iftttwall

Authored by Martin Enlund via Nordea,

Could Bitcoin undermine the dollar and the United States? Perhaps. We do see reasons to mull the long-term value of the dollar – not primarily because of cryptocurrencies, but due the country’s economic-political choices and China’s continued rise…

Investor and entrepreneur Peter Thiel recently wondered if not “Bitcoin should … be thought [of] in part as a Chinese financial weapon against the US”.

To try to explain what this could mean, we turn to recent economic research on fiscal and monetary capacity.

Fiscal capacity refers to a state’s administrative and political ability to tax its population, and monetary capacity refers to the degree to which the state can get its citizens (and others) to hold the state’s currency – in Thiel’s case the world’s most important reserve currency – the dollar. In 2020, Bonfatti, Brzeninski, Karaman and Palma suggested in their article Monetary capacity a model in which fiscal and monetary capacity go hand in hand.

Public demand for dollars depends on inflation ­expectations (you do not want to hold zero-return notes when inflation is high). Low inflation expectations thus improve monetary capacity as more economic agents will want to keep a currency which is expected to maintain its (real) value.

In turn, high monetary capacity leads to greater fiscal capacity for example as liquid and transparent financial markets facilitate taxation and administration. And a greater fiscal capacity leads to a more credible monetary policy in the form of lower inflation expectations. And this naturally means stronger monetary capacity! A benign cycle is the result.

Chart 1. A benign cycle between monetary capacity and fiscal capacity…

Before we return to what Peter Thiel (perhaps) meant, we can take a look at US’ fiscal policy at the end of 2020 and compare it to the situation in Sweden in 1993. In the early 1990s, Sweden experienced an enormous economic and financial crisis, and was forced off its currency peg in late 1992. To eventually stabilize interest rates and the Swedish krona, Sweden had to spend several years doing structural reforms while engaging in fiscal austerity. While it is surely problematic to directly compare the world hegemon the US, the dollar and its status as the prime global reserve currency, to Sweden and the Swedish krona, we do so anyhow for illustrative purposes.

Chart 2. Government debt and budget balance, US vs Sweden – oops?

In the chart above we see that the US’s government debt is already twice as high (as a share of GDP) as Sweden’s was in 1993, and by the end of last year its budget deficit was twice as high as Sweden’s was by end-1993.

And this is before the new US infrastructure programme which risks being partly unfunded, which could lead to a higher deficit and increased debt. Moreover, if the US is serious about its new cold war with China and with Russia (Nixon split China and the Soviet Union – Biden seems to do everything he can to push Putin into the arms of Xi), and about a ”new green deal” to be able to ”build back better”, then you may ask if we aren’t just seeing the beginning of massive fiscal expansion (which might make the aforementioned budget metrics even worse).

Chart 3. Budget and current account deficits a possible structural headwind for the dollar

If, based on the above comparison of public finances, we were to conclude that the US’s fiscal capacity has decreased, we should also see increased inflation worries. Since the spring of 2020 this is something that has been seen across financial markets. During the winter of 2021 a well-known investor (Michael Burry – made famous by the book and movie The Big Short) even warned of a Weimar-like development. While he might mostly have been talking his book, increased inflation worries – or rising inflation expectations – could lower monetary capacity.

But back to Peter Thiel. He might be worrying that the US’s monetary capacity could be eroded by growing competition from, cryptocurrencies. For instance, unlike the (fiat) currencies we are used to, Bitcoin is designed to be deflationary. No central bank or banking system can create trillions of new Bitcoins.

If businesses and households were to decide to (and be allowed to?) increasingly hold cryptocurrencies instead of dollars, the US risks could experience decreased monetary capacity (and in the long term perhaps also fiscal) capacity – perhaps even a vicious cycle between the two?

Chart 4. Does a vicious cycle between monetary capacity and fiscal capacity beckon?

However, there is another and greater threat against the US’s monetary capacity. China’s e-currency DC/EP (Digital Currency, Electronic Payment), which is planned to be widely demonstrated no later than at the Olympic Winter Games of 2022, likely presents an even bigger challenge, however, for similar reasons.

As China’s GDP and role in world trade continue to grow, it seems natural to expect that countries, especially its neighbouring countries, will to a larger and larger extent start to use China’s currency as both invoicing and financing currency. And if demand for China’s currency increases, the appetite for dollars will decrease, which – keeping everything else equal – lead to reduced monetary capacity, which leads to decreased fiscal capacity. And so on.

Chart 5. The dollar’s share of the world’s currency reserves – gradually but slowly decreasing

For all that, the dollar is likely to remain the world’s most important reserve currency for many years, perhaps even decades.. We do think there are reasons to doubt the general value of the dollar over the long term, however, not primarily because of the development of cryptocurrencies, but more due to the country’s economic-political choices (fiscal expansion, re-regulation and taxes) as well as China’s continued growth. 

