Fed Fears: Exploring the Case for Cryptocurrencies as a Store of Value Amidst Fiat Money Uncertainty

by Ryan Shea

Cryptocurrencies as a Store of Value ?

In previous articles I made the case that owning a non-readily-printable form of money, namely one with a fixed or limited supply, is valuable and set to become even more valuable in the future. Notwithstanding the recent price slump – a financially painful lesson for those who think crypto is a one-way bet (“Up Only!”(1)) and/or a quick way to easy street (sorry folks, no such thing exists) – in my view, this perspective remains valid.

This is not a controversial perspective in crypto circles. Indeed, one often comes across arguments justifying owning fixed-supply private cryptocurrencies(2) predicated on the view that fiat currencies always end in failure (true historically, as yet unprovable for the current incarnation of fiat currencies because they are still functioning). Simplified down the argument goes as follows: the inevitable collapse occurs because fiat money is controlled by governments and they like to promise voters lots of things to get elected  – democracy is, after all, a popularity contest. However, voters don’t like paying taxes and governments(3) have the ability to print an unlimited amount of money at almost zero marginal cost. Because of the way these incentives line-up, the system is inherently inflationary, undermining fiat money’s ability to act as a persistent store of value. Eventually public confidence in fiat money slumps, along with any residual value(4), as people abandon it. Fiat money down, cryptocurrencies up.

In terser language: Promise. Print. Panic(5).

The appeal of the fiat collapse narrative in crypto circles is obvious. It’s Bitcoin’s raison d'etre as clearly indicated by the following comment Satoshi Nakamoto made in a thread posted in February 2009.

“The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”(6)

That Bitcoin was born during the Great Recession was no accident. Its creator(s) was/were clearly concerned about the prospects for fiat money given what was going on at the time(7).  Judged by how the market cap of cryptocurrencies has risen since then it is clear increasing numbers of people also have trust issues with central banks (governments really, as they are the ultimate boss) maintaining fiat money’s ability to act as a store of value.

If fiat money – including CBDCs(8) that are under active consideration by authorities around the global – serves the public well as a store of value it will be challenging for private cryptocurrencies to thrive. Indeed, it could be the catalyst to send valuations plummeting back towards zero(9). Conversely, if fiat money does not, then private cryptocurrencies (some, by no means all because they come in many different forms) will flourish. It all hinges on how fiat money performs(10).

Before going further, let me make clear I am well aware that Bitcoin, and other cryptocurrencies, are considerably more volatile than fiat money – six times higher(11) in fact - and appreciate that for many this means they are a poor store of value. However, volatility is just one factor in determining whether something is useful as a store of value. Value also plays a role, something that should be patently obvious. If not, consider the chart below, which plots the value of two stylized monies. Money 1 has half the volatility of Money 2, but loses around 5% of its value per year whereas Money 2 gradually - albeit unevenly - rises in value. Which would you prefer to use as a store of value(12)?

A Stylized Tale of Two Monies

In crypto circles commentaries, discussing fiat money collapses very often contain a chart showing how the real, or inflation-adjusted, value of the US dollar has fallen more than 90% since 1971 when President Nixon closed the gold window and the link to the “barbarous relic” was finally severed. I’m sure you have all come across this argument. If not, it won’t take long to find. This is presented as evidence that fiat money does not act as a good long-term store of value.

Certainly it is true that the way the aggregate price level moves in advanced economies changed markedly after the early 1970s. The chart below shows both the level of headline consumer prices in the US and its annual percentage point change (inflation being the first derivate of the consumer price index in time) since 1930.

Long-run US Consumer Price Trends

The shift is even more apparent in the following chart, which plots the same data for the UK going all the way back to 1790. From the 1970’s onwards the slope of the consumer price index becomes markedly steeper, reflective of less volatile but sustained positive inflation.

Long-run UK Consumer Price Trends

There is only one problem with this argument as to why fiat money is not a good store of value: it is almost totally irrelevant.

