Selini Capital CIO: No matter how big Bitcoin is, the central bank will not accept Bitcoin as an asset

Recently, the US dollar index DXY has continued to rise, and market volatility has increased significantly. What impact will the continued strength of the US dollar have on the market and asset prices? What measures will the Federal Reserve take to affect the liquidity level of the US dollar? What will be the future trend of cryptocurrencies such as Bitcoin and Ethereum? Blockworks co-founder Michael Ippolito invited Selini Capital's CIO Jordi Alexander to discuss this. BlockBeats compiled and translated it as follows:

Michael: Welcome to today's episode of "On the Margin". Today I'm joined by Jordy, the CIO of SELINI Capital. Hello, Jordy, welcome back to the show.

Jordy: Thank you, Michael.

Michael: First of all, I would like to talk to you about the macro issues. Can you tell me about your macro forecast for the coming year and what things you will pay attention to?

Jordy: First is liquidity, which is a big driver of asset prices in financial markets and permeates the economy in various ways. People have become so used to it that they forget it is not a permanent state. Although liquidity conditions have eased, I am still concerned about the liquidity in the system. We can see that households and businesses in the United States, as well as households and businesses in some other developed countries, still have a lot of cash on hand, which will determine whether we have escaped inflation or have escaped austerity. But I think it will be difficult for us to escape these until liquidity is under control. In addition to this, I am also concerned about relative interest rates around the world, which I think is what ultimately drives currencies, not countries that use dollars to borrow. Of course, interest rate policy is crucial, but it also depends on how central banks choose between inflation and recession, and how far they want to go. In the long run, a lot of the situation will still be dictated by future economic conditions.

Michael: Since you have been paying attention to the strengthening of the US dollar recently, let's talk about this topic first. In the previous show, Brent talked about his "dollar milkshake theory", pointing out that liquidity will decrease due to the shortage of US dollars. Why do you think the US dollar will strengthen in the future? Why is the strengthening of the US dollar an issue that we need to pay attention to from a macro perspective?

Jordy: It is true that the international community has been demanding the US dollar, and the US dollar has advantages that other currencies cannot replace. But in reality, once a crisis occurs, the Federal Reserve will provide a large amount of US dollars to the international market. The result is that the US dollar interest rate rises, which in turn drives up the currencies of other countries, but countries like Japan cannot afford the high interest rates. In my opinion, the advantages of the US dollar are now being abused. The government is printing more US dollars and using the money to buy foreign bonds to create a larger balance sheet.

Michael: There are two main entities that are influencing liquidity levels: the Fed and the Treasury, which issues bonds and the Fed buys them. Since March 2020, the Fed has released a lot of liquidity to the market, which is now being pulled back due to quantitative tightening, and the market has reacted significantly. Can you share with us your views on future liquidity trends and how it will affect asset prices? Do you think the Fed will enter a pivotal state and secretly inject liquidity into the market?

Jordy: Quantitative easing policies always last for a long time, while quantitative tightening is much shorter, and the official balance sheet has been expanding, which has become a normal state - the cumulative deficit level may gradually reach 5 trillion or even 10 trillion from the previous 1 trillion. Compared with the decline in asset prices, the indirect inflation caused by the increase in the balance sheet amount is more critical, and the decline in purchasing power has made many people dissatisfied. Trump has slowed down this trend, and more poor people want to be consistent with the rich in terms of rights. In order to prevent the collapse of asset prices, the Federal Reserve began to provide universal basic income to improve the lives of some people and maintain social cohesion, which is also the current official priority.

Michael: I agree with you. It has always been believed that the Fed should be responsible for stabilizing prices and improving unemployment, and the former is even more important. So how do you think the universal basic income measure will be implemented, which groups of people can get relief, and what will be the mechanism of transfer payments?

Jordy: At present, the government has two main tools for redistributing wealth: taxation and welfare. For example, they can provide welfare to specific groups of people, or they can impose taxes on certain types of income of the rich. For example, Spain recently began to impose a 5% tax on banks. However , in the United States, it is very difficult to improve distribution by raising taxes, and the rich will try every means to transfer assets abroad. Therefore, distributing welfare has become a more reliable way, and the government can provide subsidies for people's basic living needs (according to Maslow's hierarchy of needs theory). However, this approach cannot solve the problem of inflation.

Michael: Can you talk about how measures like universal basic income can meet the basic needs of the American people through transfer payments, and how it will affect the financial market? Because I think that although Gavin Newsom reduced California's gasoline tax and reduced people's burden, it will eventually further push up gasoline prices, so I feel that these measures will eventually cause inflation.

