The asset that’s missing
“Genius hits a target no one else can see.” — Schopenhauer
So what do we mean by the asset that’s missing? Plainly, we mean an asset that integrates the best of fiat monies (like the dollar) and commodity-monies (like gold or Bitcoin).
But which qualities do we strive to keep from one and borrow from the other? Asked another way, “What are the virtues and vices of fiat and commodity monies?”
The short answer is fiat monies are great for near-term stability but they lose value to inflation, are highly censorable—and being directly tied to the rise and fall of sovereign states, they’re not durable.
Commodity monies on the other hand, are highly durable, uncensorable, and absolutely scarce (ie: we can’t arbitrarily increase the supply of gold or Bitcoin causing price inflation). They’re just not stable enough for commerce.
The asset that’s missing isn’t a digital dollar, we already have dollars. And as much as we love Bitcoin it can’t be a digital gold, we already have gold. We said missing remember? It’s something:
<< Much lessinflation-prone than fiat monies>> Much morestable than commodity monies== Similarlydurable / uncensorable to commodity monies
What’s being described here, is akin to a really low-volatility gold.
This may sound backwards, but bear with me. Stating the obvious, the dollar’s purchasing power has declined profoundly over time against gold; there’s a clear winner.
But the fact is, over shorter time horizons gold’s swings are just too big for use as an alternative demand deposit that supports commerce.
US Dollars are used predominantly globally for both debt and trade invoicing
Today, if you’re an emerging market importer with a trade agreement in place to purchase $100M of wheat per year, you really have to keep a lot of USD around to honor that agreement regardless of whether you’re buying from a US exporter. Trade invoices are predominantly denominated in dollars.
- Invoicing of International Trade: An overwhelming fraction of international trade is invoiced and settled in dollars. The dollar’s share as an invoicing currency for imported goods is ~4.7. times the share of US goods in imports¹.
This gives rise to a global mass demand for safe dollar deposits (held in order to honor invoices) which in turn makes it cheaper to borrow in USD. For this reason, debt is also predominantly denominated in dollars.
- Bank Funding: According to Bank for International Settlements (BIS) locational banking statistics, 62% of the foreign currency local liabilities of banks are denominated in dollars. Dollar liabilities of non-U.S. banks are on the order of $10 trillion, and are roughly comparable in magnitude to those of U.S. banks².
Businesses, governments, and individuals across the world borrow and invoice in USD, even if their revenues are booked in a local currency. They simply take on the risk of losing value to dollar-appreciation — and don’t really have a choice.
This sort of denomination is deeply entrenched, well studied, and self-reinforcing. As such, the dollar’s dominance as a global unit of account will not be challenged anytime soon.
Some alternative demand deposit (or store of value checking-like account) might be able to compete, but even outside the US, any alternative asset would need to be less inflation-prone than the USD, censorship resistant—and reasonably stable.
What would a low-volatility commodity-money look like?
So what if a commodity-money like gold or Bitcoin was made significantly less volatile?
This is worth asking now because it has recently been made clear this sort of low volatility commodity money can be extracted durably and scalably from existing commodity monies by reorganizing a medium volatility asset into high and low volatility perpetual derivatives.
Here’s what 1/10th gold volatility looks like compared to inflation:
And this is what our hypothetical low-volatility gold’s inflation-adjusted price plotted against USD purchasing power looks like:
If such an asset’s purchasing power curve were to resemble what’s pictured above, it could in theory be held as an alternative safe asset to dollar demand deposits filling a massive void in the global market—the benefit of which would be healthier competition and diversification from the risks of global dollar dependence.
Now you might be wondering: Why make commodity-monies more like fiat and not the other way around?
The answer: because one is less than three.
Taking a commodity-money which nearly fits the bill and tweaking one thing to make it more stable is far more reasonable and achievable than modifying fiat-money—which merely appears to nearly fit the bill—three ways to become inflation-resistant, uncensorable, and durable.
The blockchain technology newly enables the creation of commodity-monies and significantly lowers the barrier to entry for creating simple banks. This is a gift, we should take it.
The same technology simply does not enable the creation of fiat monies which at their core work on the assumption that adoption can be forced by the state—are fundamentally inflation-prone, and don’t freely trade on markets. It’s a red herring, we should avoid it.
Totally down for some low-vol commodity-money tho,
Evan Kuo
[1]: Gopinath, Stein. (2018). Banking, Trade, and the Making of a Dominant Currency. National Bureau of Economic Research
https://www.nber.org/system/files/working_papers/w24485/w24485.pdf
[2]: Ivashina, Scharfstein, Stein. (2014) Dollar funding and the lending behavior of global banks. Quarterly Journey of Economics
https://academic.oup.com/qje/article-abstract/130/3/1241/1934119?redirectedFrom=fulltext