Invariably people do not hold money in the form of bank notes or coins, except when they are worried about the health of the banking sector like during the Great Depression or its lighter, later, cousin the Great Recession. The vast majority of money is held in interest bearing deposits at commercial banks. This earned interest provides compensation for the loss of purchasing power due to inflation. As evident in the chart below, the total return of holding US dollars (ie, incorporating the compounded interest earned on bank deposits(13)) has tracked the headline consumer price index relatively closely over the past 90 years!

US dollar Total Returns – Nominal vs. CPI index

Divergences do, of course, occur and this can be clearly illustrated by taking the ratio of the two series to generate fiat money’s total return in inflation adjusted terms. This is the return that people actually care about because it’s what happens to the purchasing power of the vast majority of their money.

US dollar Total Returns – Inflation Adjusted

Sterling Total Returns – Inflation Adjusted

Over the past 90 years the trend in this ratio both in the US and the UK (and most other advanced countries) has been upwards. People have done well to hold money within the commercial banking system as interest paid on deposits more than offset the erosion from inflation. However, there have been three notable exceptions: the late 1930s-early 1950s, the mid-to-late 1970s and since 2009. During these periods, fiat money did not maintain its purchasing power even taking into account interest earned – it was a fail in terms of acting as a store of value.

Regards the current period of negative inflation-adjusted returns, many crypto enthusiasts(14) have long anticipated surging inflation as increased money supply leaches into the economy. It marks the next and final step in the fiat collapse narrative after promise (debt accumulation) and print (QE).

Unfortunately, the relationship between money and the aggregate price level is not straight forward – there is no one-to-one mapping. The chart below shows how real economic growth and inflation in the advanced economies have evolved over the past 40 years. What is striking about the chart is that there is nothing especially striking about it. Growth and inflation in the decade following the Great Recession looked very similar to preceding decades despite surging debt-to-GDP ratios and central bank balance sheets. For most of the post 2009 period, the erosion of fiat money’s purchasing power has been gradual, the result of zero nominal interest rates minus low stable inflation.

Real GDP Growth and Inflation – Advanced Economies

However, over the course of 2020 the situation has changed substantially. The loss of fiat money’s purchasing power has accelerated because central banks refrained from raising interest rates in the face of a sharp jump in inflation rates – see chart. Their rationale for inaction was the perception the rise in prices was due to transitory factors related to supply-chain bottlenecks resulting from Covid-19-induced shutdowns and over time these inflation pressures would subside – that’s what transitory means after all!  

Recent Headline CPI Inflation Trends

Undoubtedly, some of the acceleration in inflation is due to Covid bottleneck effects(15) and hence is  likely to be transitory. However, by their words and actions over the past few months it is obvious central banks have become less sanguine. The last FOMC statement announced they were accelerating the end of government bond purchases in anticipation of hiking the Fed funds target rate soon. Similar signals have been sent from the ECB, while the BoE went a stage further and has already begun removing policy accommodation - its key policy rate was increased by 25bp (it was very nearly a 50bp hike) – and it announced that it will begin reducing its Gilt holdings by no longer reinvesting maturing bonds.

The catalyst for this monetary policy pivot is inflation has risen further and proved more durable than originally expected. The concern is that could trigger a de-anchoring of low inflation expectations in the private sector and, to the extent that this alters wage and price setting behaviour, compliance with the inflation mandate over the medium-term could be jeopardised (the dreaded second-round effects in central banker speak).

Certainly the outsized print in the January US CPI report did nothing to quell such worries. As a result, US interest rate futures are discounting more than 100bp of Fed tightening this year, beginning at next month’s FOMC meeting. Indeed, there has even been chatter about a possible inter-meeting hike of up to 50bp – a move that would certainly signal the Fed is worried about having fallen behind the curve.
On the face of it this has a very strong echo of the 1970s, (the last time US headline CPI inflation rose so strongly was July 1978(16)). Back then, the Fed, along with most other central banks, initially accommodated the OPEC oil price shocks as they were concerned about the negative impact on real economic activity. This proved to be a significant policy mistake, inflation took off eroding the purchasing power of fiat money (recall the chart on US dollar inflation adjusted total returns).

