The global problem

Time is short

debt crisis

[Intro] [The global problem] [The crypto solution] [Investment thesis]


To understand why crypto is valuable, we must first understand the problem it solves.

For this, we'll touch a bit on monetary history.

It's a looong story (decades in the making) so I'll summarize the key points as concisely as I can.

Chapter 1: The birth of fiat currencies

The story begins at the end of World War II, as nations came together after six years of chaos and destruction. The time for reconciliation had come and everyone was yearning to rebuild.

As the United States was the richest and most influential country at that time, most other countries agreed to a new financial system that anchored their currencies to the USD, while the USD itself would be anchored to gold¹. This meant that the USD became a proxy to the precious metal and was treated "as good as gold".

This also meant that the U.S. was placed in a powerful and privileged² position; Their currency (USD) was now supported by all other currencies, and they became the gatekeeper of world trade.

On the surface, this seems like a purely economic matter. But at the heart of it, this is really an issue of power, fairness and trust.

You see, by pegging their currencies to the USD, the other countries effectively gave the U.S. unprecedented power over global affairs... but this was on the condition that the U.S. did not abuse that power - they were expected to use it fairly.

Sadly, the U.S. did not fulfill their end of the bargain. In the following years they repeatedly spent more than they earned, and unfairly printed USD to fund the habit. Meanwhile, their gold reserves - the store of wealth backing the USD - kept shrinking, which meant that the USD was worth less and less. This worried some countries, and they began exchanging their USD for gold.

As trust in the USD plummeted, the U.S. shocked the world in August 1971 by unilaterally breaking the agreement and halting the exchange of USD for gold³. From that moment on, all paper currencies were no longer backed by gold or any other asset; They became worth something only because the government declared it, and they were willing to enforce that declaration with violence (i.e. by fiat).

This is how the global monetary system went from the 'gold standard' to the 'dollar standard', with the U.S. government essentially calling all the shots.

Chapter 2: Unhappiness on the ground

Over the next few decades, the U.S. experienced a number of economic and financial crises, including 1987's Black Monday, the blowup of Long Term Capital Management in 1998, the dot-com bubble in 2000, the 2008 global financial crisis (GFC), and more recently the Covid-19 crisis.

The central bank's and government's response was typical: cut interest rates and print/borrow money to prop up the economy.

There would be no problem with this approach IF interest rates are eventually raised back to normal levels and the debt is paid back.

But as was the case back in Chapter 1, the U.S. leadership did not do the responsible thing; They kept interest rates persistently low and never paid down their debt¹⁰ even after the crisis was over.

fed funds rate
fed balance sheet

A "side effect" of low interest rates, in particular, was the boosting of the stock market¹¹:

stocks only go up

Unfortunately, the stock market rally mostly benefited the rich, as the average American did not invest much in stocks. This worsened the wealth gap, leading to much dissastisfaction on the ground. Unsurprisingly, the central bank was accused of helping their rich friends get richer¹² while everyone else struggled.

percentile net worth

(2019: The top 5% of families benefited most from rising stock prices fueled by near-zero interest rates)

The negative sentiment was especially intense following the 2008 GFC when the government notably "used taxpayers’ money to bail out greedy and incompetent bankers"¹³. People were enraged that the banking elites who caused the crisis not only got away scott-free, but took taxpayers money and paid themselves millions in bonuses¹⁴.

The common perception is that the bankers were not fairly dealt with because they had powerful friends in high places¹⁵. As a result, trust in the government, the central bank and Wall Street took a significant hit and never fully recovered.

This is an important piece of the puzzle that we'll soon revisit. Unhappiness with the American leadership is a significant reason for the rapid adoption of crypto technology.

Chapter 3: Debt crisis

Since the USD was - and is - no longer backed by a scarce asset (which would restrict its issuance), the U.S. could freely print and borrow money whenever they encountered financial problems.

Under normal circumstances, there's no problem with taking on some debt to tide over difficult times... as long as the debt can be paid off.

But with the U.S. debt-to-GDP ratio now accelerating past 120% with no signs of slowing down, people are questioning whether the debt level will ever come down.

us debt to gdp

This is a BIG problem, because this means the U.S. has effectively painted itself into a shrinking corner:

  • If the central bank raises interest rates, many people and businesses are at risk of immediate bankruptcy.
  • If the central bank keeps interest rates low, debt and wealth inequality go up. The increasing debt becomes harder to pay off, and people are at greater risk of insolvancy down the line. Meawhile, imbalances in the economy continue to build up.

Caught between a rock and a hard place, the only thing the central bank can do now is to buy time by printing money, keeping interest rates low, and convincing everyone that things are under control.

In 2020 alone, the U.S. printed almost 20% of all the U.S. dollars that have existed since the birth of the nation¹⁶. This has ballooned the money supply, greatly devaluing peoples' savings:

us money supply

Meanwhile, the government slides even further into debt:

america debt

source¹⁷

And here's the *official* government estimate of future debt levels:

US Federal Debt Held By Public

source¹

This is a scary chart, as it shows that we are likely past the point of no return.

And by the way, the U.S. is not the only country with these issues. Almost every country on earth is in the same boat with burgeoning debt, low interest rates, and no realistic plan to dig themselves out of the growing financial sinkhole they find themselves in.

To summarize:

  • The U.S. is broke. Debt levels are at unprecedented levels and accelerating.
  • Interest rates have been kept near zero for over a decade, building up dangerous imbalances in the economy. If interest rates go up, we'll see a large wave of defaults and bankruptcies.
  • With interest rates already at the lower bound, there is no other way to manage financial problems but to keep printing currency.
  • Massive currency printing erodes the purchasing power of the USD, punishes savers, and lowers confidence in the currency.
  • The government has no way out of this cycle; All they can do is keep printing/borrowing and hoping the economy improves quickly.
  • There is substantial dissatisfaction with the political and financial establishment. People trust their leaders less today.

And we're just talking about economics here. There are other structural issues that I haven't touched on, such as an aging population, technology-led deflation and other forces that weigh heavily on global economic growth (this Real Vision video¹⁹ explains more).

The bottom line: This is NOT sustainable. The system is on a one-way road to self-destruction.

Chapter 4: New system, old establishment

The problems I've outlined are not new; The financal and political elites have known about them for years.

This is why the World Economic Forum has been talking about a "Great Reset"²⁰.

In it, they highlight "restoring the environment", "redesigning social contracts" and "shaping the economic recovery".

On the side, they quietly added "financial and monetary systems", as though they thought no one would notice:

great reset

So surprise, surprise; The elites are planning for a "reset" of the global financial system that they've destroyed.

They're implicity saying, "we know we ran things into the ground (while helping ourselves and our friends get richer), but next time will be better! Next time we'll be green, fair, and have sustainable policies!"

The same cycle has repeated many times over the past 50 years: the people in charge abused the power given to them and unfairly rigged the system in their favour. And now that the system is collapsing, they're asking everyone to support the next system they're coming up with.

This time however, few are listening. After decades of getting shafted by the establishment, a strong distrust of them has developed.

In the past, people went along with it because there was no alternative.

But today, we have technology that can solve the age-old problem of power, fairness and trust.

That technology is crypto.

Next: The crypto solution