Wall Street giant chief fears end of “debt super cycle”: Is crypto the solution? Wall Street giant chief fears end of “debt super cycle”: Is crypto the solution?
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Wall Street giant chief fears end of “debt super cycle”: Is crypto the solution?

Wall Street giant chief fears end of “debt super cycle”: Is crypto the solution?

Cover art/illustration via CryptoSlate. Image includes combined content which may include AI-generated content.

The antidote to the many economic crises the world has faced over the past few decades has been debt. Case in point: as of the time of writing this, the latest estimates put the amount of global debt somewhere in the region of $250 trillion, or approximately three times the economic output of the world (world GDP). Better yet, this number isn’t shrinking, as can be seen with the White House’s $6 trillion coronavirus stimulus package. 

This debt has been spread out amongst society; governments hold trillions of dollars worth of sovereign debt, households are crushed under student loans and mortgages, corporations tout trillions in bonds, and so on and so forth.

It’s not controversial to say that this is unsustainable — debt is borrowing money from the future to improve the standard of living today. In fact, the head of one of Wall Street’s giants has said that the “great debt supercycle” is likely coming to an end.

And that’s where Bitcoin and crypto assets could shine.

End of the “debt supercycle” could aid Bitcoin & crypto

On Mar. 27, Scott Minerd — Global Chief Investment Officer of a financial services and global investment firm based in New York, Guggenheim Investments — released “The Faustian Bargain,” a short but potent letter in which he painted a harrowing outlook of what’s to come for society.

He made it clear that the policies governments have adopted of “increasing fiscal stimulus and easy money” to “temporarily offset any decline in demand” in a contraction or recession is unlikely to survive:

“Now faced with the exogenous shock of the COVID-19 pandemic, policymakers are returning to the same tools employed in the financial crisis a decade ago… Lending these companies more money will only compound the long run problem resulting from over-leverage and make the companies even more vulnerable to failure in the long run.”

Then what’s the solution? What’s the way out of this?

According to Minerd, there are a few solutions:

  • Restructuring of debt
  • Negative interest rates
  • The debasement of fiat money

With all the solutions that Minerd believes could transpire in response to the collapse of global debt, crypto seems like a potential way out — a potential vehicle that investors can use to store their wealth in the “worst downturn since the [Great Depression of the] 1930s” and to hedge against the risks that come with the aforementioned solutions.

#1: Restructuring of debt

The first solution he mentioned was the restructuring of debt, which would see creditors give “haircuts” to the debt of reorganizing companies.

The issue with this solution, the Guggenheim Investments chief explained, is that this is a “time consuming and expensive” process, especially considering the availability of debt around the world. As a result,  “the sheer volume of reorganizations would swamp the financial and legal systems […] and [would] likely set off a downward spiral.”

In this case, where companies and potentially even governments are defaulting on their debt en-masse, Bitcoin could be a hedge as it isn’t subject to the same downside risk equities and bonds face as issues of corporate and government debt.

#2: Negative interest rates

The second solution Minerd discussed was the implementation of “negative interest rates,” which would “require a rapid shift to a cashless global society and an overhaul of regulation around pension funds and the insurance industry.”

In this case, decentralized cryptocurrencies make perfect sense; in a truly cashless world where negative interest rates are commonplace, the digital fiat that you will be transacting in will slowly disappear over time.

Bitcoin and cryptocurrencies, on the other hand, won’t be susceptible to the same problems.

#3: Debasement of fiat money

Lastly, he brought up the debasement of fiat money. He explained that there are two problematic outcomes with this solution, too little debasement or too much debasement, which would cause a spiraling in asset prices used as collateral backing loans and rapid inflation, respectively.

In the former case, Bitcoin isn’t an asset widely used to back loans, making it less susceptible to a “spiral downward” in the values of collateral assets.

In the latter case, rapid inflation should prove the value of a disinflationary asset like Bitcoin, which is not susceptible to the same central banker whims that fiat is susceptible to.

Posted In: , Analysis, Edge