In Part 3, I highlighted the most popular counterarguments to Balajiās claims. Hopefully it was encouraging to see something other than doom and gloom!
A Fiat Crisis is Coming
Why?
Balajiās initial claims were clickbaity and too focused on the banking crisis. He did this to draw maximal attention to the message, not to pump his bags as some claim. Since he initially spoke out, the BTFP has mitigated some of the bank run fear, and he has settled his $1M Bitcoin bet early. Heās also written a more balanced article on the impending fiat crisis that I largely agree with. He posits that the US dollar will be dramatically devalued by either unprecedented money printing or a hard default on our debt. In addition to the precarious situation the bond crisis has created for banks, the US is also facing a massive debt ceiling, a record-breaking commercial real-estate crisis, astronomical credit card debt, $1.8T of student loans that the country has gotten comfortable not making payments on, gradual dedollarization throughout the world, and even potential for massive military conflicts.
Thereās so much thatās simultaneously broken in the economy, even after (and partly because of) the artificial prosperity of 2021. There arenāt enough healthy sectors to bail out the failing sectors. Too many things are failing at once. - Balaji Srinivasan
The fundamental claim is that all these messes will require some form of money printing or loan default in order to get out of. Weāve swept so much under the rug that itās become a mountain and dust is spilling out. This will inevitably weaken the dollar through inflation and/or damaged trust.
If youād like to understand the different crises the US is facing, read the article and/or watch his explainer video for more context and sources.
When?
All empires come to an end. The āgreatest country on earthā has been increasingly mocked as the US has fallen behind in many societal metrics in the past decade. Our de facto belief, even if we theoretically understand the eventual demise, is that the US will thrive for centuries. Most of us have never considered anything otherwise. Balaji uses an āorder of magnitudeā model where he applies percentages that the fiat crisis will happen in months, years, decades, or centuries.
I think the US has a 10% chance of defaulting in months, 70% chance in years, a 19% chance in decades, and a 1% chance of making it to centuries - Balaji Srinivasan
He polled his following on Twitter and got similar probabilities. Significantly more people expect the crisis to occur in less than a year, but many also expressed their faithfulness in the banking system to last centuries.
Personally, I align closely with Balajiās percentages. I was shocked to find he only assigned a 10% chance to the crisis coming in months based on the urgency of his initial posts, however Iām unwilling to assign a higher likelihood that something happens in the short term than he did. āYearsā is certainly the most likely, and Iām curious what role the 2024 election could have in this process. On one hand, I can see those in office doing everything in their power to maintain the status quo in order to get reelected, while on the other, I can see these crises being exacerbated and weaponized to get incumbents overthrown. I have a hard time understanding how the US could go another decade without a financial crisis. The only way this could be avoided is some paradigm shift away from a cyclical economy by way of increased government control over the state of the economy (this is purely wild speculation). However, it seems like this approach would be impossible without total dedollarization globally (hard default?), which would clearly be a catastrophe. I see āDecadesā and āCenturiesā as tightly coupled. If the dollar continues to thrive for 90 years, thereās no reason it canāt for 190, so I assign a 10% chance to both.
What Am I Doing About It?
So a fiat crisis is coming. What should we do about it? Hedge. Itās untenable for the everyman to go all-in on crypto, Indian Rupees, and/or gold, but we can make small to medium bets on assets less dependent on the dollar, or outside of the US economy entirely. In the (un?)likely case of the dollarās demise, these assets will appreciate handsomely and weāll be fine, at least relative to our uninformed, dollar-denominated peers. The simple advice youāll see is to buy gold, real estate, and/or crypto. These assets are seen as āinflation hedgesā that will appreciate if the US dollar loses value due to overprinting. Itās important to note that these assets donāt gain buying power (real, inflation adjusted value) unless demand for them increases. So real estate is like to hold its buying power, precious metals and crypto could actually gain buying power if their usage increases.
So how big of a hedge position do you need? This is clearly highly dependent on each personās financials, but I think about it several ways. It can be measured in terms of a percentage of investments/net and in terms of wealth percentile. It can also be measured in buying power, but thatās much trickier to calculate, as it requires estimates of hyperinflation rates as well as pinpointing where value fleeing from USD goes. Unless youāre researching full time, your total hedge should be no more than 50% of your total investments/net worth, which sets a clear upper limit. To hone in further, we can attempt to estimate wealth levels based on different forecasted asset prices. You can decide for yourself what wealth percentile youāre aiming for. Itās estimated that it only takes ~0.2 Bitcoin to be in the top 10% of holders. 8 ounces of gold will accomplish the same thing, though so much gold is owned by federal reserves around the world. Youāll certainly need somewhere to live, and owning your house, regardless of having a mortgage (which would get devalued significantly by inflation), will significantly limit your downside.
The first action that nearly everyone would benefit from taking is moving money from banks that pay nearly 0% interest to money market funds that track federal interest rates. Otherwise youāre simply losing buying power as inflation outpaces the interest youāre earning. If your money is sitting in a regional bank thatās paying a solid interest rate and you have less than the FDIC insured $250k, youāre potentially ok, though that money wonāt reappear overnight in the case of a bank failure. I believe that holders of crypto ETFS, precious metal ETFs and/or REITs should sell and purchase crypto, gold and/or real estate directly. If there is a fiat crisis, direct control over assets will be immensely valuable. I donāt believe that cashing out of retirement accounts and triggering a tax penalty is prudent, however increasing exposure to world index funds while decreasing US exposure could hedge risk while adding upside. I do see crypto as the most valuable asset to hold in case of a fiat crisis. Itās harder to detect and physically take, as well as easier to transact with. Buying crypto is a great hedge against risk of the dollar being devalued. Bitcoin and Ethereum are both fundamentally strong, I recommend 50/50 to those who arenāt super familiar with crypto. Regulation is the biggest risk to crypto. In the case of a fiat crisis, some governments may outlaw the use of crypto in an attempt to maintain their currencyās value. All in all, I believe that 0.25 Bitcoin, plus 5 ETH is a solid hedge against a fiat crisis. Itās also an investment with significant market and regulation risks, so many will understandably opt for much less or none at all.
The last thing I want to mention considering is jurisdiction. We all have that uncle claiming heās going to leave the US if so-and-so is elected, however few actually think through what political/economic changes would have to take place in order to leave, and where theyād go if they did. My encouragement is not to leave, but to have a plan. In case of a fiat crisis, 1% will have already taken extreme action (preppers), but 95% of people wonāt have remotely considered it. Be part of the ~4% with a plan. What would it take for you to move? Where would you go? What would you prioritize in a jurisdiction? Balaji and others expect that the current wave of people from blue states like California, New York, and Illinois to red states like Texas and Florida will turn into a full blown tsunami. Red states are more likely to be crypto-friendly and less likely to comply with efforts made to close the fiat exits. Itās worth thinking briefly about other countries that may be crypto friendly and/or less impacted by the devastation of the US dollar as well.
Things could get ugly. Most people donāt have a plan, but itās not too late for you. Settle on your own personal percent likelihoods of a fiat crisis occurring in the coming months, years, decades, and centuries. Take action accordingly.
In case it isnāt obvious, this isnāt financial advice. Iām not an expert. The aforementioned is my limited understanding of our present economic situation based on limited study of limited content.
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