Peter Thiel – who together with Elon Musk built PayPal – calls Bitcoin critics like Warren Buffet and Jaime Dimon the “gerontocracy.” I’ll be a bit more colorful and call them the senile idiocracy… In this video, Thiel lays out his case for Bitcoin. I wrote the Digital Liberties Amendment because I believe Thiel’s foundational case for crypto is right. But here Thiel is making the same mistake made by the senile idiocracy… You can only compare Bitcoin (or any other crypto currency) to other “competitors” if you have a stable unit of measure by which to compare.
But let’s let Thiel have his say before we go on…
Bitcoin Maximalists vs. the Senile Idiocracy
Thiel is too kind when he calls Warren Buffet, Jaime Dimon, and others like them the “gerontocracy.” On the other side of this discussion are people like Thiel who call themselves “Bitcoin Maximalists.” The problem is they are both wrong, and for the same reason. You cannot talk about one investment doing “well” and another “badly” – or one being more “competitive” than another – unless you presume a viable, stable unit of measurement by which you make the comparison.
Writing at GoldMoney.com, Alasdair Macleod writes about the implications of commodities like oil and gas being priced in currencies other than U.S. Dollars. His article is about how the conflict in Ukraine heralds the end of the status quo when it comes to money.
[T]he link between commodity prices and gold has endured through it all. It is this factor that completely escapes popular analysis with every commodity analyst assuming in their calculations a constant objective value for the dollar and other currencies, with price subjectivity confined to the commodity alone. The use of charts and other methods of forecasting commodity prices assume as an iron rule that price changes in transactions come only from fluctuations in commodity values.
While Macleod writes about the loss of confidence in all modern currencies which are not tied to a commodity like gold, the flaw he identifies here is the same found in the analysis of Bitcoin skeptics. Consider swapping “commodity” and “crypto” in the quote: “[It] completely escapes popular analysis with every [crypto] analyst assuming in their calculations a constant objective value for the dollar and other currencies, with price subjectivity confined to [crypto] alone. The use of charts and other methods of forecasting [crypto] prices assume as an iron rule that price changes in transactions come only from fluctuations in [crypto] values.
This is another way of observing that volatility in Bitcoin is an indictment of the fiat unit of comparison, not of Bitcoin. Yet when you look at Thiel’s charts you see the exact same mistake. The failure here is a failure to imagine a post-fiat world where you can no longer rely on the U.S. Dollar at the Y axis of your charts to determine what “up” and “down” mean. What then?
To understand this, simply look at a $20 bill and ask yourself: “How much food can I buy with this?” Then imagine one month from now and ask: “On a scale of 0-10, how confident am I that next month this $20 will buy roughly the same amount of food as today?” Today, your answer is probably between two and three. Back in 1970 it would likely have been 10. Once that confidence goes to zero, it will become clear why you cannot rely on Thiel’s analysis… because that Y axis is measured in the same dollars that no longer have any real meaning to your standard of living.
In this discussion of competitors to Bitcoin, Thiel notes another assumption which market commentators like him make: the up/down correlation between stocks and crypto. Where stocks go so does crypto. Yeah – as long as the Dollar remains viable at the Y axis to draw this comparison… When you get to zero on the above scale of confidence, the Dollar at the Y axis becomes meaningless. Short and sweet: Crypto and stocks are correlated – until they aren’t. What then?
The essential distortion – debt-funded stock buybacks
Thiel is comparing Bitcoin to competitors like the stock market – using the S&P 500 index as his benchmark. Quite apart from the problem of using the Dollar at the Y axis is the much more subtle problem of stock buybacks. Until 1982 open-market stock buybacks were (rightly) considered illegal stock price manipulation. Before 1982 companies made an offer to their shareholders outside the open exchanges – a “private tender.” Allowing companies to buy back their shares via the exchanges sends a “false demand signal” (my term). Demand is not driven by positive market perceptions of the company’s business model and management team, but by its C-Suite’s desire to placate shareholders (and otherwise goose their own bonuses).
This has the effect of reducing the “earnings per share” (EPS) denominator, causing EPS – the basic measurement used to value a share of stock – to rise. Under normal circumstances, a company has to increase earnings (the numerator) to increase EPS. Prior to today’s “near-zero interest rate policy” (NIRP), a company would have to take from earnings to buy back their shares or otherwise pay a dividend from those earnings. Now – with cheap money – they can issue bonds (i.e. borrow) and use the proceeds to buy back their shares. This works great for shareholders – until it doesn’t.
