The U.S. dollar once had a reassuring statement printed on it: “Redeemable in gold on demand at the United States Treasury or in gold or lawful money at any Federal Reserve Bank.”
Q4 hedge fund letters, conference, scoops etc
Those were the days of the gold standard. Every dollar was a gold certificate. And anyone could redeem their dollars for gold at any time.
But over time, the U.S. government changed its stance from “redeemable” for gold to “backed” by gold. And in 1971, U.S. President Richard Nixon got rid of the gold standard completely.
It was the beginning of the era of “fiat money”. That’s money that’s not backed by anything but faith in the government that printed it.
Governments around the world realized the U.S. could print as much money as it wanted. And others quickly followed suit. Today, there’s not a government on the planet that backs its currency by anything other than its word.
Nixon’s plan was a grand experiment. And it came with a devastating side effect… governments got addicted to debt. Why worry about spending when you can conjure more money out of thin air?
It took nearly 40 years, but that debt’s finally catching up with us.
The day the Federal Reserve announced it was insolvent
In December, the U.S. Federal Reserve (the equivalent of a central bank in most countries) published its quarterly financial statement.
I immediately spotted something important.
The Fed has a US$67 billion loss on its bond holdings.
Not many people took note. That’s because the Fed hasn’t actually claimed those losses yet. They sit there “unrealized” on their books.
Why? Because the Fed has no plans to sell its bonds. The Fed can do this because it doesn’t have to use mark-to-market accounting (which records unrealized losses for what they really are… losses).
It’s ironic. The U.S. government almost always forces banks to use mark-to-market accounting. Some countries, including Switzerland, require their central banks to use it, too. And if the Fed did use mark-to-market accounting, it’d be insolvent (i.e., unable to pay its debts, or bankrupt).
It gets a pass, though. It’s part of the kick-the-can culture that’s allowed the U.S. government to build up more than US$22 trillion in debt.
That’s the biggest dollar amount in history. And if you calculate the debt as a percentage of U.S. gross domestic product (the total value of all the goods and services the U.S. produces in a year), debt levels have only been this high one other time in history: during World War II.
U.S. interest payments alone cost more than US$360 billion. That’s five times what the federal government spends on education.
Every time interest rates rise a single point, U.S. debt payments balloon by another US$220 billion. Today, 7.4 percent of the U.S. budget goes to interest payments. By 2021, that figure will be nearly 11 percent.
That assumes interest rates rise slowly and steadily in the coming years. If investors lose faith in the U.S. government’s ability to repay its debt, borrowing costs will rise even faster. And the government will have few options to pay off that debt.
So what will the government do? Print even more money. That could cause interest rates and inflation to rise even faster. And very quickly, the government itself could be on the brink of insolvency.
How to protect yourself
Bitcoin was developed in large part as a response to reckless money-printing by governments around the world.
There’s a limit on the total number of bitcoin that can be created: 21 million. Just as the gold standard limited how much money governments could print, bitcoin’s hard cap ensures no one can simply create more on a whim.
That’s why it’s often called “digital gold.” Like gold, you can’t will more into existence.
That makes bitcoin the perfect hedge against inflation (as we’re seeing play out before our eyes in Venezuela).
Many insiders talk about bitcoin needing a “killer app” – a game or use-case that makes it so compelling millions of people start using it virtually overnight. But I believe we’ve already got that use case: protecting ourselves from our governments.
Bitcoin’s “powder keg” moment
Since bitcoin’s launch in 2009, most monetary crises have been confined to developing economies. A single monetary shock in the developed world could be bitcoin’s “powder keg” moment – the spark that drives explosive interest in crypto. I’m not talking about millions of new bitcoin traders… I’m talking about tens – or even hundreds – of millions of new users. If that happens, bitcoin won’t just double or triple. It could go up 25x, 50x or even more.
I think that Wall Street is preparing for exactly that future.
In the past, we couldn’t do much but buy gold when governments experimented with our currencies. Today, cryptos offer us an alternative that’s far easier to buy, store and sell than gold. And not only could it protect us from a collapsing fiat currency, it could make us rich.
Good investing,
Fred Marion
Cryptocurrency Analyst, Stansberry Pacific Research
