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The thing it’s closest to is a speculative commodity. Please explain how it’s “re-collateralizing the broken offshore dollar market.”
Bitcoin
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ColdBlueSteel
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Like Bear Sterns…oh wait
AlbionAmerican
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There is an excess of dollar demand due to the desire to trade in dollars around the world, it creates massive imbalances in FX markets and arbitrage between onshore and offshore dollar credit markets. Essentially there is a shortage of dollars because firms around the world borrow dollars locally and local banks supply those dollars, however, when the shortage becomes too extreme as it often has in recent years, the dollar rises and it essentially puts a lot of pressure on foreign currencies / central banks / local banks who have exposure and could lead to collapse in highly indebted countries where the US has interests (like Europe). Its basically trying to avoid an Asian Financial Crisis elsewhere, that's the problem it presents.
Everyone suddenly needs liquidity when dollar demand is overwhelming (as it was in March 2020 and the Fed was opening swap lines like crazy to central banks). Having a different unit of account to devalue the USD against (like Bitcoin) allows the Fed to alleviate the pressure without forcing the Fed to have to print up massive amounts of dollars to supply global liquidity.
gtyellowjacket
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Milk and Cookies
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Devaluing the USD relative to all other foreign currencies sounds cool for Americans. Good call.
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I cannot bring myself to take crypto seriously as anything other than a pump and dump scheme which will end up bankrupting huge swaths of society.
ColdBlueSteel
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Elaborate?
Milk and Cookies
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I was mainly riffing on the last sentence in the post i replied to.
The idea that global demand for USD is a bad thing and we need to devalue the USD to alleviate pressure it puts on foreign currencies -- well let's just say I'm going to need that explained to me again. The fact of the matter is the USD has been on a steady decline as a preferred global reserve currency for about the last 25 years giving way to other currencies which is weakening the dollar's dominance. So crypto potentially accelerating that decline is good for us how?
AlbionAmerican
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I never said it was good or bad, it merely presents problems that have to be dealt with on occasion. If you don’t know what the Asian Financial Crisis is then you’re misunderstanding my point. A dollar that is either too strong or too weak is a problem as long as the dollar remains the overwhelmingly dominant choice of trade settlement worldwide. Bitcoin helps address the problem when the USD gets too strong (as it has in recent years) and gold in a way does the same when the dollar gets very weak (as it did from 2001-2012), as you can see below.
Milk and Cookies
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In any postmortem about the Asian Financial Crisis the blame will lay squarely at the feet of the governments of those Asian countries who were trying to juice their rapidly expanding economies by relying on exports, pegging their currencies to the USD and not having sufficient currency reserves to protect themselves. I like a strong dollar - imports and traveling are cheap. And it bolsters our image internationally. If a foreign country wants to peg their currency to the USD without the necessary safety nets that's on them.
Btw, I'm not anti-crypto. Its an interesting speculative asset and seems to be unlike anything we've seen before. Some of the attempts to conjure up some inherent value for it leaves me wanting so far.
Btw, I'm not anti-crypto. Its an interesting speculative asset and seems to be unlike anything we've seen before. Some of the attempts to conjure up some inherent value for it leaves me wanting so far.
AlbionAmerican
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You are wrong sir, a dollar that gets too strong will blow up global finance. The dollar must be STABLE if we're to have a peaceful planet. The implications of a dollar rising to unsustainable levels is massive defaults around the world to start off with, and that would fall back on globally important banks specifically in Western Europe and Japan creating major financial crises for them which would in turn force them OFF of the current status quo and right into the hands of whomever is offering stability (ahem, Russia and China). BRICS would basically be the new standard of the world, however it manifests, the US would have no voice at the table because all of our interests would have gone kaput. Either that or they just let their banking system implode which creates insane levels of global chaos, which obviously isn't an option. That's the impact of a dollar that gets too strong, its not about imports or exports, the US dollar accounts for 59% of all global currency trade settlement still which is enormous and needs to be managed. You cannot let the free market dictate these things anymore because the consequences are much more serious now that there are real competitors to the US built global system unlike in the 90s. Sorry but a responsible power doesn't put global stability on the line and opens up the power vacuum for autocratic regimes to rule the future just because it helps some Americans stretch their vacation dollars in Mexico.
