On June 6, 2021 I published a column titled “We’ll Know Crypto Is For Real When Its Coins Start Collapsing.” More than most want to admit or realize, failure is growth. A “market” for crypto money defined by the various “currencies” going up, up, and up is less information pregnant. It’s real, but upward speculation is a signal of many unknowns. A market defined by collapse signals reason and realization entering prices. Information is progress.
As I point out at the beginning and end of my new book, The Money Confusion, what was true in June of 2021 is true today. Carnage is the life of the crypto industry. It signals long-term staying power as investors get serious about putting the bad out to pasture in favor of the good. History supports this truth, at which point it’s useful to digress, or move sideways.
In particular, it’s useful to address what has so many up in arms: the collapse of Sam Bankman-Fried’s former blue chip crypto concept, FTX. There’s a view that the latter is a signal of something amiss, and worse, artificial about the whole private money concept. FTX’s decline has birthed endless skepticism.
Take the Wall Street Journal’s Joseph Sternberg. Sternberg writes that “Easy money fuels speculative manias as surely as night follows day.” But that’s not true. If true, then it would certainly be true that Japan’s economy would have been the face of by endless speculation beginning over 30 years ago as the Bank of Japan went to “zero.” In reality, the Nikkei is still well below highs reached back in 1989.
From there, Sternberg tacks to the popular notion about a search for yield as “individual savers desperate to find returns poured billions of dollars into cryptocurrency ‘investments’.” See above to understand the limits of such a belief, and then imagine retail investors calling their brokers with “I can’t get enough yield now, so please buy BitcoinBTC for me.” It's not realistic to believe that retail buyers can move markets in this way. If in possession of such power, then it stands to reason that hedge funds working in concert with one another could forever move markets in any direction desired....Except that they couldn't.
After which, there’s just no evidence of central banks being able to stimulate soaring markets. If they could, the markets and the underlying economy would be so destroyed as to not rate discussion. If anyone doubts the previous truth, just look up the most valuable companies in the year 2000 to see just how awful the U.S. economy would presently be if central bankers could prop up prices artificially in the way that Sternberg seems to suggest.
The columnist believes that “The greatest financial fiasco so far this business cycle couldn’t have happened without the Fed,” which is Sternberg arguably getting what happened in recent years backwards. More realistically, it’s the happy truth that equity markets routinely reshuffle the flow of capital that speaks to why cryptocurrencies became a thing. Put bluntly, investors would never have found cryptocurrencies if the Fed’s zero rates had pushed “individual investors desperate to find returns” into higher-yielding assets simply because they wouldn’t have needed to.
All of which brings us back to Bankman-Fried. While the guess here is that the commentary meant to vilify him today will age as well as that which lionized him not too long ago, and while this column would never condone lying, fraud or theft assuming any of three reveal themselves, the whole FTX saga will ultimately be viewed by sober minds as progress. George Gilder has long referred to what the lazy and simplistic in thought refer to as “bubbles” as “growth spasms.” Exactly. It’s through the production of information that we progress.
Looking back in time, in the early parts of the 20th century thousands of carmakers or would-be carmakers were matched with capital. Just about every single company created failed. Fast forward to the end of the 20th century, something similar happened with the internet. One supposes Sternberg would find the fingerprints of “the Fed” on both growth spasms, but the happier reality is that copious investment in world-changing technology of the automobile and internet variety thoroughly transformed how we lived and live. Put another way, what Sternberg contends is a Fed creation is actually history repeating itself as investors with serious skin in the game search for the future.
As The Money Confusion asserts, something similar is afoot now. Just don’t give the Fed credit for this surge of investment. The simple truth is that if the Fed had control of credit and its cost as the pundit class imagines, there wouldn’t exist enough credit for intrepid investing of this kind to begin with.
