Financial Protectionism harms the global economy and creates an opportunity for decentralized money.
The global financial ecosystem is deceptively complex. As a global reserve currency, the US dollar plays an important role in the growing global digital economy. But in the face of a pandemic and economic depression, financial policy around the world is retreating from globalism and taking on more nationalistic tones. Because of this retreat and the global reserve status of the US dollar, the intensely partisan US elections represent a massive impact in the search for a global store of value.
As a simple example of the complexity of financial policy, most people would be surprised to discover that real interest rates are negative. ie: Savings accounts are losing money despite their positive interest rate. (Real interest rates equal the interest earned on money minus annual inflation rates.)
We are entering a prolonged period where real interest rates are negative because of monetary and fiscal policies around the world. And these policies are eroding the value of money.
As a consequence, people are losing trust in the globally centralized financial system. Individuals and businesses alike are searching for ways to store value and bypass the traditional nation based monetary systems. This presents an interesting global opportunity for the adoption of bitcoin.
Here’s why Bitcoin benefits from this environment.
US Financial Policies Create Negative Real Interest Rates
We are in the midst of a global pandemic and government policies have been focused on systemic shelter in place orders. These orders freeze commerce. People are forced to stay home, businesses are forced to close, and it creates financial strain on a global scale. To cushion this financial blow, monetary policy makers such as the Federal Reserve have reduced interest rates to near zero around the world.
In some cases, interest rates have been reduced to negative values. The logic behind these decisions, is to incentivize savers to invest their capital into the economy. The thought being, increased investment into the economy can help businesses survive and keep employment numbers stable.
US Financial Policy Creates Inflation
The Federal Reserve also recently shifted it’s policy to allow for an increase in inflation. Inflation is the rise in prices and services relative to the value of the local currency. It represents a fall in purchasing power of money. The key to inflation is that your money is worth less over time. The rational behind allowing for increased inflation is that it supposedly supports a more fully employed economy.
Combined, these policy decisions cause savers to receive near zero interest while simultaneously losing purchasing power of their money. This combination of factors creates negative real interest rates and most savers don’t understand the reality of this situation.
This is especially true for individuals living paycheck to paycheck with limited understanding of investing practices. They simply aren’t aware of the consequences of monetary policy.
An Example of Negative Real Interest Rates
As an example, let’s say you have a Bank of America Savings Account with 0.01% annual interest. And let’s assume the annual inflation rate is 1% (it’s not, the real inflation rate is a lagging indicator and deceptively hard to quantify). The real yield on this savings account would be -0.99%. Out of $1,000 saved, you would lose nearly $10 in purchasing power to inflation.
The numbers don’t need to be exactly accurate to drive the point home. With real negative rates, savers lose value.
Real negative rates won’t break anyone’s bank but they deceive savers and disenfranchise individuals that can’t afford to take on investment risk. It fosters a sense that the financial system leaves many people behind.
US Financial Policy Decisions Impact Global Money Management
The decisions the Federal Reserve makes with the US Dollar have a global impact because the dollar is the world’s global reserve currency.
“Today, more than 61% of all foreign bank reserves are denominated in U.S. dollars, and nearly 40% of the world’s debt is in dollars.”
As a result, US fiscal and monetary policies greatly impact the global financial system. But here’s the catch, US policy makers design policy to benefit the US population, not the rest of the world.
These financial decisions are subject to change and may change dramatically given the dynamic of upcoming elections in the US. If the Democrats sweep, policies will drastically change and impact the global financial system.
The Global Nuance of US Election Risk
The Electoral process in the US has become such a large chasm of beliefs. It’s a polarized Duopoly. But what’s lost in the Left vs Right, Democrat vs Republican debates are the spectrum of ideas that exist within these poles.
US policy is full of an underlying set of dogmatic beliefs.
- Nationalism vs Globalism
- Progressive Socialism vs Free Markets
- Authoritarian/Fascist vs Democratic Choice
As an example, Trump is a Republican and a nationalist. And although Joe Biden is the “liberal” candidate, he also plans to implement nationalist policies.
Other possible changes that could occur with a Democratic sweep include:
- Anti-China and Russia policy implementations (Nationalist policy)
- Tax increases – especially capital gains taxes (progressive policy)
- Climate Change infrastructure spending increase and regulatory restrictions on business (globalist policy)
- Expansion of spending on social programs such as universal healthcare including expansion of the Pandemic UBI initiatives (progressive and socialist policy)
Alternatively, Trump and the republican “pro business” candidates win.
It’s deceptive to describe Trump as pro business given his nationalistic approach to global policy. Take the TikTok dispute between US and China. At face value it’s about data privacy. But going deeper, it’s an extension of Trump’s nationalist trade war agenda with China.
The nuance of each parties initiatives will greatly impact the value of the dollar and the global financial system will experience the impact of these adjustments.
The Consequences of the Election
Depending on the political party chosen, the monetary, fiscal and general regulatory environment of the US could drastically change. This impacts the global reserve currency and thus the rest of world.
Whoever gets into office, it’s clear that US Nationalism will dominate policy. And nationalism gets in the way of global interoperability of money.
It’s especially true of US Nationalism because of the nature of it’s world reserve currency status. Think of interoperability as the level of cooperation and connectedness of systems. As countries around the world opt for nationalistic policies, the global interplay of commerce suffers.
As a consequence, this election is a hard choice for anyone that doesn’t support polar extremes of the duopoly. Both represent a severe form of nationalism which is contrary to the growing digitalization of business.
Trump’s style of nationalism harms globalized business but the US Progressive Socialism movement is nationalistic as well.
Nationalist Financial Policy Conflicts with Modern Digital Businesses Need for Global Interoperability
The proliferation of the internet around the world has made business overwhelmingly global.
Digital business models live and die by their network values. They are predicated on growth. Interoperability is one of the most important elements of growing global and digital age networks. Whether the company is a SaaS, a traditional multinational corporation, or a smaller stay-at-home capitalist style operation, future growth is challenged by rising nationalism.
As a global reserve currency, US fiscal and monetary policy impacts the entirety of global business. The dollar has become the de-facto financial interoperability mechanism. But global business is harmed by policy decisions that lower interest rates and increase inflation are driven entirely by nationalism.
This dilemma brings to bear the need for global communities to have decentralized digital infrastructure. Growth of international digital commerce depends on sound and highly interoperable money that is not impacted by nationalistic policy.
Bitcoin Offers Globally Decentralized Financial Interoperability
A finite supply of interoperable digital money becomes essential to controlling inflation and growing a vibrant and robust digital ecosystem. Modern digital businesses cannot be truly integrated on a global scale without sound interoperable financial mechanisms.
In the face election uncertainty and real negative rates, this environment punishes holders of cash. Although we can expect many to suffer this penalty in the short run, it’s rational to assume that most money managers (individual or institutional) will hunt for other opportunities.
As a result of this environment, bitcoin represents an interesting opportunity. A decentralized, and globally interoperable financial asset that can bypass capital controls. It would make sense to expect some significant capital inflows to bitcoin give these global circumstances.
The finite supply of bitcoin is important in this environment but only if bitcoin has high degree of interoperability – ie: if it can plug into preexisting financial systems, the more it becomes part of the establishment, the less volatile and more valuable it can be.
The 2021 policy cycle presents a scenario that reinforces a flight to decentralized assets. Creating an increase in bitcoins network effects and consequentially, bitcoins value to the globalized digital economy. It’s not an intuitive leap to believe that bitcoin’s value could increase over the coming policy adjustment cycle.
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