Mar 13, 2022·edited Mar 13, 2022Liked by Noah Smith
Exorbitant privilege, or exorbitant burden? If you haven't read them yet, I recommend Michael Pettis and Matt Klein, especially their joint book _Trade Wars are Class Wars_.
They make a nice case that America's soaking up foreign capital actually amounts to not a privilege but a burden, harming American equality and growth.
Roughly -- any dumb errors here are mine, not theirs -- Germany, China and some other countries have rigged their economies so that less income goes to consumers, and more stays with corporations or the government. The result is higher national savings, not because "Germans are thrifty," but because specific policies changed to keep working Germans or Chinese from taking home as much of their GDP contribution as personal income.
These pro-national-savings policies help these countries have competitive exports and robust employment. But it also sticks them with lower consumption and a trade surplus. Where does that surplus end up?
That surplus has to match with a trade deficit. And when countries as big as Germany and China run big surpluses, the final trade deficit is going to land on some country that's big, stable, and open to selling government bonds in trade for cheap imports. In other words: the United States.
In the long run, Pettis and Klein argue, these policies end up basically pushing down the bargaining power of workers worldwide, while, by making American wages less competitive, it quietly inhibits what kinds of jobs are worth companies creating in the United States. It's a small-scale version of a "resource curse," where the American resource worsening our terms of trade is dollars. Dollars, that is, plus our role as the provider of consumer demand to the world. Not because Americans are spendthrift, but because it's the inevitable consequence of our economy being big and open while other countries' economies have been rigged for reduced consumption and surplus exports.
It's a nifty book, and I'd love to read your review of it.
"Using Chinese currency means being vulnerable to Chinese sanctions, and after what just happened to Russia no one will trust China *not* to do that" -- that's a heck of a point.
Ironically, American dollars just became *more* safe than Chinese yuan, because we now all know that your currency of choice is also your sanctions vulnerability.
I suppose crypto really can't be a reserve now unless/until there's a more genuine anonymity. Which should be a technically solvable problem, but will regulators let you trade into an anonymous currency?
Now that currency and bank accounts are sort of weapons, maybe nobody important will be allowed to accept currency anonymity again.
"We don't take cash here! What do you think we are, criminals?"
It seems like you ignore the "any other crypto" option. I mean, I'm still a cryptoskeptic, but it does seem to me like Ethereum and various others, as you yourself put it, stand a better chance than BTC of actually replacing the euro-dollar system (if ever).
Perhaps the timeline is outside the scope of the current conflict, but if a transition is in the offing, it'd be nice to understand what it might look like.
Thanks Noah for the solid article - your point on Russian reserves being more Euro reliant is excellent. Your skepticism that countries would trust China more than the US makes sense too.
Some notes:
1. I read the figure titled "Question D" as a weak endorsement for the dollar's future strength. One might argue it reinforces the case that the dollar's strength is in doubt. It seems to imply high uncertainty for the dollar, rather than confidence in strength or weakness.
2. I'm unsure that short term price behaviour in the dollar is a good proxy for longer term and tail-event risks. Longer term signals can be swamped by short term price volatility and other causes of movement. I have the same doubt around inferring causation from short term Bitcoin price movements - there is a lot of unrelated price variability and there are other factors influencing price in the short term that may swamp movements. If - from the dollar graph - you infer dollar strength, would it only be consistent to expect no (or weak) correlation from the Bitcoin and gold graphs? Generally, I just think it's hard to take much long term from the short term graphs.
3. I agree price volatility is a big problem for Bitcoin. Transaction costs of a few dollars and low transaction throughput wouldn't proclude it from being gold-like (also hard to transact). It seems unlikely that internet would be down everywhere for a very long time, and Bitcoin transactions are hard to stop - although I take your point on traceability, which would allow government sanctions on holders. That said, based on the Biden proclamation, I'm not sure the US is moving towards banning Bitcoin (although they previously have banned gold, so I wouldn't rule it out). If it did come to that, it would surely be a sign of weakness in the US, and relative strength for non-US geographies. All of this said, on a 10 year timescale, it seems unlikely bitcoin would replace the dollar. On a 100 year timescale, I would say it's unlikely the dollar or Bitcoin will dominate, but maybe it's something more like Bitcoin than the dollar.
4. What is your response to Dalio's assessment of where the US is in its big cycle?
Noah, this is very interesting and plugs very closely into some things we talked about over at Spectacles last month and before (some disagreements, lots of agreements).
One thing I'm surprised you don't touch on is central bank digital currencies (CBDCs). Though you discuss bitcoin, these things are very different.
Right now, the biggest CBDC launches have been in China and Nigeria. You explained very well why a Chinese currency (digital or otherwise) is going to continue to face problems (some old Chicago wisdom, essentially).
However, the Fed is looking into CBDCs right now, and this technology could be important. It's not crystal clear just yet, but they may offer legitimate structural advantages over USD or other traditional currencies by combining the best of fiat with the best of crypto.
Unfortunately, they could also enable some very bad practices which could undermine democratic health. I imagine you're somewhat familiar with this tech, but vis a vis the reserve currency question in particular (and how it relates to democracy) you may find the two pieces we ran on this interesting.
They were contributed by a guest writer, Bryce Johnston, who's an Army officer and Fulbright scholar of development econ. Smart guy. Good writer. Check them out...
"the Bitcoin network simply can’t handle transactions of the size and frequency needed to support the global financial system"
Could you clarify what you mean by "size" here? As far as I know, there's no particular limitation on the amount of BTC that can move between two wallets in a given transaction. "The owner of wallet X transfers 1e20 BTC to wallet Y, here's the appropriate crypto signature block to prove that the true owner of X authorizes that," is a perfectly cromulent transaction block that could be submitted for processing by the folks mining for zero-tail hashes, you'd just have to have that many BTC to back the transaction (which nobody does).
Edit: Oh, I think I get what you're referring to -- you're talking about the size _in bytes_ of a single block, not the size in currency of the transaction. (Though if that's correct, I think your way of expressing it seems wrong/sloppy. This is not about the size of a transaction at all.) That poses a limitation on how many tranx can be processed at once, in a single block, and since the time to sign a block and add it to the chain is automatically regulated by the consensus algorithm (if recent blocks arrived too fast, then the next block requires one more zero on its hash, doubling the search time), the number of tranx per unit time is effectively capped.
Exorbitant privilege, or exorbitant burden? If you haven't read them yet, I recommend Michael Pettis and Matt Klein, especially their joint book _Trade Wars are Class Wars_.
They make a nice case that America's soaking up foreign capital actually amounts to not a privilege but a burden, harming American equality and growth.
Roughly -- any dumb errors here are mine, not theirs -- Germany, China and some other countries have rigged their economies so that less income goes to consumers, and more stays with corporations or the government. The result is higher national savings, not because "Germans are thrifty," but because specific policies changed to keep working Germans or Chinese from taking home as much of their GDP contribution as personal income.
These pro-national-savings policies help these countries have competitive exports and robust employment. But it also sticks them with lower consumption and a trade surplus. Where does that surplus end up?
That surplus has to match with a trade deficit. And when countries as big as Germany and China run big surpluses, the final trade deficit is going to land on some country that's big, stable, and open to selling government bonds in trade for cheap imports. In other words: the United States.
In the long run, Pettis and Klein argue, these policies end up basically pushing down the bargaining power of workers worldwide, while, by making American wages less competitive, it quietly inhibits what kinds of jobs are worth companies creating in the United States. It's a small-scale version of a "resource curse," where the American resource worsening our terms of trade is dollars. Dollars, that is, plus our role as the provider of consumer demand to the world. Not because Americans are spendthrift, but because it's the inevitable consequence of our economy being big and open while other countries' economies have been rigged for reduced consumption and surplus exports.
It's a nifty book, and I'd love to read your review of it.
"Using Chinese currency means being vulnerable to Chinese sanctions, and after what just happened to Russia no one will trust China *not* to do that" -- that's a heck of a point.
Ironically, American dollars just became *more* safe than Chinese yuan, because we now all know that your currency of choice is also your sanctions vulnerability.
I suppose crypto really can't be a reserve now unless/until there's a more genuine anonymity. Which should be a technically solvable problem, but will regulators let you trade into an anonymous currency?
Now that currency and bank accounts are sort of weapons, maybe nobody important will be allowed to accept currency anonymity again.
"We don't take cash here! What do you think we are, criminals?"
It seems like you ignore the "any other crypto" option. I mean, I'm still a cryptoskeptic, but it does seem to me like Ethereum and various others, as you yourself put it, stand a better chance than BTC of actually replacing the euro-dollar system (if ever).