Jordy: These measures will indeed lead to inflation, and I think this phenomenon will be cyclical and will not go away easily. Inflation levels may indeed remain unchanged in the short term, allowing prices to stabilize for a few months, but then they will soar again. At the same time, once liquidity levels in the market decrease, prices will continue to rise, causing the economy to stagnate or even cause stagflation. It is also easy for financial markets to fall into this cycle because if yields start to fall, asset prices will rise, and companies will over-hire and over-spend, causing inflation to rise, and then officials will have to start tightening policies. So when you think about it from a first principle perspective, it is easier to see the end game and the balance of the economy. Obviously, the excess wealth and purchasing power cannot flow to asset prices all the time, because those assets are owned by 10%-20% of the people. So we will have to create wealth for 50%-60% of the people, no matter what method is used. We can imagine that there is a wall in front of us, and a huge wave is hitting it. There will always be a moment when this wall will break through - whoever can introduce the right bill to achieve this goal will become the president.

Michael: So what is the end game you mentioned? According to you, how can we make water pass through the wall?

Jordy: I ​​think the most likely scenario is that central banks will eventually become tools of power, and central banks around the world will gain unprecedented power, not only to have more private information, but also to gain control. Since 2020, the Federal Reserve has bypassed the financial system to directly incentivize certain economic behaviors, targeting specific groups to increase purchasing power, including the time and place of consumption. For example, in Singapore, you will receive a message on your mobile phone saying that you have received 200 yuan and can spend it at the food center within two months. This approach can guide the specific flow of money and purchasing power, because a simple loose policy will only allow assets to flow to the rich.

Michael: It is true that the Fed has tried to intervene, for example, in 2020, the Fed has carried out a series of interventions, which is quite unprecedented. They have purchased corporate bonds and made direct loans to small businesses. The authorities sometimes want to intervene and block this transfer of funds in the short term, but it is impossible to succeed in the long run. Another thing is that I also think that if the liabilities of the Federal Reserve are direct fiat currency, it will cause great inflation, because the reason why we separate the Treasury and the Federal Reserve is to ensure that the liabilities of the Federal Reserve will not become legal tender, so as to avoid massive inflation. Do you think that how the liabilities of the Federal Reserve become legal tender will have a big impact?

Jordy: I ​​think that in order to really cause inflation, money has to flow to people who want to spend it. If you just give money to the bank and the bank doesn't release the money, then it won't cause inflation, and the money won't enter the real economy. Not only on the demand side, but also on the supply side, inflation is reflected, and both are increasing, but we don't know how much they are changing. My thoughts on these issues are that if people are just willing to keep money in the bank, it won't cause inflation. However, people will always want to exit this mode and buy something real. Although the US dollar is the most powerful currency, it is still just a fiat currency, just some paper money, and people will always want to use it to buy real assets. Then, when people put money into the market at the same time, it will definitely cause inflation.

Michael: As far as I know, there are indeed many reasons for inflation, such as geopolitical pressures, which limit the ability of companies to outsource supply chains. The Fed's solution to the current supply and demand problems is just to print more dollars, which seems to cover up the problem, but it is tantamount to hitting a stone with an egg. So how effective do you think the authorities are in solving all these problems, and what risks do they have that have not been fully explored?

Jordy: Every place will tend to protect its own people. So the dollar becomes a weapon, and places will print a lot of money to buy dollars and foreign debt to increase local purchasing power. In this way, the dollar will be abused, its status as a reserve currency will be reduced, and it will have an adverse impact on the international economy. Therefore, as long as the dollar is in this position, many people will use it for this purpose, so at some point there will be a rebound against the dollar, and the question is what will happen then. The euro is in a completely different world. In the years it has been in operation, it has helped the finances of countries such as Spain, Italy, and Greece. But I think the idea of ​​Europe intending to achieve unity through monetary unification is a bit crazy because it is difficult to ensure that every country has the same monetary policy. However, for now, European unity will remain, but it is difficult to predict what will happen in the future. Some people may think that Bitcoin can be an alternative, but I think the reason why people use Bitcoin is that they want to have something that is not regulated. So even if the number of people using Bitcoin increases tenfold, it will not be included in the balance sheet of the central bank.

Michael: I know you are a supporter of Bitcoin. Can you talk about the future trend of Bitcoin, such as whether the era of hyper-Bitcoin will come? What do you think will be the best development of Bitcoin in the future?

Jordy: I ​​think it is difficult for Bitcoin to become a global unified currency , because in addition to the long-term problems it needs to solve, Bitcoin's biggest advantage is also its biggest weakness - Bitcoin's protocol is difficult to change. So even if someone says we need to solve the security problem within a hundred years, miners will not have the motivation to create security for the network because they don't get enough Bitcoin, and then Bitcoin's predictability and immutability become its biggest weakness. The second is the issue of quantity. There are only 21 million Bitcoins in the world, but the population is billions. No one wants to have only a pitiful 0.006 Bitcoins in their wallet, because they are used to the US dollar and used to having a large amount of currency.

