Bitcoin: A Solution to Excess Wealth?
Canada is planting 30 million trees this season. The purpose is to build a powerful carbon sink.
Canada is planting 30 million trees this season. The purpose is to build a powerful carbon sink.
Carbon is not the only thing that modernity produces in excess. There is a surfeit of capital. Absorbing it has become a major challenge and threatens financial stability. There are more than $13 trillion of negative-yielding bonds in the world. Despite claims of exorbitant privilege, the U.S. government pays about 1.5% interest to borrow for a decade, historically low and below the Federal Reserve’s inflation target. Japan and Germany, the next largest market economies, can borrow at considerably lower rates. Germany charges investors nearly 20 basis points, or 0.2%, annually for the privilege of lending to it. It is not coincidental that cryptocurrencies were born in an age in which savings are abundant.
Capital is subject to the same law of supply and demand as other sectors of society. Capital is cheap because it is abundant. Large companies have more money than they know what to do with, so they return it to shareholders in stock buybacks and dividends. The drive to improve returns fuels mergers and acquisitions.
Equity valuations are stretched. House prices in many countries are rising quickly. Credit spreads, which measure how much one is paid for a unit of risk, are historically tight.
Excess capacity is another expression of surplus savings, that is, overinvestment. The U.S. economy is roughly the size it was on the eve of the pandemic. Yet around 7.5 million fewer people are working. Despite a booming economy, the U.S. is using a little more than three-quarters of its industrial capacity. Even at the end of 2019, it was just above 76%.
Capital is abundant because market-based economies are huge wealth creators. By applying science to production and finance, capitalism has been incredibly successful. And it turns out that to succeed, capitalism does not need to permit slavery, employ children, or deny women the right to vote. It can provide unemployment insurance, social security, and head-start services without being dictated to or sacrificing personal liberty. Its plasticity confounds critics. It can be reformed.
However, capitalism’s biggest weakness grows out of its most powerful strength, one that cannot be reformed away. It produces wealth on levels heretofore inconceivable. We live in an epoch that King Midas would recognize. We are choking on our wealth. Even if one does not recognize the disease (the idea of surplus capital is still controversial in some circles), the symptoms are undeniable. The return to capital is low, whether it is interest rates or profit margins. Redundant investment (excess capacity) is another symptom. Efforts to rationalize industries are part of the M&A wave. Corporations have become net providers of capital, no longer net borrowers. Speculation is extensive, and the gamification of “investing” began long before Robinhood and the legalization of sports betting in the U.S.
If we will not address the underlying distributional issues and the disparity of income, wealth, and power, then we need to channel the surplus savings away from those expressions that help fuel economic and political instability. What is needed is a vehicle that does to savings what trees do to carbon. Voilà! Enter crypto.
Some diehards continue to insist that crypto is money. El Salvador’s President Nayib Bukele recently pushed through plans to recognize Bitcoin as legal tender. More than two-thirds of the nation’s population lacks bank accounts or credit cards. Bitcoin rose about 270% from mid-December to mid-April and has since been halved. Volatility makes this a dangerous experiment. Let’s see if it lasts longer than Tesla’s offer to sell cars for Bitcoin.
Perhaps the function of crypto is to redirect savings from lifting equities to even more stretched values, or pushing nominal and real rates lower, or creatively destroying goodwill in acquisitions. Some have said that blockchain was a solution looking for a problem. The problem that crypto may attempt to address is the need for a new asset to absorb the wealth in a nonthreatening, ideologically safe way.
Crypto was born during a period of great concentrations of wealth, and it cannot help but reflect that origin. Despite the talk of decentralized finance, ownership of crypto, let alone trading, appears highly concentrated. One recent study found that more than 72% of Bitcoins (now about $33,000 each) are owned by those with 100 or more Bitcoins, along with miners and brokers. Nearly 32% are owned by those with 1,000 or more Bitcoins. A recent survey by Gemini, a crypto exchange, found that the “average” crypto trader was a 38-year-old male whose household made about $111,000, roughly 60% more than the median family income in the US.
The volatility and environmental issues of some models (proof-of-work) suggest that even as a centralized store of value, crypto’s role as a savings trap may be limited. It will not solve the challenge of capitalism’s unparalleled ability to produce wealth. The current steep decline in the face of strong price pressures weakens arguments of a hedge against inflation and as store of value. Ultimately, crypto is another expression of the surfeit of capital.
Marc Chandler is chief market strategist, Bannockburn Global Forex.
Reprinted by permission of Barron’s. Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: June 28, 2021.
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
China’s economic recovery isn’t gaining the momentum money managers are awaiting.
Data from China Beige Book show that the economic green shoots glimpsed in August didn’t sprout further in September. Job growth and consumer spending faltered, while orders for exports came in at the lowest level since March, according to a monthly flash survey of more than 1,300 companies the independent research firm released Thursday evening.
Consumers’ initial revenge spending after Covid restrictions eased could be waning, the results indicate, with the biggest pullbacks in food and luxury items. While travel remains a bright spot ahead of the country’s Mid-Autumn Festival, hospitality firms and chain restaurants saw a sharp decline in sales, according to the survey.
And although policy makers have shown their willingness to stabilise the property market, the data showed another month of slower sales and lower prices in both the residential and commercial sectors.
Even more troubling are the continued problems at Evergrande Group, which has scuttled a plan to restructure itself, raising the risk of a liquidation that could further destabilise the property market and hit confidence about the economy. The embattled developer said it was notified that the company’s chairman Hui Ka Yan, who is under police watch, is suspected of committing criminal offences.
Nicole Kornitzer, who manages the $750 million Buffalo International Fund (ticker: BUIIX), worries about a “recession of expectations” as confidence continues to take a hit, discouraging people and businesses from spending. Kornitzer has only a fraction of the fund’s assets in China at the moment.
Before allocating more to China, Kornitzer said, she needs to see at least a couple quarters of improvement in spending, with consumption broadening beyond travel and dining out. Signs of stabilisation in the housing market would be encouraging as well, she said.
She isn’t alone in her concern about spending. Vivian Lin Thurston, manager for William Blair’s emerging markets and China strategies, said confidence among both consumers and small- and medium-enterprises is still suffering.
“Everyone is still out and about but they don’t buy as much or buy lower-priced goods so retail sales aren’t recovering as strongly and lower-income consumers are still under pressure because their employment and income aren’t back to pre-COVID levels,” said Thurston, who just returned from a visit to China.
“A lot of small- and medium- enterprises are struggling to stay afloat and are definitely taking a wait-and-see approach on whether they can expand. A lot went out of business during Covid and aren’t back yet. So far the stimulus measures have been anemic.”
Beijing needs to do more, especially to stabilise the property sector, Thurston said. The view on the ground is that more help could come in the fourth quarter—or once the Federal Reserve is done raising rates.
The fact that the Fed is raising rates while Beijing is cutting them is already putting pressure on the renminbi. If policy makers in China wait until the Fed is done, that would alleviate one source of pressure before their fiscal stimulus adds its own.
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual