Michael Casey: COVID Economy Shows Monetary Failure


Welcome to Money Reimagined.

A lot of red in crypto markets this week. The sell-off has likely given pause to latecomers. Among crypto old-timers, however, there are no real signs of panic. No one’s talking – not yet, at least – about  a rerun of 2018 when bitcoin, ether and large swaths of the token universe suffered a violent reversal from the previous year’s ICO-fueled crypto boom. It’s seen as more of a correction or a pause than the start of another protracted bear market.

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One reason for that is discussed in this week’s column: COVID-19 has exposed the failings of our financial system and crypto offers an alternative to it. Another is that one pocket of the crypto universe is suddenly capturing mainstream attention and seeing an explosion of creativity among software designers and artists: non-fungible tokens, or NFTs. 

NFTs are the theme of this week’s episode of our “Money Reimagined” podcast, the second in a three-part series on the topic. This week, Sheila Warren and I interviewed Lethabo Huma, a brilliant, innovative digital artist from South Africa, and Visa’s head of crypto, Cuy Sheffield, who is a trailblazing NFT collector and supporter of up-and-coming Black artists. To spice things up, we took the show onto Clubhouse for the first time. 

Have a listen. After reading the newsletter below.

Two-speed economy tells of monetary failure

  • Global COVID-19 deaths: 2.5 million
  • Global work-hours lost: equivalent to 255 million full-time jobs, according to the ILO
  • Contraction in the global economy: 4.3%, according to World Bank estimates
  • Emergency monetary expansion by the Federal Reserve: $3.4 trillion
  • S&P 500 total valuation: up by $6.8 trillion
  • Return for the MSCI emerging market index: 21%
  • U.S. house prices: up 10.4%, per Case-Shiller index
  • Bitcoin price gain: 60%.

This week’s grim milestone of the U.S. surpassing 500,000 COVID-19 deaths, almost one year since its first one, prompts an accounting of how this devastating global experience has played out in real-world and financial settings. 

Per the data above, there’s an almost unreal bifurcation in outcomes. As measured in human lives affected by simultaneous health and economic crises, Main Street has suffered badly. Yet, at the same time, holders of physical, financial and digital assets have enjoyed spectacular returns.

My point is not to highlight the unfairness – as indisputable as that is – but to point out something even more troubling: the ultimate failure of the financial capitalist system that now drives big Western economies like the U.S. 

This failure is why we stand at the cusp of a momentous change in money and why, even with the volatility of crypto and bitcoin prices this week, interest will continue to be directed at this transformative technology. 

Efficient markets?

The story we were told throughout the 20th century was that in a capitalist society markets enable allocation of capital to where it’s most effective. The role of government was to intervene only insofar as its actions improved the efficiency of markets and assured broad-based access without privilege to special interests.

The principle was that regulation should not add unnecessary barriers to competition and in some cases, such as in antitrust actions, should proactively force monopolists to remove such barriers. Most important, regulators should ensure control over the information underpinning market decisions wasn’t systematically skewed in favor of some over others. 

Much of this was based on the “efficient market hypothesis,” which holds that markets efficiently process all information available to quickly set prices that capture the state of the world and provide a valuable signal for capital allocation.

Freed from information distortions, asset prices were supposed to rise on good news and fall on bad. Since those prices represented the consensus of multiple responses to that information, they would incentivize solutions that are, on balance, best for everyone.

Market failure

The efficient market hypothesis was convincingly debunked after the 2008 financial crisis. So, one might assume the contradiction between COVID-era financial information and prices offers another case of its failings. After all, stock prices, which are supposed to reflect expectations for future earnings, surged to record highs at the same time that the global economy underwent its worst contraction since the Great Depression.

But in this case, markets more or less processed information properly. The problem is a different one. It’s that there was another, hugely offsetting piece of information that affected investors’ decision-making: massive monetary expansion.

Central banks’ announcements and executions of “quantitative easing” programs made stocks and other assets valuable for two reasons. 

First, they drove interest rates on many forms of debt down close to zero. So, even if nominal future corporate earnings were now sharply lower, they were relatively attractive compared with returns on bonds. 

Second, because the Fed offered no end date to its program – a notion dubbed as “infinite QE” – the dollar monetary expansion mathematically inflated the value of finite assets denominated in the dollars. 

The new money had to go into stores-of-value whose supply wasn’t expanding. Stocks were favored for their liquidity. But so, too, were assets that were less liquid but had even tighter constraints on supply, such as real estate and fine art – and lately, scarce digital art. (See the “Conversation” below.) 

Over time, this monolithic idea of a rapidly and relentlessly expanding money supply overwhelmed all other unique forms of non-financial information.  

It made investors less discerning, creating ever-tighter correlations across assets, a trend toward sameness. Stock picking was increasingly driven by non-fundamental factors, such as the collective action of Redditors driving up the “meme stocks” of economically troubled companies such as GameStop.

And it meant younger investors, facing a future of zero interest rates, would say things like this: 

This, in a nutshell, is the failure of financial capitalism: a system that makes no distinctions between alternative investments can’t allocate capital effectively.

This, in a nutshell, is the failure of financial capitalism: a system that makes no distinctions between alternative investments can’t allocate capital effectively.

Bitcoin as truth teller

To be sure, central bankers could posit that price data do accurately reflect economic expectations because their policy measures are putting a floor on the downturn and setting the economy up for a rebound. 

(Rachel Sun/CoinDesk)

But that’s not how a vast swath of humanity sees things. This disjuncture between real-world and financial information – see the chart in the section below, for example – tells a simple, brutal tale. Central bank rescue efforts have overwhelmingly favored a narrow class of well-off asset owners and done close to nothing for the majority. 

An even more important rebuttal to the central bankers’ argument can be found in the huge price runup for bitcoin since late March. 

Bitcoin is a non-yielding asset. You buy it to exit fiat. For now at least, until better payment rails and decentralized financial solutions can be built on top of it, that’s its main purpose. It’s not a bet on economic recovery. If anything, it’s the opposite.

As we’ve discussed before, the price of bitcoin is an information signal telling policymakers about the level of confidence, or lack thereof, in the financial system. It’s time they paid attention to it. 

Job Losses, Stock Market Wins

To illustrate this information disjuncture, let’s look at what has traditionally been the most important monthly economic indicator for Wall Street: the nonfarm payrolls report from the U.S. Bureau of Labor Statistics. 

As expressed in terms of total employment, you can see that the U.S. labor market is still deeply “in the red” from where it was before the pandemic led to sudden lockdowns and a major shock to the global economy in March last year. Not so the S&P 500 index. 

(Shuai Hao/CoinDesk)

While the stock market’s initial Spring recovery correlated with a modest three-month rebound in employment, what’s most notable is that, after that, as the jobs recovery lost luster and failed to regain 10 million lost positions, equities just kept rising and rising and rising.

The Conversation: NFT Mania

February 2021 may go down as the month that non-fungible tokens, or NFTs, burst into the public consciousness.

With Christie’s planning an auction of digital art megastar Mike “Beeple” Winkelmann’s work, a tokenized version of Chris Torres’ legendary “Nyan cat” meme selling for 300 ETH ($453,000 at time of print), and the NBA’s Top Shot game selling an NFT of a clip of New Orleans Pelicans player Zion Williamson for $100,000, the entertainment world is abuzz with this trend. As we’ll see from the conversation this week, some are over the moon with it, others aren’t convinced. 

Someone who is excited is Mark Cuban. The Dallas Mavericks owner, “Shark Tank” star and influential investor told CNBC that if he were to launch a business right now, it would be in the NFT space. Here he is explaining why he thinks digital scarce rights will foment a revolution that goes beyond arts and entertainment:

Here’s a revealing thread from an NFT digital art collector explaining his logic. What’s interesting is the focus on buying early versions of the various new NFT art forms, such as the fascinating genre of “generative art” made by algorithms. That way, the collector owns an early piece of history – not unlike the mindset applied to antiques.

Meanwhile, major-league-baseballer-turned artist and black empowerment activist Micah Johnson launched the #AKU project, raising money for up-and-coming artists. The winner of the first auction of an NFT attached to a physical sculpture gets unique, exclusive access to it via a vault in Miami.

But is there any real there there? What is unique and enforceable about NFT-enforced rights to digital art? Bram Cohen, who as the founder of BitTorrent knows something about how rights to creative works move around then internet, asks some tough questions:

Meanwhile, a voice from the old art world, the influential New York Magazine critic Jerry Saltz, pours snobbish scorn on the whole scene (though it’s not clear he knows what NFTs are):

I ask you, how can a movement that produces something like this not be a big deal.

Relevant Reads: CBDC War Begins?

Meanwhile, a bit of fuel was thrown onto the flickering flames of an impending “digital currency war” between the U.S. and China, with both now accelerating their work on central bank digital currencies (CBDCs).

  • After years of U.S. officials showing little urgency for a digital dollar, Federal Reserve Chair Jerome Powell is now saying this is going to be an “important year” in its development. Nathan Di Camillo reports.
  • Shortly thereafter, as Daniel Nelson and Nikhilesh De report, some Fed officials released a paper outlining a process for consulting and engaging the general public in the design and development of the digital dollar. It’s fair to say this level of open public participation is not part of the Chinese development of its digital yuan, though entire cities such as Shenzhen have been used for pilots.
  • Why the expediting of activity in the U.S.? It’s not entirely clear, but notably it comes as China and the United Arab Emirates join a partnership with the Bank of Thailand and the Hong Kong Monetary Authority to form a regional CBDC payments system, Jamie Crawley reports. This is being described as a system to bypass the dollar-centric global payment system run by SWIFT. Such initiatives could one day diminish demand for the dollar as the world’s reserve currency.
  • And in another sign of CBDC technology going live, the East Caribbean Central Bank, the monetary authority for nine states, announced it had conducted the first transaction in its DCash digital currency. The payment, coordinated with the central bank’s provider, Bitt, occurred in a supermarket in Grenada. Jamie Crawley reports.

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