So, just how does crypto enable a stable market?
No need to answer. It doesn’t.
Milk and Cookies
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You're making some very extreme claims. Just on first reading, you seem to be saying
- the USD is capable of getting so strong it collapses the world economy before the market would be able to correct on its own
- this is a real possibility
- bitcoin would prevent it
- the assured negative impacts of reducing the position of USD as a reserve currency worldwide in favor of bitcoin are outweighed by the alleged risk mitigation of this imagined future catastrophe that has never happened before in the history of global commerce
AlbionAmerican
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They aren't extreme at all, in fact its a problem being talked about across the financial industry and subtly in Fed papers.
Let me just lay out the problem for you, foreign governments and corporations borrow in USD, even though most of their revenue is in their local currencies. The lender of these dollars is often not even a U.S. institution because foreign lenders often lend to foreign borrowers in USD. This exposes borrowers to currency risk due to a mismatch between the currency of their revenue and the currency of their debt. Borrowers often take this approach because they can secure a lower rate by borrowing in USD rather than in their local currency, effectively shifting the currency risk from the lender to themselves. Somtimes USD-denominated bonds and loans may be their only available option. The size of this market is enormous, $13 trillion, and is what keeps the USD in demand globally, its the bid for why people still want dollars as there is no other option. China is trying to build its own thing but China also loses control over their currency the more they internationalize it, so its a double edged sword like most things in finance.
To help supply liquidity for these markets are also the enormous FX swap markets that non-bank institutions around the world also participate in, its roughly $26 trillion for non-US nonbanks, and $39 trillion for US nonbanks, which btw is all off-balance sheet, its just enormous risk we're talking about here. These markets would be impacted by anything happened to the USD (like what I was saying before, it has to remain stable, it cannot get too weak or too strong) because if the USD became too strong it means non-US institutions with too much USD credit exposure could potentially default on that debt, which has ramifications that can't even adequately be modeled out you see. This is why the dollar getting too strong is a risk, its essentially creating the dynamic of an enormous global short squeeze on the USD. Look up Dollar Milkshake Theory on Youtube, that guy Brent Johnson lays it out for you in a more simplistic way.
My entire point is there are ways in which the Fed can manage this with Bitcoin rather than having to expand their balance sheet every time the world has a hiccup relating to dollar funding. If you'd like to discuss that point then first you need to educate yourself on just how much of a problem a dollar that is too weak or too strong is to global finance as it creates global financial instability, instability is bad for finance, and bad for the continuation of this system America created. Its bad for the stability of our own system too, its bad for our foreign allies if things go wrong. All of that is easy to understand why the USD being stable is the most important thing for the global system, if you're against the global system then that is an entirely different argument but you aren't making this. You wanted a strong dollar for cheaper vacations and consumption, which is paradoxical to the reality we now live in.
Here's a link to the paper I pulled the above from (https://www.atlantafed.org/-/media/...4/05/15/02--offshore-dollar-and-us-policy.pdf)
Milk and Cookies
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I appreciate the attempt at providing more info, but none of this justifies any of your four claims i had issue with in my last response.They aren't extreme at all, in fact its a problem being talked about across the financial industry and subtly in Fed papers.
Let me just lay out the problem for you, foreign governments and corporations borrow in USD, even though most of their revenue is in their local currencies. The lender of these dollars is often not even a U.S. institution because foreign lenders often lend to foreign borrowers in USD. This exposes borrowers to currency risk due to a mismatch between the currency of their revenue and the currency of their debt. Borrowers often take this approach because they can secure a lower rate by borrowing in USD rather than in their local currency, effectively shifting the currency risk from the lender to themselves. Somtimes USD-denominated bonds and loans may be their only available option. The size of this market is enormous, $13 trillion, and is what keeps the USD in demand globally, its the bid for why people still want dollars as there is no other option. China is trying to build its own thing but China also loses control over their currency the more they internationalize it, so its a double edged sword like most things in finance.