You can read more about our long-term concerns here, and our latest (actually somewhat dollar-positive) financial forecasts here.

April showers bring May flowers.

Not this time around. Weather models suggest significant snowfall could be seen in higher elevation areas across the interior Northeast. Maybe Old Man Winter is about to put up his last fight for the season (let’s hope so).

The Weather Channel’s Felicia Combs reports, “snow will be falling across the Northeast to round out the workweek. Mountain snow will add up to feet in portions of the Green Mountains. Elevation will make all the difference in what snow sticks around.”

Five states have already published alerts for snow from upstate New York to Maine. A winter storm warning is in effect for Massachusetts, Vermont, New Hampshire, and Maine, where higher elevations could receive upwards of 18 inches. 

Heading into this weekend, the National Weather Service tweeted: “Which season is it?” 

(1) Snow will taper off across the Northern Plains today. (2) Heavy snow in the Central Rockies lingering through Friday. (3) Flash flooding possible in the Lower MS Valley through Wednesday. (4) High terrain snow in the Northeast Thursday night/Friday.

Old Man Winter is not giving up yet (nearly a month into spring) as a new snowstorm approaches the Northeast. 

Authored by John Tamny via RealClearMarkets,

For over a year well-to-do Americans have quite literally been “quarantining” packages shipped to them,  and that were dropped off at their residences by “science-denying” untouchables who lacked the means to similarly “shelter-in-place.”

The package-terrified have usually waited 48 hours before handling said box and contents.  

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What about the Clorox wipes that were never in stock thanks to frantic science believers clearing the shelves of them? Some never left their homes. 

Of course, when the corona-fearful actually ventured outside, they wore gloves while still not touching anything. They jumped out in the street when passing another human since, well, you know, the very humans who’ve driven all progress for millennia were suddenly a lethal menace to one another. But the main thing is that if they had to risk their lives by being in public, the science reverent more than masked up: they wiped down everything they came near.  

Even though airlines were sending out texts ahead of boarding meant to comfort the nail-biting about plane interiors that had been thoroughly scrubbed, passengers still brought their own wipes on planes; that, or they accepted wipes from flight attendants in order to double up on the work done by maintenance. At present, Hilton essentially co-brands its rooms with Lysol…. 

Oh well, apparently all that hand wringing about surfaces was a tad overdone. Last week the CDC announced that the risk of contracting the virus by touching a “contaminated” surface was somewhere in the neighborhood of 1 and 10,000. Another myth born of Covid-hysteria has bitten the dust.  

Since it has, the reasonable in our midst can only hope that Corona-celebrity Anthony Fauci is asked to comment on the new findings. They’re very telling, and not solely because what was once believed deeply has turned out to be so wrong.  

But since all the hysteria about surfaces has been revealed as much ado about nothing, it’s worth starting there. More realistically, it’s worth traveling back in time nearly 40 years to 1983. It was then that Fauci asserted in a paper that “routine close contact, as within a family household” could spread AIDS. To say that Fauci was wrong brings new meaning to understatement.

At the same time, Fauci’s false assumptions in ’83 don’t indict him. Back then little was known about AIDS. Doctors were flying blind as it were, so they worked tirelessly to learn more.  

Applied to the present, all-too-many on the left have hysterically criticized the “science-deniers” in their midst who are only deniers insofar as they haven’t always accepted the present consensus about the coronavirus. As opposed to deniers, these skeptics were just being reasonable. Think about it. It’s not “science” if there isn’t doubt.  

And as Fauci’s incorrect assumptions from long ago yet again remind us, there’s so much we don’t know. There’s so much we get wrong in the early days as we’re learning. In the 1980s the view from the NHS experts in England was that one in five Brits would contract AIDS for which there was no cure. Even in hyper-lefty Hollywood, homosexual actor Tony Perkins went to great lengths to hide his AIDS diagnosis given his reasonable belief that he would never work again. Hollywood had overreacted. By many miles. How little we knew.  

That so many got AIDS so wrong not too long ago should hopefully cause the hysterical of the moment to perhaps dial down their certainty. What you believe likely won’t age well, which is the point. It explains why so many of us were so horrified by lockdowns.  

You see, we weren’t solely against lockdowns because we deny science or that we don’t care about the virus, or didn’t believe it existed. In truth, we were against the lockdowns because freedom produces abundant information in addition to being a virtue on its own.  

