Thread by @RealNatashaChe

Why bitcoin will never become the global reserve currency

Bitcoin maxies tout it as the ultra sound money. But in fact having #bitcoin as the global reserve currency would be one of the worst ideas of the 21st century.

It’s not gonna happen. Here’s why👇

1. “Ultra sound money” makes it ultra difficult for anyone to get out of recessions

People are having a knee-jerk reaction to monetary policy excess right now.

Fed prints too much. Asset prices all inflate. Your money is worth less. It helps the rich and hurts the poor.

All true.

But having the pendulum swing the other extreme is not the solution. In fact, extremely short sighted.

The world got off the gold-standard bandwagon for a reason— it was super clunky and made recessions/crises worse than they should be.

Imagine if we had “#bitcoin standard” when Covid hit. Everyone fled to safety. Bitcoin price would go up. Governments would rush to raise interest rates to counter the incentive of converting to bitcoin, so that they wouldn’t lose their bitcoin reserves.

You’d end up with monetary tightening at the worse timing, when the economy needed the exact opposite.

Counter-cyclical monetary policy is like oxygen. When it’s around, you take it for granted. When it’s missing for 5 mins, you scream.

The COVID recession lasted 14 months. The 2008 recession lasted 18 months. These were helped along by monetary expansion. Think they are too long?

The 1873 recession lasted 65 months. The 1929 recession lasted 43 months. Those were under the auspices of the gold standard.

Yes the monetary policy action may be excessive. But saying the cure is to tie the hands of central banks completely is like chopping off your leg to cure a broken toe.

2. Inflation would become more volatile, too.

Think inflation is too high now? Try the 1910s— close to 20%. Or the early 1920s— negative 15%.

When you don’t have to tie the value of your currency to bitcoin or gold, you’re free to issue more or less money to limit the price moves of consumption goods. This is the so-called “inflation targeting”.

But when you have your currency value tied to an asset like bitcoin, you give up most of your options for moderating the prices of actual goods people buy. That leads to more volatile inflation for goods and services, not less.

3. There are not enough bitcoins to go around.

The Fed printed US$3 trillion last year. And yet there’s an estimated $13 trillion global dollar shortage. And the dollar has been on a long-run appreciation trend for the past decade.

Why?

Simple. The growth of global commerce and finance is outpacing the supply of the global reserve currency, i.e. the dollar. The US only accounts for 15% of global GDP. And yet the USD is used for over 50% of international trade settlements and even higher in debt services.

If you have so much shortage even when the Fed printer is going nuts, imagine what it’s like when you have a reserve currency that has 21 million fixed supply.

Every country would be selling their grandmothers to get more bitcoins and it still won’t be enough. Whenever you get a whiff of recession, Interest rates would skyrocket, credits would crumble and you’d see massive debt defaults.

It would be the opposite of what you see today. But it wouldn’t be any less dystopian.

4. Global commerce and economy would shrink.

In a bitcoin dominated economy, you’d have massive deflation. That would work, theoretically. But at what cost?

The natural tendency of economic activities is to expand. Productivity goes up every year. Countries are more connected. New goods and services are invented daily. With expansion comes with more demand for money that serves as the connective tissue of all transactions.

That’s why money supply of fiat currencies needs to expand every year, even without extraordinary monetary policy.

Now imagine you say, no more new money. We’ll have a fixed supply, forever. The price of everything will have to go down, because there’ll be more and more things and stuff compared to available money.

The more productive an economy is, the more price deflation it would have.

That makes it impossible for anyone to borrow money on a fixed rate, or for any company to pay a fixed salary. You’d go bankrupt taking on any longer-term leverage. All enterprises would quickly become unprofitable.

You say, we can lower nominal interest rates to account for deflation and reduce wages, too. Yes, but those adjustments would be backward looking, i.e. with a delay. Overall you would be adding massive cost to investment, hiring, and trade.

And forcing every part of the economy to artificially contract, just so that you can have a fixed money supply? What the 🤬 🤬 🤬?

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So, where do we go from here?

Bitcoin or gold standard is a no go. But dollar reserve system is broken. What would happen next?

Here are 6 thoughts.

1/ Some small populist governments may attempt a peg to bitcoin. A few ill-informed politicians will fancy themselves revolutionaries who give monetary “power back to the people!” They will be popular for a while.

2/ Their economies will become volatile and it will create more problems than it solves. “The people” will be unimpressed. They’ll be forced to abandon the peg, and end up as the Exhibit A of what not to do with your monetary policy in schoolbooks.

3/ More countries will have a small number of bitcoins in their reserve assets. Currently less than 10% of global reserves are in gold. Bitcoin would eat into gold’s share, but there’s no reason for it to expand much beyond that, unless the value prop shifts dramatically.

4/ The US will be increasingly unwilling & unable to shoulder the responsibility alone as reserve currency provider of the world, at the cost of hollowing out domestic industries and adding to the debt burden of future generations.

5/ The world will shift to a multi-reserve system one way or another, with 3 to 5 major currencies sharing the function of global trade settlement and FX debt denomination.

6/ The business of digital “stablecoins” pegged to a basket of fiat currencies will be thriving. There will be many issuers of those and they will collectively become the new connective issue of international commerce and finance.

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