To help supply liquidity for these markets are also the enormous FX swap markets that non-bank institutions around the world also participate in, its roughly $26 trillion for non-US nonbanks, and $39 trillion for US nonbanks, which btw is all off-balance sheet, its just enormous risk we're talking about here. These markets would be impacted by anything happened to the USD (like what I was saying before, it has to remain stable, it cannot get too weak or too strong) because if the USD became too strong it means non-US institutions with too much USD credit exposure could potentially default on that debt, which has ramifications that can't even adequately be modeled out you see. This is why the dollar getting too strong is a risk, its essentially creating the dynamic of an enormous global short squeeze on the USD. Look up Dollar Milkshake Theory on Youtube, that guy Brent Johnson lays it out for you in a more simplistic way.
My entire point is there are ways in which the Fed can manage this with Bitcoin rather than having to expand their balance sheet every time the world has a hiccup relating to dollar funding. If you'd like to discuss that point then first you need to educate yourself on just how much of a problem a dollar that is too weak or too strong is to global finance as it creates global financial instability, instability is bad for finance, and bad for the continuation of this system America created. Its bad for the stability of our own system too, its bad for our foreign allies if things go wrong. All of that is easy to understand why the USD being stable is the most important thing for the global system, if you're against the global system then that is an entirely different argument but you aren't making this. You wanted a strong dollar for cheaper vacations and consumption, which is paradoxical to the reality we now live in.
Here's a link to the paper I pulled the above from (https://www.atlantafed.org/-/media/...4/05/15/02--offshore-dollar-and-us-policy.pdf)
1. Can the USD get so strong it collapses the world economy? You don't know that's the case. There are countless interconnected variables that keep the world economy in relative equilibrium. Every time the USD has gotten strong in the past it has been brought back down by market forces before any kind of meltdown event. You haven't supported this claim and its never happened in the past.
2. Is this likely to happen soon? This Brent Johnson guy has been peddling this armageddon claim for 5 or 6 years at least it looks like. His theory doesn't seem to have a good reputation in non-contrarian circles. It makes sense if he's being held up in crypto communities as a prophet though. He doesn't sound much different than most gold grifters claiming the end is near.
But let's assume you and Brent are right and we are on the cusp of massive defaults around the world.
3. What evidence do you have that bitcoin is just the right instrument to prevent it?
If you are too exhausted to try to attempt supporting these claims - i get it. We can stop here and each agree we're not buying what the other guy is selling and call it a day. But if you feel up to it give it a go.
AlbionAmerican
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1) This was PROVEN in the Asian Financial Crisis, it collapsed multiple economies who really weren't burdened with a lot of debt either, which you claimed was something local govt's did mistakenly but this is not the case, they were trying to grow economies (which the US was encouraging too leading up to the crisis), and when the USD strengthened it became a massive problem of currency outflows and in turn currency collapse due to these high servicing burdens on local dollar debts on local industries. Now, take the Asian Financial Crisis and multiply it by WAY more, we have a world far more flooded with debt which could not absorb a repeat of this situation, and this situation isn't going to hurt emerging economies this time if it played out, it would hurt Europe, Japan, Australia, Canada and the UK, aka, our allied countries. Canada and Australia could be a bit more insulated given their resources but UK, Europe and Japan could not. Btw, the scenario I'm talking about has basically already been playing out, its almost as if the Biden Admin + Fed were stage managing precisely what I've laid out the last 2.5-3 years. We're already watching the slow collapse of the Euro, and the Yen has declined by 50% in the last few years, for a country who has to rely heavily on energy imports. I have a theory that Japan is set up to grow their offshore Yen market, so this may workout okay for them. Japan is really well setup to fill in the voids where the US retreats from in the coming years not just in financial terms but militarily too, this is a separate discussion but they have a path out, whereas UK and Europe are really really screwed if the dollar rises too much, unless they gain inflows from EMs but can't see that happening.
