Article / 31 October 2017 at 11:28 GMT

Steen's Chronicle: Are cryptos signaling the next economic crisis?

Chief Economist & CIO / Saxo Bank
  • Elements of next crisis 'already in plain sight'
  • Treasuries in focus as Fed moves to cut purchases
  • Cryptocurrency settlements now sit at over $170 billion/day

The astonishing rally in Bitcoin has implications well beyond 
the success of speculators. Photo: Shutterstock

"Today’s edition of Steen's Chronicle is written by my good friend Daniel Arbess – one of the smartest people I know, and a true gentleman. Dan has an extremely good take on the medium- and long-term trends in the financial markets and always maintains an open mind." 
— Steen Jakobsen

By Daniel J. Arbess

We won't be able to call the next economic crisis a “Black Swan” when it hits, because the elements are already in plain sight on the field. 

Think holistically. Connect the dots among a constellation of seemingly unrelated, fast-moving conditions that are the subject of intense-but-separate discussions every day. Technological forces, including the growth of distributed ledger settlements denominated in cryptocurrencies and shrinking petrodollar recycling triggered by US shale innovation, are coinciding with the promise of monetary policy normalisation (even at the zero bound) and structural fiscal imbalances. 

It's a cocktail for further dollar weakening (at least relative to some currencies), higher volatility, rising Treasury yields (with or without rising policy rates), widening corporate credit spreads, rising debt service burdens, and (in due course) increasing corporate defaults as well as recession or worse.

The last global economic crisis hit when hundreds of billions of dollars in mortgage debt went bad and governments bailed out the banks to save the financial system. The next one might start with a loss of confidence in the creditworthiness of governments and their currencies generally.

This process is gaining momentum as foreign government buyers of US Treasuries shift to purchasing their own sovereign debt and private sector institutions begin adopting cryptocurrencies – spontaneously-created citizens’ alternatives that entirely bypass paper currency for settling financial transactions. 

The Fed presently holds $2.6 trillion of the $20 trillion of outstanding US Treasury debt, up by a factor of more than five from the less than $500bn held before the financial crisis. Foreign governments hold $6.3 trillion, almost half of which is in the sovereign hands of China, Japan and Saudi Arabia. 

As the Fed finally starts unwinding its "extraordinary accommodations", it seems appropriate to ask who's buying? Over the past 15 years, global debt-to-GDP has risen by over $100 trillion to $217 trillion, or 327% of global GDP. 

China and Japan’s central Banks are increasingly refinancing their own debt, with China also bypassing the US. as the world's largest oil importer (US purchases of Saudi oil have dropped by half in the past decade). 

So Saudi Arabia, a top 15 holder, is now being paid in yuan instead of dollars, and therefore has less of a reason to buy US Treasuries.

China cut holdings this year as Beijing moved to manage capital flight by intervening in foreign exchange markets in support of the renminbi. Photo: Shutterstock

While the dollar and Treasuries may still be, as bond investor Bill Gross used to say, “the cleanest dirty shirt” in the global monetary system, can we really just assume that this will be good enough? 

(Wait until the $100 trillion of as-yet-unfunded US  Medicare and social security obligations our generation is leaving behind comes due...)

Consider the emergence of blockchain and cryptocurrencies in this context: in the depths of the financial crisis back in January 2009, and referencing a Times of London story headlined “Chancellor on brink of second bailout for banks”, Satoshi Nakamoto – a person or persons of still-unconfirmed identity – created, or “mined”, the first settlement “block” of blockchain. 

This was the first so-called “distributed ledger” for settling financial transactions in the cloud based on securely validated data, instead of on established securities exchanges, physical mortgage and UCC filings, and the like. 

Blockchain, and other distributed ledger settlements, ingeniously crowd-source the massive computing power necessary to accomplish secure cloud-based settlements of complex transactions by paying the computer scientist “miners” with a cryptocurrency called “Bitcoin” for the blockchain ledger (with other names used for other, competing ledgers).

Investing in Bitcoin (or any other cryptocurrency) has so far been a highly speculative bet on whether distributed ledger settlements will find mass purchase, as well as which one will gain broad enough acceptance with merchants in the physical, commercial world to become the settlement ledger of record. 

Cryptocurrency settlements now sit at over $170 billion/day across some 800 ledgers, with numerous spontaneous initiatives emerging to consolidate the different cyptocurrencies into a single trading platform facing real-world merchants.

Is it possible that Blockchain will become the Arab Spring of transaction settlements? Will the adoption of these technologies and usage patterns drive fundamental change in a similar manner to how widespread social media use empowered citizen democracy, bypassed the establishment-curated channels of political discourse and process across the Middle East and North Africa?

Most governments and monetary authorities haven’t reacted yet, but they will. We’ll know soon enough whether this is indeed a real-world medium of exchange, or a just new-age indicator of macroeconomic anxiety. Either way, this is a development that warrants more than derisive dismissal by the financial establishment. 

Bitcoin ETF

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Source: Saxo Bank 

Daniel J. Arbess is Founder/CEO and Chief Investment Officer of Xerion Investments and, a member of the Council on Foreign Relations and Co-Founder of No Labels
Daniel CN Daniel CN
Another question: are cryptos reflecting a perversion of markets in which kicking down cans whole chains of blocks is paid most?
Daniel CN Daniel CN
I do not think Bitcoins are a bet on underlying technology. When techies traded Bitcoins, you did not see those spikes. As in all marketing aspects, its the trend/antitrend forces. Here: distrust in government fiat currencies. So mass psychology might be a guidance. And thus, I believe what can be read out of it is not a imminent economical crisis but a very present political one. The spark to create Bitcoin was not Lehmann. It was the ever increasing laws and enforcement instruments to monitor flows of money to press more taxes out of people.


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