It was only reversed when central banks brought inflation back down via extremely high nominal interest rates – a decade long process. In the US, the Fed pushed up the funds rate to just under 20%, the economy experienced two recessions in quick succession and the unemployment rate hit double-digits. The UK did not fare any better. It suffered three recessions in quick succession and also experienced double-digit unemployment rates.

Economically painful without question, but by pushing real interest rates up to almost 5%, central bank action swiftly restored the purchasing power of fiat money. For crypto investors a replay of the 1970s would be bad news. Underpinning fiat money’s ability to act as a store of value runs contrary to the last step of the fiat money collapse narrative and, as such, weakens the incentive to convert fiat money into cryptocurrencies. Little wonder the sector had a very poor start to the year. In January Bitcoin was -18%, Ethereum -26%, Solana – 37% and the meme-tastic Dogecoin -17%.

However, in my view, comparisons with the 1970s are flawed because it fails to take into consideration the fiscal position of governments. In the 1970s, government debt-to-GDP ratios were moderate by historic standards, around the 50% mark – see chart. A better comparison is with the 1940s when government debt ratios were considerably higher – over twice as high – due to war-financing needs. A more accurate, but less catchy, description is “echoes of the 1970s, but with a much worse fiscal backdrop”.

To understand why the level of debt-to-GDP ratios is an important factor in determining inflation-adjusted returns for fiat money we need to draw upon one of the key equations(17) used in debt-sustainability analysis.

This equation defines the trajectory of government debt-to-GDP ratios. Aside from the lagged debt-to-GDP ratio, the influencing variables are the government’s primary fiscal balance(18), ie. excluding the cost of debt service, the nominal interest rate and nominal GDP growth. The ratio of the latter two variables (highlighted in red above) is critical.

When the nominal interest rate is above nominal GDP growth to maintain a stable debt-to-GDP ratio the government has to run a primary surplus. The alternative is an ever-increasing debt-to-GDP ratio (unsustainable(19)). The greater the gap between the nominal interest rate and nominal GDP growth the larger the required primary surplus.

Conversely, when the nominal interest rate is below nominal GDP growth, the fiscal hurdle to stabilize the debt-to-GDP ratio is lowered. In fact, in such circumstances governments can run a modest primary deficit indefinitely (FYI: we are nowhere near modest primary deficits at this point). Because this ratio is multiplied by the prevailing debt-to-GDP ratio, these effects are increased the higher the debt-to-GDP ratio.

Monetary policy, because it influences both nominal interest rates and nominal GDP growth, has fiscal implications. These implications are modest when government debt-to-GDP ratios are modest as was the case in the 1970s (Italy was a notably outlier). When central banks did eventually act they had scope to bring down inflation by using tight monetary policy (high nominal interest rates) to decelerate economic growth without significantly undermining governments’ fiscal positions.

This was not the case in the 1940s when debt-to-GDP ratios were much higher. In fact, back then the Fed had an explicit policy objective

“to stabilize the securities market and allow the federal government to engage in cheaper debt financing of World War II.(20)”

They did so by adopting a formal yield curve target(21), pegging nominal short and long-term interest rates at low levels. This policy, which was introduced in 1942 did not end in 1945 when peace was declared but persisted until 1951 by which time the purchasing power of the US dollar had halved!

It only ended(22) when the FOMC, faced with 20% inflation rates, collectively refused to “maintain the existing situation”. President Truman and Treasury Secretary Snyder, in contrast, were pushing for the bond yield peg to continue and little wonder given that it proved a very effective method for lowering the debt-to-GDP ratio (from a peak of 121% in 1946 it dropped almost 50 percentage points by 1951).