Perhaps the timeline is outside the scope of the current conflict, but if a transition is in the offing, it'd be nice to understand what it might look like.
Thanks Noah for the solid article - your point on Russian reserves being more Euro reliant is excellent. Your skepticism that countries would trust China more than the US makes sense too.
Some notes:
1. I read the figure titled "Question D" as a weak endorsement for the dollar's future strength. One might argue it reinforces the case that the dollar's strength is in doubt. It seems to imply high uncertainty for the dollar, rather than confidence in strength or weakness.
2. I'm unsure that short term price behaviour in the dollar is a good proxy for longer term and tail-event risks. Longer term signals can be swamped by short term price volatility and other causes of movement. I have the same doubt around inferring causation from short term Bitcoin price movements - there is a lot of unrelated price variability and there are other factors influencing price in the short term that may swamp movements. If - from the dollar graph - you infer dollar strength, would it only be consistent to expect no (or weak) correlation from the Bitcoin and gold graphs? Generally, I just think it's hard to take much long term from the short term graphs.
3. I agree price volatility is a big problem for Bitcoin. Transaction costs of a few dollars and low transaction throughput wouldn't proclude it from being gold-like (also hard to transact). It seems unlikely that internet would be down everywhere for a very long time, and Bitcoin transactions are hard to stop - although I take your point on traceability, which would allow government sanctions on holders. That said, based on the Biden proclamation, I'm not sure the US is moving towards banning Bitcoin (although they previously have banned gold, so I wouldn't rule it out). If it did come to that, it would surely be a sign of weakness in the US, and relative strength for non-US geographies. All of this said, on a 10 year timescale, it seems unlikely bitcoin would replace the dollar. On a 100 year timescale, I would say it's unlikely the dollar or Bitcoin will dominate, but maybe it's something more like Bitcoin than the dollar.
4. What is your response to Dalio's assessment of where the US is in its big cycle?
Noah, this is very interesting and plugs very closely into some things we talked about over at Spectacles last month and before (some disagreements, lots of agreements).
One thing I'm surprised you don't touch on is central bank digital currencies (CBDCs). Though you discuss bitcoin, these things are very different.
Right now, the biggest CBDC launches have been in China and Nigeria. You explained very well why a Chinese currency (digital or otherwise) is going to continue to face problems (some old Chicago wisdom, essentially).
However, the Fed is looking into CBDCs right now, and this technology could be important. It's not crystal clear just yet, but they may offer legitimate structural advantages over USD or other traditional currencies by combining the best of fiat with the best of crypto.
Unfortunately, they could also enable some very bad practices which could undermine democratic health. I imagine you're somewhat familiar with this tech, but vis a vis the reserve currency question in particular (and how it relates to democracy) you may find the two pieces we ran on this interesting.
They were contributed by a guest writer, Bryce Johnston, who's an Army officer and Fulbright scholar of development econ. Smart guy. Good writer. Check them out...
On CBDCs and the democratic health challenges: https://www.spectacles.news/big-brothers-bank-account
On CBDCs and reserve currencies: https://www.spectacles.news/the-power-of-the-dollar-guest-insight
Would love to hear your thoughts on this topic.
Well if Saudi goes through with Yuan sales for oil a little may turn it to a lot, i guess we will see...
"the Bitcoin network simply can’t handle transactions of the size and frequency needed to support the global financial system"
Could you clarify what you mean by "size" here? As far as I know, there's no particular limitation on the amount of BTC that can move between two wallets in a given transaction. "The owner of wallet X transfers 1e20 BTC to wallet Y, here's the appropriate crypto signature block to prove that the true owner of X authorizes that," is a perfectly cromulent transaction block that could be submitted for processing by the folks mining for zero-tail hashes, you'd just have to have that many BTC to back the transaction (which nobody does).
Edit: Oh, I think I get what you're referring to -- you're talking about the size _in bytes_ of a single block, not the size in currency of the transaction. (Though if that's correct, I think your way of expressing it seems wrong/sloppy. This is not about the size of a transaction at all.) That poses a limitation on how many tranx can be processed at once, in a single block, and since the time to sign a block and add it to the chain is automatically regulated by the consensus algorithm (if recent blocks arrived too fast, then the next block requires one more zero on its hash, doubling the search time), the number of tranx per unit time is effectively capped.