Daily Balajisms – Fiat crisis
Financial crises crush the banks. A fiat crisis turns governments into counterparty risk.
It’s easier to launch a new digital currency than to build a high-tech factory, says Balaji Srinivasan. He thinks the de-dollarization trend will accelerate and turn the Financial Crisis 2.0 into a full-blown fiat crisis. The US dollar is not too big to fail in 2023.
The US and EU shouldn’t be complacent with their currencies’ relative dominance in global trade. Because the dollar, as a reserve currency can be unbundled, rather than replaced. The store of value function will go to bitcoin, the medium of exchange will go to the Chinese yuan and Indian rupee. India is now EU’s largest supplier of refined fuels.
During the recent Shanghai Auto Show, which took place for the first time since Covid, legacy automakers were taken aback by the progress their Chinese competitors have made. They could see EV supercars like Yangwang U8 by BYD doing a tank turn. Many concluded, it’s a wake-up call for the West.
Governments will try to ban short selling, impose capital controls and go after fiat-to-crypto bridges. We will see digital lockdowns, sudden and unannounced. Like the physical lockdowns during Covid.
The old establishment is bi-polar, says Balaji. Total apathy or total panic. Inflation is transitory, until it isn’t. Rates are supposed to remain low, until they are hiked through the roof in a year.
Balaji thinks we are in a poly-crisis. It’s a debt ceiling crisis, a credit card and auto loan crisis, a student debt crisis, a bank crisis, a commercial real estate crisis, insurance companies crisis, a de-dollarization crisis, and a de-globalization crisis - with the war in Ukraine and tensions over Taiwan.
Balaji sometimes mentions a concept of tensegrity by Buckminister Fuller. It’s a combination of tension and integrity. In a relationship between two people, countries or trading blocks there are elements of tension and also unity – things that we have in common and that keep us apart.
Novel arrangements, tech and moral innovations, like Starlink and remote work after Covid, can upend the balance and make “the rubber bands snap” – making cities like San Francisco implode, with some commercial real estate losing 80% of its pre-Covid value. If a new peak predator emerges, the old power centers get shaky.
Miami with its pro-tech and pro-business attitude of “How can I help?” is attracting tech talent and eating SF’s lunch.
The same can happen to countries, as remote work and Starlink open the global map across similar time zones, and put countries in direct global competition for tech talent. Digital nomadism will grow to the next level, as people can make a longitudinal arbitrage – thanks to the moral innovation of remote work and technological innovation of Starlink.
Betting on the long-term financial health of America in 2021 was a mistake, bond holders became the bag holders, says Balaji. Everyone who bought bonds before 2022 was crushed. As the rapid rate hikes devalued many portfolios across institutions. Today it is a mistake to bet on the short-term health of America. If you hold, what Arthur Hayes calls, “inside money” you are in a Venus flytrap.
Dollar was too big to fail in 2008, but is not in 2023, thinks Balaji. Because of Bitcoin, China and India.