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Talking points:
“The everything bubble” has been spoken about in the financial press for years. It’s the idea that asset prices across the board have severed their link with reality, with PE ratios in the stock market going far beyond what we used to call ‘overvalued’.
Retail price inflation and the rapid increase in asset prices are more of an emergent effect rather than the root cause of the problem.
The root cause of the problem is the FEDs money printing but seldom do we take that a step further and realise that is the bubble we are looking for. It’s a cash bubble.
It’s almost a reverse bubble. Typically in a bubble you have an asset that skyrockets in price, the bubble bursts and the price rapidly comes back down to a reasonable level.
But the cash bubble is the opposite. Cash has crashed in price creating a negative bubble. If that bursts, what happens? The price of cash will rapidly go back UP, meaning you’ll get fewer assets for your money.
We would normally look at that the other way around and say the asset prices were crashing but consider instead that it’s the rapid fall in the value of cash correcting upwards.
Typically you only need a larger money supply when the velocity of money is high i.e. when the same dollar is involved in many transactions in the same day (i.e. customer to Uber driver to gas station).
But why do people transact?
In the Austrian school of economics value is subjective. A transaction starts with the arising of a human desire that wishes to be satisfied.
They make that desire known somehow (say by searching Google for “buy Ice Cream on Cleethorpes beach” and proceed to Olivers on the seafront to conduct their transaction.
So that’s on a micro level. On a macro level, why would the velocity of money increase? Why would people transact more and faster?
Because a desire arises for something they want.
And this I think is where the problem lies. Not enough human desire is being stimulated.
If we think of the economy like the plumbing system in your house, at any one time there is a certain amount of liquidity in the system for optimum performance.
The water supply to your house and the drainage system connects to the wider plumbing system.
The whole thing is optimised for water flow.
So the only time more water would be added to the system would be if say new houses were built with its own set of pipes, requiring its own water flow.
In an economy, instead of houses we have businesses. Each business with a certain amount of liquidity (cash) flowing in and out.
But what determines the cash flow rate or the velocity of money?
The number and size of human desire they are able to fulfil.
Are all human desires satisfied in the world?
No, so why isn’t the money moving faster? Why instead is it being parked in assets as a store of value?
What is that cash waiting for?
It’s waiting for an opportunity?
What opportunity? An investable innovation.
With so much cash around, getting funding should not be a problem for any business. There’s a mountain of cash desperate to be put to work.
So I am suggesting that the velocity of money is closely tied to the rate of innovation in the economy.
A rapid rate of innovation would bring to market a flurry of new and creative products and services that would stimulate human desire and get that money transacting.
Not only would the money flow faster on the consumer end but venture capital funds would greatly increase their deal flow.
They would end up investing in a greater % of the deals that they consider, if they were presented with genuinely innovative products.
This ultimately brings us back to Bitcoin, crypto assets and defi.
Due to the historical stranglehold on the financial system, more than 100 years of innovation (that would have been otherwise expressed), has been pent up, building like a pressure cooker.
Now it finally has an outlet thanks to the permissionless nature of Bitcoin, cryptocurrencies, blockchains and DeFi.
The gatekeepers, who previously acted as barriers between creators and consumers are being disintermediated by everything from DeFi to NFTs.
Now that individuals don't have to go through a central authority to get access to consumers who might want their creations, innovation can happen, desire can be stimulated, and the money can flow instead of being cooped up in hollowed out assets.
And the final culprits in all this are the publicly listed companies.
Decades ago, executives began to move their focus away from creating innovation to stimulate cash flow, over to methods to pump up the companies stock price and get rich quick.
Research and innovation budgets got cannibalised in order to free up cash to pump up the appearance of profitability on financial statements and to engage in stock buy backs.
While that works in the short term to pump the companies stock, it costs the company and the economy in the long run, because eventually innovation dries up, consumers become tired of more of the same for less and the money flow slows down.
And in an attempt to “stimulate” the economy (which is consumers) the central banks print money.
The problem is we don’t need more money, we never did.
There was no shortage of money, there was a shortage of creative innovations that genuinely stimulate human desire.
That is why I am in the crypto education business.
What my students end up doing with the knowledge I impart to them, I would never have come up with myself.
But that is the beautiful thing about empowerment. Once you are empowered, God only knows what you’ll do with it.
▶️ 3Speak