ichthyoid

In the 8th episode of Block Stars, David Schwartz interviews Barry Eichengreen, who is a professor of Economics and Political Science at University of California, Berkeley, and they talk about COVID-19's effect on the global economy, as well as how cryptocurrencies factor into it all.

As I explained for episode 7, I'll be giving my thoughts on the episode first. Then, for those who are interested, an episode summary is given below that. If you're interested in what I've talked about with other podcasts, please go here. Otherwise, here are my thoughts!

My Thoughts

I've recently become obsessed with decentralization and its relationship with history (I've even written a book review on the topic!), so I was pretty excited when I saw the title of this particular podcast. With the recent announcement that the United States' GDP had fallen a record 32.7%, while cryptocurrency rose during the same period, it's pretty timely that this episode (recorded back in June) came out the time it did.

Here are a few notable things I took from this episode.

Printing Money, Hyperinflation, and the Global Economy

The world of economics is so often counter to common sense, that it's difficult to comprehend. The rule of inflation is that currency is often devalued because of an increase in circulation. An example of this is how the US Dollar has lost more than 90% of its purchasing power in comparison to gold in the past century.

Yet, despite the insane amount of money the US has printed in the past couple months, as Barry Eichengreen explains, this fact has not caused any sort of deep hyperinflation that has happened in other countries like Zimbabwe or Venezuela. Instead, due to the fact that the US Dollar is the global reserve currency, when the US economy is weak, and even when the USD is supposed to be inflating due to mass printing, around the world, other people and nations would actually buy into the US economy for cheap, thus keeping both the nation's economy and the currency afloat.

It makes sense, after thinking about it. After all, the US economy has generally been the most stable so far. Buying into that stability when the price is low will better guarantee returns in the long run. I'm not one to believe in the principles of Modern Monetary Theory, but it does make an interesting argument for printing money without needing to worry about hyperinflation—at least for the United States.

Libra and Stablecoin

In some ways, I feel like I'm one of the least informed individuals talking about crypto and blockchain. I didn't even know Barry Eichengreen had written popular scathing pieces in the Washington Post condemning Libra and central banks weighing in on climate change. Whatever the case, hearing Eichengreen talk about Libra and the potential risks it had made me feel quite a bit vindicated for what I posted on it a while back. On the other hand, I don't know if Eichengreen is giving stablecoins that are backed by more than one kind of collateral their fair shake.

I've talked before about MakerDao's DAI and why I believe that particular project is the premier stablecoin today. But Eichengreen doesn't even have to know about that particular project to understand why multiple assets backing a single product is a good thing. It's actually the same idea as index fund investing, where index funds are made up of a multitude of stocks. The large variety of index fund portfolios actually make them much more stable than individual stocks, since valuation is based on an average of them, so that even if one or a few stocks fail, there is less loss in the index.

The difference between Libra and DAI is that DAI is backed by a decentralized network and governed by a voting system that is accessible to anyone. Libra, on the other hand, is largely dependent on Facebook (at least, so far). Furthermore, Libra is also backed by hard assets, such as the US Dollar and the Euro, while DAI is soft-pegged to the US Dollar. Being soft-pegged allows the coin to exist without the need of physical assets, thus getting rid of the volatility that those physical assets may bring.

I honestly hoped David Schwartz would push a little bit more back at Eichengreen, since he actually proposed awhile ago for an XRP backed stablecoin. There hasn't been much about it out of the XRP community since that video though, so perhaps the idea hasn't really gained much traction, yet.

This was a really great interview, and I really hope this kind of branching out continues to happen in future podcasts. Continue below for the summary!

Episode Summary

Barry Eichengreen is an economic historian, studying the connection between current modern economic problems with past ones. One parallel that he's found with crypto and modern economics is the gold standard. According to him, gold has little innate value due to its limited utility. Rather, the majority of the value of gold is placed in the belief that it is and will be valued by others. Non-stablecoin cryptos like Bitcoin is valued in much the same way. Of course, Bitcoin can be better used for transactions, whereas gold is not really as liquid. And this would be why many compare the value of crypto like Bitcoin to gold.

With the way the current global economy is going, there is large uncertainty looming with regards to inflation. It is possible that the general stability that the US has enjoyed is coming to an end, and central banks will introduce fiat into their national systems en masse. This may cause a lot of people to try to find something that would hedge against that inflation. But Eichengreen doesn't believe that this will happen any time within the next decade. Instead, consumer spending may decrease, and companies will be less able to predict and project their business growth. This lack of movement would be a kind of deflation hedge against inflation.

This actually reflects the 2008 Great Recession, in which the US government printed lots of money to help with the crisis, and though lots of economists thought there would be a massive inflation hike, there wasn't. Instead, as Eichengreen sees it, the printing of money is a necessary thing to keep the economy going, even though it may result in problems down the road.

