Over the past several weeks Ether (ETH) and Bitcoin (BTC) have been experiencing record new highs. ETH has run from from $13.34 United States Dollars (USD) to $184.44. BTC has gone from $443.22 to $2225.38. Effectively, ETH has had an increase of 1,282% while BTC has risen 402%.
These gains are based on a comparison to the USD. Another way of interpreting these gains, is that the USD has been crashing against ETH and BTC. This is because the USD is subject to limitless printing. The Federal Reserve Bank, can print trillions of digital dollars with the click of a button. Concurrently, the money supply of ETH and BTC is far more limited.
So the USD is experiencing inflation, while ETC and BTC are experiencing deflation (yes, they can be mined to increase the money supply, but this process is very slow). This contrast is colossal. Normally, the central banks of the world inflate all their currencies at the same time. It’s as if you have two cars driving down the highway in the same direction. One car is going 60 miles per hour(MPH) while the other is going 70MPH. There’s only a 10 MPH difference in speed. So when the Chinese Yuan Renminbi (CNY) is inflated against USD, the difference is nominal.
However, ETH and BTC are effectively deflationary. So it’s as if ETH, and BTC are traveling 70MPH north on the highway, while the USD is traveling 60MPH south on the highway. The difference is 130MPH. It’s colossal.
To further exacerbate the problem, we’ve recently seen a loss of confidence in the currency of India and other nations. There’s also talk of negative interest rates on the deposits of fiat money. These significant trends support the organic need for an independent and honest currency.
As of today, the total market capitalization of ETH, BTC and other crypto currencies is around $78 billion USD. The world wide M2 (this is basically all the cash and bank deposits in the world) money supply is estimated to be around $80 trillion. It seems likely to me, that in time we will see cryptocurrencies replace a significant part of the M2 supply. Even if it’s just 1% of the $80 trillion, the growth in cryptocurrencies could be significant. So while the returns on ETH and BTC are huge, I think there is still more room for growth.
Full disclosure, I am invested in ETH. Investing in cryptocurrencies is extremely risky and you can lose of all of your investment.I am NOT an investment professional. This blog is NOT intended to offer financial advice.
On November 8, 2016, India’s Prime Minister Narendra Modi announced that nation’s 500 and 1,000 rupee currency notes would become worthless overnight. Those notes were the largest notes used in circulation in the Indian economy. This edict is absurd. As an American, it would be like hearing that your $20′s, $50′s and $100′s will become worthless at midnight tonight.
The lack of logistical planning is unconscionable, especially when you consider there are 1.25 billion people living in India! Literally every one of these people has been forced to run to the bank and deposit their currency before it becomes invalid. If you do a quick search on the internet, you’ll see videos where lines stretch thousands of people long. There are lines where people wait days just to deposit their money at the bank! It’s madness!
On July 10, 2016 I wrote my prediction on negative interest rates. One of the keys to the colossal shift, is the banning of physical currency. I predicted physical cash would be banned in 5 or 10 years. I certainly did NOT expect it to be banned within 5 months! Nor did I expect a nation with 1.25 billion people, to be the pilot program for the war on cash!
So my observations….
1. People often use the term “systemic” risk to refer widespread risk to attributed to a few colossal banks, but I’ve never seen the term applied to a currency. As I watch India fall into chaos, I think there is clearly a systemic risk in the use of the rupee. Over a billion people had their lives wrecked overnight, simply because they all depended on the rupee. Had these billion people diversified their assets into other currencies (ie US dollar, Chinese Renminbi, or bullion), the consequences of Modi’s edict would of been benign. This event has caused incredible suffering to the entire nation. I therefore expect people will bear these scars for years. Confidence in the rupee will be weak for at least the next decade. Anyone in India who has the means to diversify their assets, will do so. There will be a renaissance of bartering too.
2. As of about an hour ago, it appears India is really shifting into a panic. There are nationwide protests. I think this whole debacle is going to send a shockwave of pain through the Indian economy for over a year. Smooth currencies are like oil for an engine. Without oil, things go bad really quickly. When you burn out the engine it takes a long time to fix it.