Once a company can no longer redeem their old bonds with new bonds at lower rates, these buybacks will effectively reveal the company to be a Ponzi scheme. They will have to find new investors to pay old investors since their earnings are not sufficient to actually pay off the debts incurred buying back their stock. Combine the debt-funded stock buyback regime with the current NIRP/ZIRP regime and the Y axis on Thiel’s charts is revealed to be a mirage. Or to put this another way: as long as rates remain low, the tide remains high. Wait until rates rise and watch the tide go out very suddenly. We will then see a LOT of people swimming naked. What then?
The Dollar has been painted into a corner
The Fed’s fiat balance sheet is about $9 trillion. The Fed knows they have to start running off the balance sheet by selling the bonds they have been buying since 2008. When the largest buyer of something turns into a seller, the price of that thing drops. When the price of bonds drop, the interest rates rise and the days of free money are over. The ability to roll over the bonds which funded stock buybacks will end. The tide is about to go out – and quickly. What then?
The banks having bought these bonds, which then funded the systematic inflation of stock prices, are going to find themselves on the “counterparty” end of these Ponzi schemes. An entire strata of the economy will be found to be insolvent and will take their counterparty banks down with them. The note from these banks – the Federal Reserve Note otherwise known as the U.S. Dollar – will then no longer function to measure either “up” or “down” against anything – to say nothing of Bitcoin. The only comparison the Dollar will be useful for is who is more insolvent than whom… as if that information is of any use. Unless…
The only other choice the Fed has is to expand into a market which – before COVID – they had never entered: that same market used to fund stock buybacks: corporate bonds. Again, if a company does not have the earnings to redeem its older bonds, it must issue new ones. As inflation rages, no one in their right mind is going to lend at low rates that have no connection to reality. We will once again be sold the Big Lie… that we face a “liquidity crisis.” This is Wall Street’s euphemism for a “bad debt crisis.” No “liquidity” means no one is buying what you are selling… Or maybe: No one is bidding on what you have up for auction. Why? Well, with a balance sheet of $9T it sure as Hell isn’t because there isn’t enough “liquidity.” No one is bidding because no one knows what anything is worth any more! Why? Because the Y axis is now useless. The only option will be for the Fed to step in as the buyer of last resort. Buying corporate bonds will expand – not run off – their balance sheet – throwing gasoline on the raging fire of inflation. What then?
That 0-10 scale? Confidence in what that $20 will buy you a month from now?
There is now no way out for the Dollar. This means any discussion about crypto has to abandon all comparisons measured in Dollars. The charts are all meaningless as their Y axis is useless. Our discussion now needs to be about our labor and our standard of living. The discussion cannot be led by anyone in the “credentialed class” of finance and market professionals, because they are all trapped by the dogma of the Y axis – and they don’t even realize it. The conversation has to be driven by those outside the credentialed classes who can simply look at the time they spend working and realize that their time is immutable – they cannot add to an hour spent nor can their employer take away from it. But for fifty years now we have been accepting Dollars for our time. The credentialed class have spent those 50 years systematically stealing value from the dollars we are paid for our labor.
Our rent and utility bills should be making this obvious. And if not, look at how little food you can now buy with what is left.
What will the inevitable post-fiat world look like? Whatever we accept for our labor must also be immutable. Gold and silver qualify because they do not lose their weight to rust. Crypto also qualifies because the mathematical rules are enforced by a decentralized consensus. Math does for crypto what chemistry does for gold and silver. I’ll write more about the relative differences between Bitcoin and Ether, but will leave this post by saying:
Peter Thiel is wrong. The Ethereum 2.0 Blockchain and Ether is much more than a payment system; it is a rules-based monetary system with three essential advantages over Bitcoin:
1) The staking mechanism bakes in a yield;
2) The staking mechanism punishes misconduct by “slashing” the staked Ether of the dishonest – making the Ether held by the honest more valuable; and
3) The supply of Ether is NOT fixed (the eventual fixed supply of Bitcoin is a BUG, not a feature). The supply of Ether tracks the transactional growth of the Ethereum ecosystem according to fixed rules.