If the riot at the Capitol was a signal of the populist right's mistrust and discontent with the establishment, the recent run up in the price of GameStop's stock by a mob of Redditor's at the expense of hedge funds might be the populist left's. Since September 2020, a group of average investors on the subreddit Wall Street Bets invested small amounts of money in the company, driving its stock up almost 7000% before its decline this week.

Melvin Capital, the hedge fund whose short of GameStop began the Reddit revolt, lost 53% of its value in the process.

During this fracas, a similar run-up was happening in the price of Bitcoin, which saw a 400% rise in value over the same period. Unlike GameStop's rally, the price of Bitcoin was driven by large institutional investors, some of whom openly discussed their purchase as a hedge against the potential decline of the US dollar.

In this episode of YDHTY, the Data Monkey and I discussed the events leading up to this, how Bitcoin or a similar cryptocurrency could replace the dollar as the global reserve currency, and what this would mean for the United States.

We also happened to base said currency on McGriddles, because we feel the need to out-weird present day reality.

You can listen to the full episode below, on iTunes, Spotify, or any other audio chum bucket this podcast might be found it.


Show Notes

When 44 nations agreed to peg their currency to the US Dollar in 1944 as part of the Bretton Woods Agreement, the United States was inadvertently given enormous power over the world's financial system as well as the power to borrow. While this was initially kept in check by the fact the dollar was pegged to the value of gold, Richard Nixon's departure from the gold standard and later replacement with the weaker petrodollar system maintained the necessity for countries to hold reserves of US Dollars while removing the natural cap gold set against borrowing.

Where government spending stayed roughly in line with tax receipts in the years between World War 2 and the 1970s, the years that followed saw increased deficit spending and, with it, a run up in the national debt. Without high interest rates to curb inflation, the introduction of debt means more dollars in the market means lower borrowing costs, meaning those who borrow money to make more money do very well.

It also means a gradual erosion in the value of the dollar, meaning those who trade their time for money - that is, the average American worker - see a decline in their standard of living.

The above played out in three asset bubbles, all of which resulted in a gradual transfer of wealth from the average citizen to the investor class:

  • The Dot-Com Boom, where smaller, retail investors looking to cash in and those saving for retirement saw $5 trillion in assets lost, while the venture capitalists who initially funded these companies had already made their money.
  • The Mortgage Crisis, where easy access to lending encouraged Americans to purchase homes at inflated prices, only to lose an average of one-third of their net worth in the financial crisis.
  • The current Debt Boom, where the quantitative easing designed to offset the financial crisis in 2008 introduced even more money into the system, creating an inflation in asset prices so that those who had the bulk of their money in investments, such as stock, saw their wealth grow disproportionately compared to the average American. The tax cuts passed under the Trump Administration and subsequent fiscal stimulus in response to COVID have only exacerbated this.

This has led to the rise of populists such as Donald Trump and Bernie Sanders and - as evidenced by the riot at the Capitol and the internet revolt against the financial industry seen in GameStop - social unrest.

At the same time, nations have been quietly seeking alternatives to the world's US centered monetary system. China and the EU have both been looking at alternatives to the US based SWIFT system of international monetary transfers, reducing America's ability to levy effective sanctions against countries deemed a threat to global stability.

China, on its own, has made moves to supplant the dollar with its own currency as the default global reserve.

This serves obvious national interests in and of itself but, when coupled with a United States that is increasingly unable to govern - to the point where Congress hasn't officially passed a budget since 1996 - replacing the USD is appearing more and more to be an issue of economic necessity.

This is where Bitcoin, or something similar to it, presents an attractive alternative.

  • It's decentralized, so no one country can control its movement.
  • It's finite, so countries can't devalue it by creating more.
  • Most importantly, it moves large amounts of money cheaper and quicker than any other system, making it a better system for international money transfer than any other.

If Bretton Woods was a response to the instability caused by the lack of structure and coordination between nations economically, the move to a global cryptocurrency could be the response to what happens when that structure rests on one nation. Given the course of 2020 and 2021, the only question is will it be Bitcoin, McGriddlecoin, or something weirder.