead to the GFC and property market collapse. The demographics were also turning. As you age, you spend less money. So an ageing population= slower growth.
In order to paper over the cracks of this aging population, the Fed discovered a new trick; "quantitative easing" (which is another way of saying money printing). Raoul explains that the S&P 500 isn't going up in relative terms, it is the denominator (USD) that is going down.
It is the increase in Fed balance sheet driving up asset prices- "an everything bubble". As you can see in the chart, the S&P matches the balance sheets almost perfectly. However, there are only 2 assets that beat the balance sheet after 2008- Bitcoin and the Nasdaq.
4. COVID
In a low interest rate environment during the 2010s, corporations took on increased levels of debt. COVID hit in 2020 and crashed the markets and the world stopped. Central banks around the world could not allow the collateral base layer to fail, so they had no choice but to put the world on their balance sheet. This led to another bubble (2020/ 2021) built on printed money. We were seeing the destruction of feedback loops and the divergence between economic reality and perception. The only way out for the Fed was financial repression. Basically, to run inflation hotter than bond yields and inflate the debt away over time. They can't change the demographics (ageing population) or let the assets on balance sheet collapse, so they have to debase the currency.
5.BTC is the answer
By now, people are starting to figure out they are getting screwed- purchasing power eroded as asset prices rise. For boomers, Gold is the traditional store of wealth. But for millennials who have not yet created wealth, it is not as useful.
Enter BTC - born out of the 2008 financial crisis. We are seeing a migration to this alternative financial system (DeFi) as people have lost trust in the intermediaries (Govt and banks). People want to cut out the middle man if it can be done efficiently and in a trustless way.
Raoul goes on to explain that in the current over-levered financial system, when push comes to shove, nobody knows who owns what (e.g. DTCC and Euroclear). Blockchain solves this as it provides secure recorded ownership and full transparency of transactions.
We are migrating from a top-down centralised model (DTCC and Euro clear) to a decentralised blockchain. People are waking up to this and over the next few decades, Raoul believes we will see
Ongoing gradual currency debasement
Ongoing gradual migration to blockchain
6. The Future
Raoul and Robert discuss the traditional options we face and why none of these will work. They conclude that all roads lead to Bitcoin.
Traditional political options we have
Right- trickle-down economics and tax cuts on corporations
Left- raising tax on the rich
Cut interest rates
Deficit spending & Fiscal stimulus
Austrian way- let it all burn
Extending the working age
None of which can work.
We are now entering the exponential age where technology takes over everything- “Software eats the world”. Global population is declining and likely to peak at around 10 billion as robots and AI automate our lives. Birth rate is declining as cost of living increases.
Here is the optimistic scenario for the future...
Formation of online nation states
Metaverse
It's a possibility that the metaverse allows us to earn income in a world free of constraints and debt shackles like the current world. The real world is becoming a video game.
Raoul believes the next 15-20 years will be extremely difficult until we see mass adoption of the metaverse/ blockchain. The only way out is debasement and to stop the people from revolting, governments will use CBDCs to direct stimulus measures in a focused and targeted way.
The world will migrate to a new system of hard programmable money. However, in a deflationary world- everyone saves and no one invests or spends money which could be bad. Companies will be starved of capital as it flows to Bitcoin and cryptocurrency.
The other great opportunity we have is owning your own identity online and being able to profit from that. The current model (Web 2) we are being taken advantage of and we don’t own our identity. In the metaverse, we could have a number of digital identities that we can own.
Raoul postures that technology and the green energy revolution will drive the cost of energy to 0 over time- a very intersting concept. This would create an abundance of wealth and global prosperity. However, this could create several problems...
Work is our purpose. So what do humans do when Robots take over?
If one central entity owns all the robots and AI, they control the world
The future is uncertain and people fear change. We are currently undergoing the fastest rate of technological change in human history.
7. Summary
End of an era- Fiat money/ boom-bust cycle
Population Demographics drove everything
COVID has accelerated the rate of change
Digital Migration- change the money, change the world
The faster we accept the change, the better off we will be
Play the hand you are dealt and don’t fear change
Denominate yourself in BTC and digital assets