The implication should be clear: when debt-to-GDP ratios are low the spillovers from monetary policy to fiscal policy are limited and central banks are largely unencumbered in achieving their price stability (low inflation) objective. When debt-to-GDP are high and rising, these spillovers are considerably greater and sometimes monetary and fiscal policy objectives (debt sustainability) clash.

As a direct result of the policy decisions taken during the Great Recession and the Covid pandemic, government debt-to-GDP ratios have surged, not just in advanced economies but also in key emerging markets like India and Brazil, as evidenced by the following chart that shows government debt-to-GDP ratios colour-coded by quintiles. Aggregated up to the global level, government debt stands around 99% of GDP.

2020 Global Snapshot – Government Debt Ratios

Monetary policy is similarly stretched. Because central banks hit the zero lower bound on interest rates(23) during the Great Recession and were forced to switch to QE, the clearest indication of this is the size of their balance sheets. The following charts come from a 2021 speech(24) by the Head of the Monetary and Economic Department of the BIS, Claudio Borio. They show the change in the size of the balance sheets of four of the world’s major central banks and the contribution to the increase from purchases of government debt.

To give some idea how extreme this situation is the only time central bank balance sheets and government debt ratios globally have been higher over the last 140 years is during world war II(25), never in peacetime. We are in unprecedented fiscal and monetary policy territory(26). Policymakers around the globe have somehow to navigate back to more normal policy settings before those backing fiat over crypto can breathe a collective sigh of relief.

What are the available policy options?

Let me start by commenting briefly on two policy non-aggregate demand-based options that keep cropping up.

The first is governments simply writing off the debt held by the central bank. The appeal is obvious. In a single stroke it lowers the government’s debt burden and reduces the size of the central bank’s balance sheet – win-win. But anyone with even a basic understanding of how a central bank balance sheet works should see the flaw.

Government debt sits on the central bank balance sheet as an asset. This backs their liabilities, which are bank notes and coins and reserves held by the commercial banking sector. Double-entry book keeping requires to the two-sides of the balance sheet be equal. Unless there is a hugely deflationary contraction in the supply of money in the economy- very sub-optimal - the only way to balance the two sides of the ledger is for the central bank to record negative equity approximately equal to the size of the debt write-down(27). In theory this is do-able, central banks can be technically insolvent, but imagine the optics of a central bank recording a net equity shortfall in the order of tens of percentage points of GDP (anything less would be meaningless).

What some consider nothing more than an accounting trick could very easily provide the catalyst to a loss of money confidence. This is a very dangerous strategy, one I doubt any serious government would adopt except as a very last resort.

The second option, a long standing favourite with unelected policymakers(28), is raising long-term potential growth by structural policies(29). Improving the growth-inflation trade off allows the economy to grow faster for a given inflation rate. However, the reason why I added unelected prior to policymaker just now is because the benefits from structural policies come much later than the costs. When election cycles tend to be five years or under this is a problem. It is why, despite repeated calls from the likes of the BIS, IMF, OECD and other supranational bodies to implement such policies, little progress is made(30).

So putting these aside, let’s return to aggregate demand policies, namely monetary and fiscal. By raising interest rates in response to higher inflation central banks appear to be in the process of normalizing monetary policy. However, as already mentioned, when debt-to-GDP ratios are high - as they are currently -  fiscal spillovers cannot be ignored. We can use some simple back-of-the-envelope calculations for the US to illustrate why.

I assume we are in a steady-state equilibrium (an old economist trick for simplifying things otherwise the maths becomes messy) where nominal GDP growth is 4% per annum. This is based of a 2% inflation target and a potential GDP growth estimate of 2%(31).