Michael: In your opinion, is there a perfect monetary system that can continue to work for thousands of years? If we look back, we will find that most monetary systems can only exist for a period of time, and then its fatal flaws will be exposed, and then we can only keep adjusting it. Do you think we have not yet found the perfect solution, or are we gradually discovering a better system?

Jordy: I've been thinking about this over the years, but I've found that it's very difficult to get all the features we want in a system, such as fair distribution. Once the distribution in a system is no longer fair, it will definitely fall apart. In my opinion, incentives are crucial for any monetary system, and we need to know which forces will support or oppose the system under incentives. For Bitcoin, some people may have a lot of it, while others don't, and its distribution is indeed difficult to be fair. At this time, some people have some extreme ideas, such as setting up a world currency and giving one to everyone in the world. This seems fair, but soon someone can go to Africa and buy millions of this currency. So it's hard for us to find an absolutely perfect system. We can only say that Bitcoin is more suitable for our current situation. As for gold, I think its era is over and it is almost impossible for us to see it regain its glory.

Michael: Why do you think so?

Jordy: Bitcoin, as a digital version of gold, has many superior properties, while gold does not. First, the central bank can control the gold in its hands; second, gold is difficult to move and difficult to verify. The people who really control gold are basically millennials and baby boomers, and they are the only ones who will tell us that gold is hard currency. At present, it seems that countries like the United States, China and Russia have most of the assets, so only officials or people in their 70s and 80s need to transfer their wealth.

Michael: If Bitcoin eventually succeeds, what does that mean for other cryptocurrencies? One of the difficulties of investing in Bitcoin actually comes from psychological analysis, that is, when it goes up, tokens like Dogecoin will go up more. So, how do you view other tokens in the Crypto ecosystem, such as Ethereum, and how will other tokens develop in the future?

Jordy: I've written a little bit about this, and I've proposed a tragedy of the commons, where there are more beta coins like you said. If people just see the rise of Bitcoin, see the wealth of the digital ecosystem, see the market cap of digital assets go from 1 trillion to 3 trillion, then they're going to want to take advantage of the situation, and then the whole system will collapse on itself. In the long run, the people who own Bitcoin, the people who really get rich, are not going to be the ones chasing gambling stories, or the ones who try to change all this in 10 years. I'm pretty confident that we won't have that effect anymore, because by then the people who own Bitcoin will be the ones who are good at saving money, thereby retaining their purchasing power, and not engaging in high-risk activities. Ethereum is going through a huge change, and eventually it will become a macro asset. If enough people use Ethereum every day, it can become a currency, but that's still quite far away. If the price of block space drops and people can send transactions cheaply, then Ethereum has the potential to become a commodity. Not only that, the Crypto field needs many other things, first technology, then L1 and cross-chain bridges, and reliable wallets. In the next stage, we should design super applications, just like Facebook is used by billions of people, to expand the use of Crypto around the world.

Michael: The last thing I want to know is, what is your prediction for asset prices next year?

Jordy: At present, we cannot implement a free economy, but we must intervene in the economy as necessary. However, we do not have very suitable candidates to implement these policies, so we can only try different methods, first a soft landing, and then a hard landing. However, if these measures are not handled well, they will inevitably cause large-scale riots. In my opinion, asset prices will not rise sharply at least in the next year, but will only fluctuate like a sine function, and every strong rebound during this period will extend the inflation cycle. On the debt issue, due to fiscal policy and official revenue and expenditure, bond yields will be controlled, so no one will be willing to buy US Treasury bonds, so only the elderly or banks can buy them. So I would say that bonds still have room to fall, and at some point in the future, we will have a crisis on the long end. I think Crypto will outperform stocks because it has more return potential. I do think that tactically, you can do well in Crypto, but it is difficult to choose the right Token. I ask myself every morning if I have FOMO right now, like am I worried that if I don't spend money to buy 10 Bitcoin today, I won't be able to afford 10 Bitcoin in a month. If that's the case, then I should do something, but I don't feel any FOMO right now. I think we will encounter more declines and more troubles in the future, so before there is a real feeling of FOMO, I think Crypto will still maintain its current status, but it may also jump up in the future.

Thank you, Jordy, that's great advice. But while I'd love to continue talking to you for another two hours, we have to end it here. If people want to learn more about you, they can follow you on Twitter.

Original title: Inflation Is Driving Demand For UBI | Jordi Alexander

Original source: Blockworks Macro Podcast

Original translation: Kxp, BlockBeats