Peak Fiat?

tl;dr: will we look back at the 2010’s as the final, dying gasps of government-backed fiat currency?

One of my morning rituals before I sit down to write a blog post is to take a quick glance at the Wall St. Journal, print edition.

The other day, I saw the headline “Big US Banks Report Strong Results.” Inside, on the Op-Ed section was Notable & Quotable: Gregory Mankiw on Modern Monetary Theory and a third Op-Ed by co-authored by former Sen. Phil Gramm was The Plot to Politicize Banking.

Now, it’s possible that I am so far down the path of crypto that I can’t see any other story and that I am extremely vulnerable to confirmation bias, but I found this concerning.

24/7 Monetary Printing Press for the Gov’t
The Mankiw piece begins with a quote from a work by Mitchell, Wray, and Watts (MW&W) that says:

**The most important conclusion reached by MMT is that the issuer of a currency faces no financial constraints. Put simply, a country that issues its own currency can never run out and can never become insolvent in its own currency. It can make all payments as they come due.” (MW&W, p. 13) As a result, “for most governments, there is no default risk on government debt.” **

The very next paragraph offers Mankiw’s assessments of this conclusion:

When reading these words, my reaction alternates between languid concession and vehement opposition. To be sure, a currency-issuing government can always print more money when a bill comes due. That ability might seem to release the government from any financial constraints. Certainly, if an individual were granted access to the monetary printing press, his or her financial constraints would become much less binding. But I am reluctant to reach a similar conclusion for a national government, for three reasons.

His three reasons center around inflation, primarily, which makes sense (to me, at least).

That’s just part of the issue.

Political Banking
Gramm’s piece takes on a slightly different angle.

He talks about the problems that arise when government regulators and politicians seek to use the banking system to achieve political goals.

We saw this in the run up to the 2008 crisis as banks were compelled to offer sub-prime loans.

Today, however, Gramm suggests that it is going the other way.

“This time, instead of steering credit to the favored uncreditworthy, activists want to deny credit to the disfavored creditworthy. Banking was used as a weapon against legal, solvent businesses by the Obama administration during Operation Choke Point, a program to deny the disfavored access to banking services. The Federal Deposit Insurance Corp. labeled certain businesses “high risk,” including firearms and ammunition dealers, check-cashers, payday lenders and fireworks vendors. Unelected regulators, not Congress or courts, marked these industries as “dirty business” and made it “unacceptable for an insured depository institution” to offer them banking services.”

While you personally may not want firearms manufacturers to get loans, that’s all well and good until it’s an industry you care about. If the business is legal, then it should be able to get a loan. If you don’t want it to get a loan, make the business illegal.

However, between these efforts and decades of evidence that governments lean on banks (both central and otherwise) to engage in activities that the normal market wouldn’t support, the very “full faith and credit” that is supposedly behind fiat currencies is weakened.

Speaking of the Fed…

Ongoing Fed Intervention
I can’t say that I’m an expert on the Repo Market, but I can say that the Fed has injected over $500 billion dollars into it in the last few months to fix “liquidity” issues. Now, there’s an idea floating around that the Fed will engage directly with hedge funds to ease stress, Hedge Funds Could Make One Potential Fed Repo-Market Fix Hard to Stomach (there’s a good video explaining Repos there, btw, if you can access it).

The bottom line is that the Fed is committed to injecting more and more amounts of cash into the system to keep things moving.

Crypto Eats Fiat
Again, I may be talking my own narrative here and I’ve certainly written a lot about the challenges associated with maintaining global reserve currency status, but here’s my concern.

These activities feel to me like they are taking place in a bubble of assumptions in which bankers and governments think that there’s no alternative to fiat currency.

Yet, there is.

Software eats the world said Marc Andreesen. Decentralized protocols will eat the centralized system for value transfer and for money creation.

Interestingly enough, another headline from the WSJ said, “Bitcoin Has Biggest New-Year Rally Since 2012”

“crypto allocations in client portfolios is expected to more than double to 13% this year, from 6% in 2019, due to crypto returns’ low correlation with those of other assets and increased client demand for access to cryptocurrencies.”