US Debt Simulations: 10-year Forecast Horizon

If the Fed were to raise the nominal interest rate to 3%, equating to a real or inflation-adjusted rate of 1%, which is certainly not an extreme reading by any means, then to stabilise the debt-to-GDP ratio at 120% the primary fiscal balance must improve by a full percentage point every year for an entire decade. To reduce the debt-to-GDP ratio to 100% in 10 years time, a level that would still be considered elevated by historic standards, the fiscal consolidation requirement increases to 1.4 percentage points of GDP. Fiscal consolidation on this scale would be highly unusual, although there are precedents.

Instead if we keep the nominal interest rate below the level of the Fed’s inflation target, ie a real interest rate of -1%, the demands on fiscal policy are significantly lowered. The required fiscal consolidation to stabilize the debt-to-GDP ratio at current levels is halved (more plausible) and removed totally if the Fed keeps the real interest rate at -3%, which assumes that the inflation target is consistently overshot due to the binding impact of the zero lower bound.

Obviously, these are not forecasts, they are mechanical simulations. But, as the following chart for an OECD working paper published in 2014(32) examining past fiscal consolidations confirms, reducing debt-to-GDP ratios is not a speedy process.

What should be clear from such calculations is that if policymakers do not rely on inflation to erode the value of the debt it is a long path back to policy normalcy, one paved with government spending cuts, tax hikes, low nominal interest rates and almost certainly negative real interest rates.

What was not included in the above simulation but is worth considering is the effect of the Fed lifting borrowing costs to 3% nominal (1% real) in the absence of any fiscal consolidation. Under these assumptions, the US debt-to-GDP ratio continues to march higher, hitting 160% of GDP by 2032. This is an important point.

Monetary policy is much nimbler than fiscal policy. Interest rates can be changed extremely quickly and – crucially - also be easily reversed in the event of an error, something not so easy to replicate with fiscal policy. It therefore makes sense for monetary policy to be utilized first when the macroeconomic environment surprises (like now). Yet, if the US debt-to-GDP ratio is not to keep rising Japanese-style, fiscal policy will have to assume a larger burden of demand-side management freeing up monetary policy to provide offsetting accommodation(33).

Monetary policy cannot succeed on its own. This is something I think a lot of people fail to appreciate. (In terms of cryptocurrency implications, the Fed going it alone is bearish in the short-term, but longer-term because of the implied rise in the debt-to-GDP ratio, it is bullish as it keeps alive the fiat failure possibility).

That said, to reiterate, the most likely outcome – assuming a hyperinflationary implosion is avoided, something almost all policymakers are, without fail, seeking to achieve – is interest rate lift off, eventually to be followed by sustained fiscal consolidation and a subsequent return to monetary policy accommodation (central bank capitulation(34)).

This may not be the inflation-bang anticipated by proponents of the fiat collapse, but it doesn’t mean that cryptocurrencies are not able to thrive. People are used to the value of their money held in the banking sector going up in real terms. The reverse is true and even if everything goes right in terms of the fiscal/monetary policy setting, it is not likely to be the case for another decade or so.

Getting back to anywhere near normal fiscal policy settings will almost certainly require real interest rates being negative on a sustained basis. Let’s split the difference between the most accommodative projections included above and say real interest rates stay at -2%. Subtracting this amount from commercial bank deposits for the next decade means the cumulative total return loss in the US dollar would be equivalent to that seen during the 1940s.That looks a lot like the return profile of the stylized Money 1 in the first chart. Now go ask yourself the question I asked before. Is that really a good store of value?

Not so obvious is it?

Of course, sustained negative real interest rates will serve to encourage money flows into riskier asset classes such as equities and high yield. That is, after all, the portfolio balance channel in action. However, what it will also do, as an unintended by-product, is encourage ongoing public interest and money flows into cryptocurrencies(35) because fiat money’s purchasing power will continue to steadily decline.

Until next time.