We were also against the lockdowns simply because force is superfluous if something threatens; particularly if the threat is thought to be lethal. About Covid’s lethality, doesn’t the latter explain why some of the science-worshipful were so terrified, and so desperate to “quarantine” packages, wipe down doorknobs, and avoid human contact? OK, but if you were that scared, then what was the point of forced lockdowns?  

Indeed, as has been made plain, the fearful were already going to great lengths to do what they thought would protect them from the virus. The latter yet again explains the lack of Clorox wipes, masks, etc. It’s a reminder that people didn’t need to be forced.  

No doubt the fear expressed by the scrubbers and washers has proven overdone and unwarranted in retrospect, which speaks to why freedom of action during “crises” is so important. In other words, those who threw caution to the wind and who couldn’t be bothered to disinfect everything were just as important as the corona-obsessed when it came to finding answers. Arguably more important. The “deniers” provided information about virus spread that the “believers” could not. Get it?  

In this case, the deniers who lived their lives were correct. Avoiding all contact proved idiotic. The “doubters” had science on their side.  

It’s all yet again a reminder that hysterical certitude isn’t the same as knowledge. Emotion is its own form of denial.

After Biden imposed tough new sanctions on Russia in response to alleged election ‘interference’ and cyberhacks Thursday morning – foremost among them in response to the SolarWinds incident – the president is scheduled to follow-up with televised remarks on Russia around 4:30pm Eastern time. 

LIVE FEED (address is due to start at 1630ET):

He’s expected to address the Kremlin’s “malign activities” including the current Russian troop build-up near Ukraine, the Alexei Navalny affair, the “Afghan bounties” allegations, and of course all things ‘Russian election meddling’. 

All of this will no doubt further chill US-Russia relations, already at a low-point, despite Tuesday’s Biden-Putin phone call wherein the US president offered to meet with Putin face-to-face “in a third country in the coming months.”

Later in the day Thursday following the White House and Treasury sanctions announcements, which further included the US banning banks from buying new Russian sovereign debt starting June 14, White House press secretary Jen Psaki fielded questions over the executive order and claimed, “Our objective here is not to escalate.”

She explained: “Our objective here is to impose costs for what we feel are unacceptable actions by the Russian government,” in the briefing.

“We can’t predict what the impact will be, but we still believe that when there’s unacceptable behavior, we should put consequences in place,” Psaki said. 

The Kremlin’s first move was to summon the US ambassador for a “difficult conversation”. The Moscow Times previews where things are expected to go from here as follows:

• Russia has hit out at the imposition of sanctions, warning their introduction is not conducive to the proposed Biden-Putin summit going ahead in the near future.
• Russia immediately summoned U.S. Ambassador John Sullivan to the Foreign Ministry for what spokesperson Maria Zaharova said would be “a difficult conversation.”
• Russia typically responds to diplomatic expulsions in a tit-for-tat move, and is expected to expel 10 American diplomats from the U.S. embassy in retaliation. The Foreign Ministry said Thursday a Russian response was “inevitable.”
• Yevgeny Prigozhin said he was being sanctioned for his “humanitarian actions” in Africa. 

And the report has a quick overview of the extensive US actions targeting Russian government entities, officials, companies, and the economy Thursday…

• U.S. financial institutions will be banned from taking part in new Russian government bond auctions from June 14.
• The U.S. expelled 10 diplomats from the Russian embassy in Washington D.C., a group it alleges “includes representatives of Russian intelligence services.”
• The U.S. sanctioned 32 other individuals and legal entities it deemed responsible for “carrying out Russian government-directed attempts to influence the 2020 U.S. presidential election, and other acts of disinformation and interference.” They will not be able to travel to the U.S. and any assets based in the U.S. will be frozen. 
• Among the sanctioned outfits were a host of entities controlled by “Putin’s Chef” Yevgeniy Prigozhin, who was recently added to the FBI’s wanted list and is linked to the Wagner private militia group which has been deployed to various conflicts in Africa, Syria and eastern Ukraine.
• Three companies involved in constructing the Kerch bridge, which links Crimea to Russia were sanctioned, as well as five Crimean government officials, including the head of the FSB security agency and the Investigative Committee on the peninsula.
• Six Russian technology companies with links to Russia’s Defense Ministry were also sanctioned for “developing tools and infrastructure to facilitate malicious cyber activities.”
• The U.S. “formally named” Russia’s foreign intelligence service (SVR) — “also known as APT 29, Cozy Bear, and The Dukes” — as responsible for the SolarWinds cyber attack, described by the president of Microsoft as the most sophisticated and advanced hack in history. It follows earlier official comments that the U.S. believed Russia was “likely responsible” for the cyber attack.
• No new measures against the controversial Nord Stream 2 pipeline were announced.