Most people resist change and this resistance tends to increase with age. There is little wonder that investors like Warren Buffett and Charlie Munger are against Bitcoin. They are multi-billionaires. Between the two of them, they amass almost 200 years. They know what they know and they know what they like. They value investments on the basis of future cash flows. They missed the boat on all major tech investments including Google, Amazon, Facebook, and Uber. To understand Bitcoin you need to commit to at least 10 hours of study. Why would they do that if they have made so much money and have always shied away from new technology? It would be a bigger surprise if they embraced Bitcoin.
Buffett and Munger are not alone. There are hundreds of millions of Bitcoin skeptics and the only way for them to change their minds is if they are forced to embrace the new technology. One thing that strongly forces financial change is crises, and we are living through multi crises at the moment which may force this change. In this blog, I will talk you through the major financial crises we currently face which could force a more widespread adoption of Bitcoin.
Crisis 1: The US is Insolvent
The current state of the United States economy is not good. If you graph the revenue of the government to its debt, you will be horrified by how the trend of these two metrics has diverged. When George WH Bush entered the White House revenue and total debt were more or less on parity. This meant that for every dollar of revenue, there are approximately 1 dollar of debt. When junior Bush stepped into the White House, debt growth accelerated at an unprecedented rate to the extent that we now have 31 trillion in debt and approximately 4 trillion in revenue. This means that for every dollar in revenue, there are approximately 8 dollars in debt. This means that the total debt is practically unpayable. The US government would need to dedicate 100 percent of its annual revenue to paying down debt. Given that this debt needs to be serviced, it would take the government more than 10 years to pay the debt. This is clearly unreasonable because the government is also running a massive deficit. This means it is spending every year more than it earns. This means that debt needs to increase in order to find the deficit. It is also unreasonable because it is impossible for the government to dedicate 100 percent of its revenue to pay off debt. It is for this reason that we can confidently say that it is physically impossible for the US government to pay its debts which makes it technically insolvent. The only reason why it is not insolvent is because the dollar is the global reserve currency and the US is able to print dollars. The US government prints money to pay down debt, which is known as debt monetization.
Crisis 2: Banks
The failure of Silicon Valley Bank, Signature, Silvergate, and First Republic raised many questions. How is it possible that so many banks to get into trouble at the same time? This is not mismanagement because that would be too coincidental. They were killed by the Federal Reserve. I have dealt with this in other blogs so let me give you the abridged version. When COVID hit, legislators passed an emergency act requiring Americans to be paid stimulus checks in order to get through the lockdown. Americans were too terrified to spend these windfall checks because they were not sure when the lockdown would end so they invested this money in banks. Banks witnessed a massive increase in deposits. They were not sure what to do with this money because they did not fully understand the long-term implications of COVID on the economy. They did not want to lend money out to an economy that was shrouded in so much uncertainty. They, therefore, lent the money to the safest institution in the world - the United States government. They did this by buying long-dated US treasuries. Why long-dated? Interest rates at the time on the short end of the curve were close to zero. The only place they could find any yield was on the long end of the curve. Then the Fed did something that no one expected. They increased interest rates from 0 to 500 basis points and these long-dated treasury bonds declined in value. Who would buy a bond paying 1 percent when they could now buy bonds paying 5 percent? The only way to sell these bonds was to massively discount the price. This decline in the value of these treasury bonds resulted in a massive decline in value. This mismatch in assets and liabilities is what brought these banks to their knees. In order to protect other banks, the Fed needed to backstop them otherwise there would be a run on every bank in the US and that would bring about Armageddon. How much are they guaranteeing? Some estimate the number is close to 18 trillion dollars.
Crisis 3: Municipal
There is also a municipal crisis. Top American cities are facing a debt shortfall of close to $530 billion. New York alone is facing a shortfall of $190 billion. According to a report from Forbes, its assets are $60 billion whereas its liabilities are close to $250 billion. This means that every resident of New York City has a municipal debt of $64,000. What makes this situation even scarier is that the median income in the city is only $60,000. This means that more than half of New Yorkers owe more than their annual income in municipal taxes and most of them are not even aware of the situation. How is it possible that this information is only coming to light now? Firstly rating agencies have again been asleep on the job. Secondly, municipalities have been using creative accounting which allows them to understate their liabilities especially when it comes to pension liabilities. The pension schemes of these cities have become increasingly complex and this allows politicians to make false claims that the budgets were balanced. The only way to find these gaps is to cut pensions and raise taxes - two things that are exceedingly unpopular from a politician's point of view. This means that the politicians keep giving away freebies to maintain their popularity whichs2źw exacerbates the debt crisis.
Crisis 4: Debt Ceiling
On January 19 of 2023, the United States hit its debt ceiling. In response, Janet Yellen (the secretary of the treasury) began enacting temporary "extraordinary measures''. The debt ceiling had been increased multiple times since a political standoff in 2013, all without budgetary preconditions attached; the most recent increase was in December 2021. In the 2023 impasse, Republicans proposed cutting spending back to 2022 levels as a precondition to raising the debt ceiling, while Democrats insisted on a "clean bill" without preconditions, as had been the case in raising the ceiling three times during the Trump administration. According to reports from Wells Fargo, if the United States does not raise the debt ceiling, the government will begin defaulting on its debts starting sometime between early July and early September. In that event, the Treasury would have to either default on payments to bondholders or immediately curtail payment of funds owed to various companies and individuals that had been mandated but not fully funded by Congress. Both situations would be expected to result in a global economic meltdown.
Crisis 5: Bonds
There is a general bond crisis. The banks were not the only investors that bought bonds before the Fed hiked rates. Pension funds, asset managers, hedge funds, money managers, and retail investors that bought fixed-rate bonds, sovereign or corporate, are showing large mark-to-market losses. There effectively has been a crash in the global bond market that will have repercussions throughout the economy.
Crisis 6: Commercial Real Estate
The commercial real estate market is also under pressure. Not only is it being hit by higher interest rates which are forcing owners to refinance their debt at substantially higher interest rates, but the COVID pandemic taught us that it is possible for many jobs to be done on a hybrid/remote basis.
Crisis 7: Credit Cards
More consumers are leaning on credit cards to afford increasingly expensive necessities such as food and rent. That helped propel total credit card debt to a record $930.6 billion at the end of 2022, an 18.5% spike from a year earlier, according to the latest quarterly report by TransUnion. The average balance rose to $5,805 over that same period. At this rate, households are nearing a “breaking point,” according to a separate study by WalletHub. Student loan debt has been consistently outpacing the growth of personal income, with the volume of student loan debt having increased from $750 billion to $1.76 trillion from 2010 to 2022.
Crisis 8: Geopolitical and others
In addition to all these crises, there are also geopolitical crises - the ongoing war in Ukraine, and tensions between China and Taiwan. Then we have the de-dollarization crisis, with many countries expressing their interest in moving away from the dollar and settling global trade in local currencies like the Chinese yuan, Russian ruble, and Indian rupee. French premier Macron is on record as saying that “Europe should reduce its dependence on the extraterritoriality of the US dollar…if the tensions between the two superpowers continue to heat up, we will not have the time nor the resources to finance our strategic autonomy and we will become vassals”.