Ryan Shea, crypto economist at Trakx

Footnotes

[1]  While double-checking this slang term used by the cool kids in crypto (I’m not one) I came across a youtube channel called UpOnly (https://uponly.tv/home/) run by two guys, Cobie and Ledger. It’s very informal, but they have some interesting guests discussing crypto and worth a look.

[2]  ie. not stablecoins or CBDCs, which I discussed at length in the previous article – see: https://trakx.io/cbdcs-crypto-killers-part-1/

 . For ease of writing and better readability I will dispense with fixed-supply in the remainder of this article but when I talk about cryptocurrencies I am referring to fixed-supply cryptocurrencies.

[3]    Central banks only act as the government’s agent, independence is a myth – see: https://trakx.io/a-network-theory-of-money/

[4]    Recall the network theory of money outlined in the first article. Money has positive externalities in economic speak.

[5]    In the either Bitcoin article (see footnote 3 above) I noted many naysayers view Bitcoin as a Ponzi scheme. Many crypto fans, for the reasons just outlined, believe this is true of fiat money. Commenting on the Fed’s earlier attempt to rein in its QE programme Max Keiser quipped, “You can’t taper a Ponzi scheme.” So funny and so true.

[6]    See: https://satoshi.nakamotoinstitute.org/posts/p2pfoundation/threads/1/

[7]    Satoshi added the following text to the first Bitcoin block ever mined “The Times Jan/03/2009 Chancellor on brink of second bailout for banks.” More recently, in 2020, just before the third Bitcoin halving F2Pool, which mined the block, included the following text “NYTimes 09/Apr/2020 With $2.3T Injection, Fed's Plan Far Exceeds 2008 Rescue," - an indication that Bitcoiner sentiment hasn’t changed.

[8]   A much-needed technological update to public money – see: https://trakx.io/cbdcs-crypto-killers-part-1/

[9]    It’s all thanks to the network theory of money argument. That said, I have a hard time believing Bitcoin will go to exactly zero. First, never say never applies meaning there is always a non-zero probability that fiat money could fail in the future. Second, 100 trillion Zimbabwe dollar bank notes, which at the time of printing were pretty worthless, now have value as collectibles.

[10]   Along the way we might also gain some insight into time frames. Most crypto commentary doesn’t answer, or even attempt to answer, the question of timing when it comes to the fiat collapse narrative, but timing is a critical input into any investment decision.

[11]   See: https://link.springer.com/content/pdf/10.1007/s00181-020-01990-5.pdf

[12]  Anyone who says Money 1 please get in touch. I can offer such returns in any size you wish.

[13]  Because of data availability constraints I used the market yield on US Treasury Securities at 1-Year Constant Maturity to proxy short-term interest rates – see: https://fred.stlouisfed.org/series/GS1

[14]   Not to mention also gold bugs.

[15]   Energy has also been a major driver. However, core CPI inflation, which strips out this effect in large part, has been trending higher too.

[16]   Most media reports focused on the last time headline inflation was this high (February 1982) but at that time it was falling sharply making it less pertinent for comparison.

[17]   I appreciate equations aren’t everyone’s cup of tea but it makes things clearer and it is very intuitive – honest!

[18]   A budget deficit equates to a negative fiscal balance, whereas a surplus is a positive fiscal balance.

[19]   Human brains are not well-suited to understand exponential dynamics because in our everyday lives linear processes are more common. As a quick test to see how good you are at understanding exponential growth consider the following: Imagine you are in the top tier of a large football stadium. At the bottom a single droplet of water doubles and splits into two equally sized droplets of water. This subdivision process continues every second, namely two drops become four, becomes eight etc. How long after the water is a few centimetres off the ground does it take before you drown? Any answer longer than about 10 seconds is wrong. To see why think about the problem in reverse. One second before you drown the stadium is half full, two seconds before a quarter full and 3 seconds before an eighth full.