3. I also find it quite odd that most Americans are completely aloof to this disaster in India. Normally we hear about stuff in India, like when a train goes off the tracks. It’s a terrible event, but we hear about it in America. Yet the American media is mute over the entire Indian currency devaluation. This is a story impacting over a billion people! yet the American media doesn’t mention it? Even The Economist magazine glossed over the issue, which makes me question their judgement. Why is the American media ignoring such a massive news story? Perhaps the American currency ban is closer than we think? Don’t be surprised, if you’re told that in 24 hours all paper money in America will become invalid. It just happened to 1.25 billion Indians, so it could surely happen to a mere 300 million Americans.
We shall see…
BY: MATT BYRON
Recently, the international banking world has been turned upside down with the concept of negative interest rates. The fact that this terms starts with the word “negative” makes it sound ominous. The fact that this is unprecedented and not understood also scares lot of people.
I’m intrigued by the concept, so for the benefit of my own personal investments I wanted to collect my observations and formulate my own macroeconomic theory.
First, my premises:
Technological innovation is leading the world to abundance. Machines make it possible for us to grow crops and manufacture vast quantities of goods, with very little human labor. The end result is a leisure society which squanders it’s time on Facebook and watching television. Going forward, goods will continue to become better, cheaper, and faster than ever before. We will live in a world of even greater abundance.
The world needs a currency system because it facilitates specialization. For example, if a farmer wants to barter for a new computer the transaction would be very cumbersome. Afterall, how would a bushel of corn help the computer company which needs silicone? Bartering is crude and archaic. Therefore, it behoves humanity to have a monetary system.
Banks need governments to enforce laws and preserve order in society. Therefore, banks will always look after the interests of governments.
Central banks create money from nothing. Some people bicker about GPD, national deficits, or nations going bankrupt. But these issues are moot. Money is contrived and unlimited. Don’t be fooled by the ivy league MBA’s, expensive suites, esoteric vocabulary, and pretty charts. Money is just a giant game run by central banks.
Society accepts money as being something of value, without ever questions it’s creation. Money will continue to have value, as long as the majority of the populations believes in it.
The war on cash has commenced. Banks around the world are reducing the size of their largest printed bills. Governments around the world are equating cash payments with terrorism. It’s likely that in 5 or 10 years, physical cash will be completely eliminated from society.
Governments around the world are notorious for squandering resources. Because they waste so much capital, they drive demand for goods and services that wouldn’t be need otherwise.
Central banks are currently buying and will continue buying assets around the world to prop up investment prices. This is currently occurring in Japan and Europe.
So where does that bring us? Our society has an excess manufacturing capacity and an abundance of resources. So it behoves people to delay their purchases, which points to deflation. But if everyone in the world delays their purchasing, then the entire world financial economy would grind to a halt – which is bad. The central banks and governments of the world intend to remain relevant – that’s their goal.
Therefore, I foresee a confluence of key events. First, physical cash will become illegal. Holding physical cash is the easiest way to avoid the losses from negative interest rates on bank deposits. All money will be digital and you will be taxed ( by the bank or government) on your savings and income each year. We will see negative interest rates to levels we cannot fathom. Banks might lend at -3%, -5%, or even -10%. Those same banks might charge you -5%, -7%, -12% or more on your deposits. When all the money in the world is digital, you’ll have no choice but to pay for depositing you money.
Concurrently asset prices will rise, as central banks continue buying all the world’s assets. Bank of Japan already owns 52% of the entire Japanese ETF market. Central banks will drive up equities and real estate prices will increase. Central banks will corner every market.
Imagine a world, where your mortgage interest rate is -5%! It sounds absurd right? But just as absurd is the fact that money is contrived out of thin air by the banks. Therefore it’s possible.
Even though prices will increase, the governments will continue taxing real estate, equities and other assets. This taxation will keep governments in power and help them appear to still be relevant.
As we see a surplus in the unemployed labor force, social welfare programs will be expanded. More money will be available for student loans, having a child, buying a house, or government health care. Every person on the face of the earth might receive a basic life income of $500 or $1,000 per week. Keep in mind this is a digital currency, so you won’t be able to save it long (banks and the government will tax it every week). By dumping helicopter money on the public, the governments of the world will be spurring unneeded consumption (through boondoggles likes: wars, infrastructure projects, healthcare and college education financing). Additional boondoggles will include bailing out failed banks, corporations, and state governments.
Ultimately, we’re entering the ultimate era of leisure and free money. During this time we’ll see a “recession” every 7-10 years, created by the central bank, just to make it appear the marketplace is “free” and that money is “real”.
That’s just my theory…
I am NOT an investment professional. This blog is NOT intended to offer financial advice.
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