$1M Bitcoin, Hyperinflation, and Dedollarization Oh My Part 0: Intro and Prerequisites

$1M Bitcoin, Hyperinflation, and Dedollarization Oh My Part 0: Intro and Prerequisites

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May 5, 2023

Why are banks failing? Why do I care? What can I do?

This is the first post in series focused on the financial health of the United States. Crazy claims are being made that the whole banking system is insolvent, Bitcoin will skyrocket to $1M, and the US dollar will lose its status as the global settlement layer. If these claims are even partially true, the impending turmoil will spread much further than the stock or cryptocurrency markets, and could have an even greater impact on the world than COVID did. With this in mind, I set out to try and understand what’s going on. My research has definitely lead to concern, and therefore I feel urgency to share what I’ve found, packaged as palatably as possible. I covet your critique, feedback, and questions. Please let me know what you think!
This series is intended to outline why banks are failing, why it could be a big deal, and how to prepare.

Prerequisite Concepts

Before we dive into what’s happening, I need to introduce a few concepts that are crucial to understand in order to make sense of where the economy is at today and how we got here. While you’re probably already comfortable with many of them, the summaries below will help you brush up on any that are less familiar.
  • Fiat Currency
    • Fiat currency is a type of currency that has no intrinsic value and is not backed by a physical commodity like gold or silver. Instead, fiat currency is backed by the government that issues it and the trust and faith that people have in the government's ability to maintain its value and use it as a means of exchange.
    • The value of fiat currency is determined by supply and demand and is subject to inflation or deflation based on various economic factors, such as interest rates, government policies, and international trade. The government or central bank can influence the value of fiat currency by adjusting interest rates, controlling the money supply, or engaging in foreign exchange interventions.
  • Treasury Bonds
    • A government bond is like a fancy IOU note that the government gives to people who lend them money. When you buy a government bond, you are lending the government some of your money for a certain amount of time, like a few years or even a few decades. In exchange for lending them money, the government promises to pay you back with interest when the bond matures.
  • Federal Reserve
    • The Federal Reserve is the central bank of the United States. It has three main functions: conducting monetary policy, supervising and regulating financial institutions, and providing financial services to the government and financial institutions. The Fed is governed by a Board of Governors and a network of 12 regional Federal Reserve Banks. Together, they work to achieve the Fed's objectives and maintain the stability of the US economy. The Fed is an independent entity that operates under its own authority and is not subject to direct control by the executive or legislative branches of government. However, the Fed is accountable to Congress and must report regularly on its activities and monetary policy decisions. Its Board of Governors is appointed by the President and confirmed by the Senate.
  • Interest Rates
    • Interest rates refer to the cost of borrowing money, expressed as a percentage of the amount borrowed. In the United States, the Federal Reserve has a key role in setting short-term interest rates through its monetary policy tools. The Fed may increase interest rates when the economy is strong and inflation is rising to prevent overheating, and decrease interest rates when the economy is weak and unemployment is high to stimulate growth.
    • Interest rates affect many aspects of the economy, including the cost of borrowing for consumers and businesses, the return on savings, and the value of the US dollar. High interest rates can make borrowing more expensive, which can dampen spending and investment, while low interest rates can make borrowing cheaper and encourage spending and investment.
  • Bond Value vs Interest Rates
    • Interest rates have a significant impact on the bond market. When interest rates rise, bond prices fall, and when interest rates fall, bond prices rise.
    • When interest rates rise, investors demand higher yields to compensate for the increased cost of borrowing. This makes existing bonds with lower yields less attractive, and their prices fall as a result. Similarly, when interest rates fall, investors may be willing to accept lower yields, making existing bonds with higher yields more attractive and increasing their prices.
    • The relationship between interest rates and bond prices can be explained by the fact that bond yields are fixed at the time the bond is issued. When interest rates rise, newly issued bonds with higher yields become available, which makes existing bonds with lower yields less attractive and reduces their prices. On the other hand, when interest rates fall, newly issued bonds with lower yields become available, which makes existing bonds with higher yields more attractive and increases their prices.
  • Yield Curve
    • The US yield curve is a graph that shows the yields, or interest rates, of US Treasury bonds with different maturities, or time periods until the bonds mature. The yield curve usually slopes upward, meaning that longer-term bonds have higher yields than shorter-term bonds. This is because investors demand higher compensation for lending money for longer periods of time due to the risks associated with inflation and economic uncertainty over a longer horizon.
    • A negative yield curve is seen as a warning sign for the economy as it may indicate a pessimistic outlook for economic growth and inflation. It can suggest that investors expect interest rates to fall in the future, potentially because they believe that the central bank will need to cut rates to stimulate economic growth or prevent a recession.
  • How do banks make money?
    • Banks make money primarily through lending and investing activities. Banks lend money to customers in the form of loans, such as mortgages, car loans, and personal loans. Banks charge interest on these loans, which is the primary source of their revenue. The interest rate on loans is typically higher than the interest rate banks pay on deposits, allowing them to earn a profit on the difference, known as the net interest margin. Banks also invest in a variety of securities, such as stocks, bonds, and other financial instruments. They earn a return on these investments through dividends, interest payments, and capital gains.
  • Money Market Funds
    • Money market funds are a type of mutual fund that invests in short-term, low-risk debt securities, such as US Treasury bills, certificates of deposit, and commercial paper. Money market funds are designed to provide investors with a safe and convenient place to park their cash and earn a modest return while maintaining liquidity.
  • Balaji
    • Balaji S. Srinivasan (@balajis) is an angel investor, tech founder, cryptocurrency thought leader, and author of The Network State.
    • Formerly the CTO of Coinbase and General Partner at Andreessen Horowitz, he is an early investor in many successful tech companies and crypto protocols, including Alchemy, Bitcoin, Cameo, Chainlink, Clubhouse, Dapper Labs, Ethereum, Lambda School, NEAR Protocol, Opensea, Replit, Republic, Roam Research, Solana, Soylent, and Zora.
    • He famously raised alarm for the impact COVID would have weeks before the hype. https://twitter.com/balajis/status/1222921758375927808?s=20


Want to tackle this yourself? I’ve relied on the following resources as I’ve tried to understand what’s going on:
  1. Balaji’s initial tweet thread
    1. Ground zero
  1. Balaji explaining his position on Bankless
    1. More detail, as well as an emphasis on how this crisis relates to crypto
  1. Arthur Hayes Kaiseki article
    1. Thorough explanation of banks’ struggles
    2. Introduction to the Bank Term Funding Program
  1. Ben Hunt Bankless
    1. Strong opponent of Balaji’s position
    2. Main arguments
      1. Banks are solvent
      2. Inciting panic is a horrible thing
  1. Jim Bianco Bankless
    1. Moderate assessment of Balaji’s and Ben’s claims
  1. Lyn Alden Bankless
    1. Moderate perspective with an emphasis on macroeconomics
  1. Balaji Fiat Crisis Video/Article
    1. Balaji settled his bet early
    2. His stance hasn’t changed
    3. He emphasizes more causes of concern on top of the regional banking crisis
      1. National debt
      2. Commercial real estate
      3. Credit card debt
      4. Student loan debt

What’s next?

In Part 1, I’ll break down Balaji Srinivasan’s claims, starting with his “BitSignal” tweet, where he claims that a “stealth financial crisis” caused by hyperinflation is coming.