Reading the very good series and predictions about the future of money on Coindesk inspired me to put some of my own reflections down.
These points are drawn from sources like Balaji Srinivasan (here and here), Raoul Pal (here), Robert Breedlove (here), Alex Gladstein (here ) and many others.
If you peruse those talks and videos you will notice that a lot of them are about history, as in order to understand the present you have to understand your history. In order to predict the future, you have to understand the present. Underlying themes driving these predictions include A) Demographics, eg Fourth Turning B) Things can stay the same much longer than what any of us expect (see Japan) and C) Software is eating the world (ref Marc Andreessen).
There will be a monetary battle, a test of wills, between the following forces – Authoritarian capital (Eg China), Western Fiat (Fed, ECB) and Crypto capital. The Authoritarian capital requires the citizens to Submit as it is the Legal authority. Fiat capital / central banks claim to know what is best for the citizens, and the message is ‘sympathize’ so the CBs will spend greatly in order to keep the current house of cards going. Crypto capital is wild, volatile and offers get rich schemes interwoven with real world utility.
Fiat money central banks will, due to the economics of the fiat system, need to continue their QE infinity, but they will mask the fact that the system is broken in a language of social spending, of taking care of the inequalities in society. My prediction is that we will have some type of UBI (Universal Basic Income) or monthly Tax Credit scheme in most western countries within 5 years.
Unfortunately this will lead to further asset price inflation (as it has for the past 20 years) and secondarily to commodity and wage price inflation, so the main effect will be that asset prices (stocks, houses) continue to compound at 10-15% per year in fiat money terms, but measured against M2 money supply staying flat. Houses will cost double from now in 5 years and equities will have doubled as well, and we will still wonder who the hell buys any at those nose-bleed levels. The answer is TINA – There Is No Alternative.
The UBI / Social spending will be carried out via CBDC – Central Bank Digital Currencies that can be spent via your phone / device, as this will be cheaper for merchants than credit cards. Government can track the spending in real-time, can tax your income and purchases (via VAT) in real-time and merchants can provide discounts in real time based on your location, purchase history, memberships etc. Consumers will as usual have chosen convenience over privacy.
There will be some wage pressure due to the “Great Resignation” as especially Baby Boomers are feeling better about their finances while uncertain about their health, meaning there will be fewer job applicants for many open positions. My prediction is that wage inflation will outpace government CPIs (CPIs say 3-4% annually, wages 4-5%) while both will lag asset price inflation. But since asset price inflation ‘doesn’t really count’, government economists will still be wondering why the rich get richer and the poor get poorer. How much actually in ‘real terms’ will be spent to equalize the income/wealth divides will still depend on election results and politics.
Today (Dec 12th, 2021) the combined market size of Crypto is around 2.3 Trillion, Global Equities are around 120 Trillion, Global Government, Household and Corporate Debt around 300 Trillion, and Global Real Estate around 330 Trillion, so we can call the ‘real world’ financial markets a nice round 750 Trillion.
The ‘Defi Matrix’ will be the Crypto markets ‘eating the financial’ world in the 2020s.
In the words of Balaji Srinivasan :
The DeFi matrix may be to the 2020s what the social graph was to the 2010s. Once every asset can be represented in a digital wallet – bitcoin and ethereum, yes, but also CBDCs , stocks, loans, bonds, etc. – all these billions of assets will trade against each other every second of every day around the world.
This is not inevitable because I love crypto, and blockchains will create some utopian society ruled by empathy, code and crypto bros / babes. This is because I think most main-stream thinkers, politicians, businesspeople etc severely underestimate the power of:
A) how blockchains can enable Trust, an objective Truth to flourish in business and personal transactions. This is because Blockchains are a revolution in Accounting – Triple Entry Accounting (Debit, Credit, Public). Imagine for example every invoice sent, on a chain where the payer / payee can instantaneously verify its status, pay the invoice, confirm receipt and dispute it if needed.
B) Linux systems today run about 50% of the worlds webservers, and Linux is about 99% built on free labor, open source. Now imagine a similar system except that the people building the system can be rewarded in the token of the system, they gain as the token appreciates in value and the gain in the token allows creation of more utility, which brings more users, more value – creating a virtuous cycle. * How some-one like Charlie Munger who’s a student of human incentives can not see the benefits in this is beyond me..
C) The utility and financial rewards available in the Crypto / Defi markets will slowly drain away capital and resources from the TradFi world, and while the market size, number of participants in Crypto increases, the volatility and insane rewards fade away slowly.
So in the end some of the value in the 750 Trillion real world value will accrue to the Crypto layer, but obviously not all of it (as the real utility will still be in the actual houses, companies, factories etc). Raoul Pal has thrown around a number of 200 Trillion for Crypto markets, I’d be more ‘cautious’ with guesstimate of a nice 10x (25T-30T) in about 5 years time.
These predictions are basically based on a continuation of ‘more of the same’ as today, and could be upended of course if there were severe financial / monetary system crashes, wars etc. I hope not.. That’s all I got for now, any comments / feedback is always welcome.
Thanks for reading,
Oskar