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Niall Ferguson on Bitcoin & Monetary Revolution | The Stephan Livera Podcast

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Key Takeaways

  • Historical disruptions such as pandemics can accelerate monetary change
  • Niall Ferguson sees 3 possible future monetary scenarios:
    • Fiat currencies continue to debase
    • Even worse, a multi-country adoption of a Chinese central bank digital currency, essentially a system for monetary surveillance
    • Multiple forms of money coexisting, with Bitcoin being a reserve asset akin to digital gold
  • The notion of safety in diversification is central to most finance theories. However, “when correlation goes to 1, diversification can’t save you” – Niall Ferguson
  • Many economists underestimate how the quickly the economy will bounce back once vaccines are introduced
    • Rational investors look for real yield and could start existing dollar denominated bonds in response to inflation
    • Keep in mind, “you don’t need a significant move in rates to make the debt burdens of the developed and developing world suddenly quite scary” – Niall Ferguson
  • Bitcoin is tricky to confiscate and offers superior security in a world of totalitarian control
  • Financial technology will obsolete whole sectors of finance and move them to platform- powered smartphone apps
    • For instance, cross border remittances, and venture funding

Books Mentioned

Intro

Bitcoin First Impression

  • It’s common for people to dismiss Bitcoin when they first hear about it
    • This was the case for Niall when his son first introduced him to Bitcoin
      • Niall’s advice, take the views of your children seriously on most issues, you will learn from them
  • Many predicted Bitcoin’s demise because its success would pose too big a threat to the long-standing state’s monopoly on money
    • However, Bitcoin has now grown to over $350Bn with many recognizing it as a nascent store of value and is likely to continue appreciating
    • “Where people like Nouriel Roubini were predicting that bitcoin and everything else would go to zero, I realized that was wrong” – Niall Ferguson
  • Ponder this, If every millionaire puts 0.2% of their net worth into bitcoin, then you are talking $15K bitcoin price
    • More so with sentiment changing among larger investors and increasing institutional adoption (e.g. PayPal, Square, etc.)

Pandemics and Monetization

  • Historical disruptions such as pandemics can accelerate monetary change
    • For instance, the Black Death pandemic of the 1340s accelerated the monetization of the English and western European economies
    • The big disasters in history are difficult to foresee and none is normally distributed
  • New technologies force people to think about old school methods. Similarly, crypto forces people to rethink modes of payment and asset classes

Monetary Future Scenarios

  • Niall sees 3 possible future monetary scenarios:
    • Fiat currencies continue to debase
      • Visible in the remarkable dollar expansion in 2020, think of a weaker dollar and higher inflation
    • Even worse, a multi-country adoption of a Chinese central bank digital currency
      • “That’s a system for monetary surveillance”
    • Multiple forms of money coexisting, with Bitcoin being a reserve asset akin to digital gold
      • “I don’t think that Bitcoin is going to be, as it presently exists, a means of payment that we use directly” – Niall Ferguson

Bitcoin as a Reserve Asset

  • In a world of digital abundance, Bitcoin is the only digital scarce asset
    • Thus, it makes sense to own some as a reserve asset for clearing large scale transactions, with another currency or second layer solutions for daily transaction use (e.g. Lighting Network)
    • Under such a system, transactions won’t be all under the direct supervision of the state
      • Note that the state historically enjoys a monopoly over money, but not over coins. That is, it can’t trace every transaction.
  • In short, “Not a completely libertarian paradise where we can do what we like, but a world in which, as in previous eras, we have some monetary autonomy and financial privacy, provided we remain within the law” – Niall Ferguson

Deep vs Shallow Safety

  • Nick Szabo describes how gold and real-estate are subject to the local political and legal environment, whereas trust minimized Bitcoin offers unprecedented deep safety
    • The notion of safety in diversification is central to most finance theories. However, “when correlation goes to 1, diversification can’t save you” – Niall Ferguson
      • Think back to march 2020, a standard diversified portfolio wasn’t protected
  • In a world of states capable of confiscation, there is no such thing as a truly secure asset (Recall Executive order 6102)
    • That said, Bitcoin is tricky to confiscate and offers superior security in a world of totalitarian control
  • “Marxism is an admittingly potent ideology that refuses to die, and its basic objective is to expropriate your land” – Niall Ferguson

Debt and Interest Rates

  • Mainstream economists don’t view the enormous increase in public debt as a problem, and even argue for lower interest rates with no fear of inflation.
    • This new consensus among Keynesian economists will likely influence the Biden administration
  • The aftermath of a pandemic differs from a financial crisis and many economists underestimate how the quickly the economy will bounce back once vaccines are introduced
    • “A vaccine that works is a form of stimulus more powerful than anything in the Keynesian playbook” – Niall Ferguson
    • In short, what if secular stagnation turns out to have been true after the financial crises but not the pandemic?
  • “There is a non-trivial probability that things do surprise in terms of inflation, inflation expectations and that the bond market reacts to that”
    • Rational investors look for real yield and could start existing dollar-denominated bonds in response to inflation
    • Keep in mind, “you don’t need a significant move in rates to make the debt burdens of the developed and developing world suddenly quite scary” – Niall Ferguson
  • Europe could see a repeat of the Japanese financial crisis, which saw an extraordinary rise in government debt, coupled with an aging population and decades fighting low inflation.
    • However, the magnitude of Fed balance sheet expansion makes it an unlikely scenario in the US
    • That said, both consumers and banks are eager to expand once life returns to normal, so the Japanese scenario might not play out at all

A Global Financial Revolution

  • We are witnessing a revolution in financial inclusion, facilitated by smartphones and permission-less innovation on Bitcoin
    • Keep in mind, a significant proportion of global wealth is outside the financial system and can’t be used as collateral
  • Financial technology will obsolete whole sectors of finance and move them to platform- powered smartphone apps
    • For instance, cross border remittances, and venture funding
    • This will result in fees compression and decentralization of the system (and much less Fragile than a centralized approach)
  • The difficulty of establishing property titles is the main cause of poverty in poorer countries, and Bitcoin fixes this

Bitcoin in USA

  • US loves Swift because it allows financial sanctions. However, this represents an opportunity for China to build a parallel, global, totalitarian system
    • The smart US response is to use Bitcoin as part of an alternative architecture with minimal state surveillance
  • “The whole point of the United states is the liberty of the individual, and what’s exciting about Bitcoin is it kind of fits into that model of American decentralized and relatively state free” – Niall Ferguson
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Notes By Mostafa Khaled

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