[20]  Another Michael Caine moment is upon us. The Fed does not, as commonly perceived, have a two-prolonged policy objective, it has three. The Act mandates the Fed to conduct monetary policy "so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates [my emphasis]”. Almost everyone knows about the inflation objective (stable prices), most financial market participants know about the maximum employment objective, but very few know about the third in relation to long-term interest rates, perhaps because the Fed itself plays it down – see: https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm.

[21]  More recently, in September 2016 the BoJ changed its policy framework from targeting just short-term nominal interest rates (the modal policy tool for central banks in the developed world) to also targeting the longer-end of the government bond curve. Earlier this month, the BoJ reinforced its commitment to maintaining the bond yield peg when it announced it would buy unlimited amounts of 10-year JGBs at 0.25%.

[22]  The legislation bringing the interest rate peg to an end is known as the Treasury-Fed Accord - see: https://www.federalreservehistory.org/essays/treasury-fed-accord

[23]  Over time some central banks, such as the ECB, did move to negative interest rates. This was unexplored territory for most and QE was seen as a safer first step on the non-standard monetary policy road.

[24]  See: https://www.bis.org/speeches/sp211110.htm

[25]  The IMF published a great graphic in 2011 showing the evolution of public debt over the very long-run – see: https://www.imf.org/external/pubs/ft/fandd/2011/03/pdf/picture.pdf

[26]  The Japanese situation is, quite frankly, scary. Economic growth, inflation and unemployment all look normal, or should I say, “new normal”, but this is only because government indebtedness and the size of the BoJ’s balance sheet have expanded to eye-watering levels (260% and 130% of GDP respectively). Add in the country’s poor demographic trends and the situation reminds me of the recent Leonardo Di Caprio film Don’t Look Up, with bloated balance sheets replacing the asteroid.

[27]   The difference depends upon how much equity, or capital, the central bank has to begin with. Typically this is low relative to the size of the balance sheet.

[28]   Claudio Borio, in his aforementioned paper, is no exception.

[29]   Infrastructure investment and, more recently, green initiatives are seen as a being at the more politically acceptable end of the structural policy spectrum although they will require initial government borrowing – St. Augustine again.

[30]   Former Japanese PM Abe promoted his three-pronged approach to reviving the economy, nicknamed Abenomics. It combined demand-side monetary and fiscal measures with structural reform. Of the three, productivity-boosting structural reform has been the weakest in terms of implementation.

[31]   The CBO’s estimate of potential US GDP growth – see: https://www.cbo.gov/publication/56965#data. Most other countries are in the same ballpark with the exception of Japan, where it is lower due to its demographic trends.

[32]    See: https://www.oecd.org/economy/choosing-the-pace-of-fiscal-consolidation.pdf

[33]    A former colleague of mine recently reminded me of a famous quote by the renowned macroeconomist and author of one of the most famous economics textbooks Rudi Dornbusch when he said “No postwar recovery has died in bed of old age—the Federal Reserve has murdered every one of them.”

[34]   To be clear, I do not want to give the impression that this shift in the monetary/fiscal policy mix will be assuredly smooth. It is very possible stock market corrections, crashes and/or recessions will occur. They may even be required to jolt policymakers into the necessary action.

[35]   The breadth of high government indebtedness is – or should be - rather pertinent to the crypto community. As noted at the outset of this article, history is replete with financial crises where the public loses faith in their government (incompetence, corruption or both being the most frequent reasons) and the acceptability and value of the local currency plummets as the social contract between issuer and user that underpins all forms of money is broken. The typical response of the public to such events is to substitute into a hard foreign currency, often via the black market to circumvent legal measures imposed by the government in its attempt to enforce local currency usage (aka financial repression). By hard I mean a currency issued by a government that is politically and economically sound. Record high peacetime levels of debt is not something one naturally associates with economic soundness. In a world where this is now the norm rather than the exception, and includes reserve currency issuers, the opportunity set of hard fiat currencies is dwindling.