Cryptocurrency, at least on a global stage, is still a relatively small niche. The US government has actually not done much of anything to the crypto markets, despite being involved in almost everything else, including municipal and corporate bond markets. This points to the fact that crypto is not yet essential to any relevant markets.

The United States is in a unique position in the world, due to the US Dollar being the de facto reserve currency of the world. Other countries actually rush to invest into the United States when its markets are down, because they see it as a safer investment. The US Dollar is the most liquid in the world, and even when it was responsible for a world crisis, people kept reinvesting back into the country and the US Dollar. This mean, of course, that the US bears more responsibility in looking after other global markets. The US provides liquidity by purchasing into other markets to give them dollars for their economies.

The pandemic differs with other historical crises in that it forced the shutdown of all economies. Usually, demand decreases, capitulating supply. But in the pandemic, both were forced to stop. Banking and foreclosure problems are slowly coming to pass, rather than quickly, making current events are basically unprecedented.

Some may say that there are parallels with certain industries being heavily impacted (e.g. airlines), which would cause a domino effect into other the industries. However, Eichengreen doesn't think this will be the case, as something like the airline industry is more isolated, and the current help in the crisis is going towards people to keep them more financially safe.

The conversation then turns then to the idea of crypto as a store of value and as an inflation hedge. Because there are different kinds of crypto (for example, stablecoin versus Bitcoin), whether crypto is a hedge really depends on what kind of inflation is present. If the US dollar loses puchasing power against Bitcoin, that also means that the stablecoin backed by US Dollars also move lower. Eichengreen talks about two kinds of stablecoins—partially backed versus fully backed by assets. Neither seem like they will last very long, given the amount of faith needed for partially backed, while fully backed is increasingly difficult to do. Both are susceptible to great volatility or inflation of any assets those stablecoins rely on.

Libra may have been set up as an interesting example in this way, because it was originally intended to be backed by multiple different assets. But now, due to regulatory concerns, it's transforming to be just like another stablecoin. Eichengreen was responsible for an opinion piece that lambasted Libra in 2019. Both Schwartz and Eichengreen note that the diversity of collateralization would cause these stablecoins to become extremely dependent on the stability of each asset, and thus, volatility could potentially be exponentially felt. Additionally, with smart contracts being added to Libra, it may be that a black swan event would capitulate the assets Libra relies on, which would then require something like the Federal Reserve to come and rescue the whole project. But Libra doesn't have anything like that. Instead, it freezes the ability for users to get their money when they need it.

Thus, even with new technology like blockchain, it seems the typical and traditional financial instruments, such as insurance and regulation, are still required, as they create the same problems that made people want these traditional instruments in the first place. It gives a pretty strong argument for regulation even in the crypto sphere, as regulation is meant to protect consumers.

As with almost everything today, the conversation steered towards China versus the US. As many know, China is on the verge of introducing the world's first national cryptocurrency. Eichengreen points out a study conducted with Seoul merchants that revealed a distrust people have of whether China will use this new digital currency to track everyone's transactions.

However, if Central Bank Digital Currencies (CBDCs) aren't inherently decentralized, it seems that they don't really bring anything new to the table. And, in fact, if central governments will always require intermediaries like banks to send money (either to retail or even individuals), then the whole point of using blockchain is completely moot.

Schwartz brings up Eichengreen's opinion piece in 2019 which asked whether central banks should weigh in on climate change. What's interesting is that central banks are an autonomous entity of government with basically only one mandate—to keep inflation levels low. If they have to suddenly be concerned with a different objective as well, their actions could no longer be measured accurately, giving the institutions more power than needed. This doesn't mean something like climate change can't affect monetary policy. After all, it can have very real impacts on physical things like supply and distribution. There is, of course, concern that blockchain mining consumes as much energy as entire countries. But there may be hope that future proof-of-work blockchains can be more energy efficient.

Eichengreen likens the competition between different cryptos to the early 1800s up to the Civil War in the United States, where different banks issued its own currency. This resulted in currencies that fluctuated in value, despite all saying they were worth “$1”. In those days, the liquidity of each different currency had certain effects on their popularity. If the world is to go towards the idea of tokenizing everything, then it will be important to have a single unit of measure for everything (just like how the stock market is all measured in US dollars).

As they wrap up, Eichengreen talks about the future of crypto, where purely speculative investments will eventually die out. Ones that provide tangible utility like cross-border payments (i.e. XRP) are most likely to do well. Schwartz asks him to comment on the rest of 2020 and into 2021, but Eichengreen tentatively predicts a bumpy future, preferring an epidemiologist to answer the question rather than an economist.