2. & 3. The end isn't near, but if you have even a minute understanding of counterparty risk, then you'll realize when crises hit, it affects not just that country or that company, but the entire world given the debt levels. You have to have your head so far in the sand to realize the potential for a global crisis has never been closer, it just depends on where it could play out (finance, geopolitics, war, food shortages, further energy shortages, etc.). I cant believe someone who claims to be informed on the world doesn't realize we're on the brink of something, it may not manifest itself as a crisis if policy leaders are smart about it, which WAS MY ENTIRE POINT REGARDING BITCOIN. Crisis can be prevented by letting something else absorb the volatility, whatever type of volatility (whether it be financial, government or real world volatility) its ALL linked and its ALL due to the world being too damn flooded with debt. There is ALWAYS a counter party to debt, and the world ALWAYS runs up against the limits to how much more debt can be created before it needs to be extinguished via some pressure valve, be it higher gold prices, commodity prices (oil going to $300/barrel), economic collapse, or global war. History of warfare is far more often a story of counterparty debt than what people understand it to be.
rodoheel
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I am anti-crypto. Whatever novelty or speculative use value it provides is far outweighed by the negatives. It is used today largely as a way to create an opportunity for grifters and swindlers to dupe people into "investing" in something they really know nothing about. We are burning down the power grid to create something of no practical use or substance just so a handful of the most predatory jack assess on the planet can get rich. The fact that a few "regular" people might collaterally get rich too is easily offset by all the negatives.
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Ive been reading horror stories about people who have been screwed over by coinbase etc when tryin to cash in what's that all about? Everything about it is fishy as hell esp when it comes to securing it so no one will steal it. Guess im just too old school to get it.
Milk and Cookies
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Don't take my word for it.
IMF:
"The underlying causes of the Asian crisis have been clearly identified. First, substantial foreign funds became available at relatively low interest rates, as investors in search of new opportunities shifted massive amounts of capital into Asia. As in all boom cycles, stock and real estate prices in Asia shot up initially, so the region attracted even more funds. However, domestic allocation of these borrowed foreign resources was inefficient because of weak banking systems, poor corporate governance, and a lack of transparency in the financial sector. These countries' limited absorptive capacity also contributed to the inefficient allocation of foreign funds. Second, the countries' exchange rate regimes—exchange rates were effectively fixed—gave borrowers a false sense of security, encouraging them to take on dollar-denominated debt. Third, in the countries affected by the crisis, exports were weak in the mid-1990s for a number of reasons, including the appreciation of the U.S. dollar against the yen, China's devaluation of the yuan in 1994, and the loss of some markets following the establishment of the North American Free Trade Agreement (NAFTA)."
Or Investopedia:
"Many of these problems were the result of policies to promote export-led economic growth in the years leading up to the crisis. Governments worked closely with manufacturers to support exports, including providing subsidies to favored businesses, more favorable financing, and a currency peg to the U.S. dollar to ensure an exchange rate favorable to exporters.
While this did support exports, it also created risk. Explicit and implicit government guarantees to bail out domestic industries and banks meant investors often did not assess the profitability of an investment but instead looked to its political support. Investment policies also created cozy relationships among local conglomerates, financial institutions, and the regulators who oversaw their industries. Large volumes of foreign money flowed in, often with little attention to potential risks. These factors all contributed to a massive moral hazard in Asian economies, encouraging major investment in marginal and potentially unsound projects."
The tale of the Asian Financial Crisis is of moral hazard by those local governments and businesses. In the postmortems no one says the lesson learned is that we should never let the USD strengthen beyond some arbitrary value, which is what you're asserting. The blame is laid squarely on the monetary and fiscal policies of those countries.