- In response to the pandemic, the US has been pumping trillions into the economy.
- Caitlin Long believes the dollar will encounter a short squeeze of "staggering proportions.”
- Cryptocurrency is a better bet because it's real equity, Long said.
Amid the current pandemic, banks are furiously pumping credit into the system. It’s like diluting soup, and that could lead to hyperinflation and a collapse in the dollar. And what will be left to consider? Cryptocurrency and gold.
That’s the opinion of Caitlin Long, at least. Long, the CEO of Avanti, a regulated crypto bank set to launch in the US next year, and an advisor to the Wyoming Blockchain Coalition, sees a paradigm shift in the works.
So far, the US has created $2 trillion for a coronavirus stimulus package, nearly all of it out of thin air. With so much borrowed money sloshing around in the economy, she believes the time is nigh for only “real assets” backed by real equity.
The virus burst the bubble
“The virus was the pin that pricked the credit bubble,” she said at Virtual Blockchain Week last night. “A credit bubble has been building in the Western world for more than five decades.”
She's referring to 1971 when the US severed the link between the dollar and gold in lieu of fiat—legal tender backed by government decree. The move gave the government more flexibility in expanding and contracting the money supply, as needed.
It’s no secret that Long is a fan of Austrian economics, which supports the idea that a rigid gold standard is the only way to “sound money.” She has said she became a convert in 2008, during the last financial collapse.
The problem with gold, though, is you can only expand the money supply as fast as you can dig the precious metal out of the ground. But at a time of crisis, when companies need money to stay afloat, that could lead to economic collapse.
In a 2017 podcast, Long said she doesn’t necessarily advocate a return to the gold standard, but she does think money should be equity-backed.
The short-squeezed dollar
Long believes the current crisis brought on by COVID-19 could cause a collapse in the dollar, forcing people to rethink the real value underlying their assets. According to her, the dollar is going to encounter a “short squeeze of staggering proportions.”
IT WAS ONE HELLUVA PARTY for US (& Europe) for >50 years—we consumed more than we produced & hangover has now begun. It seems the dollar is having one more short squeeze higher (predictable). Will “almighty dollar” then go by the wayside, just as “sound as a pound” sterling did?
— Caitlin Long 🔑 (@CaitlinLong_) March 18, 2020
As Long explained it, the system has been designed in such a way that the incentive is to lever up balance sheets and not pay attention to solvency anymore. "A lot of publicly traded companies now running to the Fed for a bailout are those who bought their stock back at higher prices,” she said. (In fact, several major US airline companies are guilty of this.)
“In the old system, the incentive was to lever up and buyback stock and strip capital, and literally hollow out the solvency of the system,” said Long.
That's not going to continue to work well, she said. Because many foreign governments and corporations need dollars to finance trade, the pandemic has fueled massive demand for US currency as investors exit markets and seek stable assets. As a result, the global economy is effectively net short dollars, ergo “the short squeeze.”
In response to that demand, the US is overissuing dollars. But once the crisis passes and demand drops, the value of the dollar will not be sustained, Long said.
When that happens, balance sheets will start to matter again, if not now, then in the next crisis, she said. "We want to understand what assets we own that are nobody else’s IOU.” According to an earlier story she wrote in Forbes, that means assets that are no one’s liabilities and have no counterparties. Examples of other equity-based assets are land, physical commodities, and personal property.
And that, of course, leads to crypto, which she refers to as a “naturally equity-based asset.” As long as you own your private keys, nobody else can lay claim to your crypto, argued Long. She compared owning private keys to Bitcoin to owning a deed to real estate or owning an actual physical gold bar. “Those are assets that are no one else’s IOUs.”
Long cautioned that when it comes to stablecoins, however, because many of those are actual IOUs. In fact, several stablecoins, most notably Tether, are purportedly backed by the US dollar.
“If you look at the volume of crypto assets that trade every day, well over a third are stablecoins that are backed by IOUs. And also 25% of Bitcoin and Ether are held in third-party custody, so those are IOUs, too,” she said. (She failed to mention another shortfall of cryptocurrencies, such as bitcoin, is their wild volatility. In 2018, Americans lost $1.7 billion trading bitcoin.)
In closing, Long advised folks to examine their balance sheets to see which assets might be someone else’s IOU. And along that same line, she said that we have “no clue” whether some cryptocurrency exchanges are solvent. That is because unregulated exchanges are not subject to third-party audits.
“I for one would be happy if some of the weak balance sheet players flushed out of this industry and let the strong balance sheet players who are providing valuable services, and helping crypto adoption rise [like] cream to the top,” she said.