USA Will Lead China You are what your liabilities say you are.  I had the privilege to meet with a very well respected economist yesterday, and he explained this undeniable fact.  You are what your liabilities say you are.

What does this mean?  Let’s take a look under the hood of a global giant, McDonald’s.  A McDonald’s franchise in Spain accepts Euros from customers and pays their supply chain, building costs and labor in Euros.  McDonald’s is a US domiciled company and reports quarterly earnings in USD and ultimately pays their shareholders in USD. At the moment a customer buys a hamburger in the Madrid, McDonald’s in reality owns Euros.  Needless to say, McDonald’s is better than most at mass hamburger production, but currency speculation?

Financial markets have created vehicles to make transferring Euros to USD, and USD to Euros very easy for McDonald’s.  The spot EUR/USD market is quoted as much in the news as any major financial index.  When someone travels between the US and Europe, many times the currency exchange rate is a topic of discussion.  So when McDonald’s sells a hamburger in Euros, they can easily find an investor looking to convert USD into EUR.  Don’t want to dig too deep into the textbook part, but understand that futures and options markets on this currency rate have developed which are more specific tools offered to McDonald’s to hedge this currency risk.

Let’s take a leap into Bitcoin, shall we?  A merchant that accepts Bitcoin is showered with all of the upfront advantages that the payment process offers.  Read more about the advantages of Bitcoin vs Paypal.  For most merchants that accept Bitcoin, their liabilities are presently in fiat.  Without safe, stable and reliable mechanisms of transfer from Bitcoin to fiat, we are asking the merchants to be currency speculators.  Brokers around the world have developed well established “exchanges” that are attempting to offer this service to the merchants.  These brokers need a centralized, regulated market for their corespondents to trade.  One exchange rate for all fiat currencies against Bitcoin.  The United States has the motivation to establish this exchange.

China devalues their currency as a means to continue to be ultra competitive in pricing of their products to the world.  The Chinese manufactures pay their liabilities in this suppressed currency.  The supply chain in China is artificially suppressed via this manipulation.  China is a huge loser to the uptake of Bitcoin.  Considering that it is a zero sum game, many other world leaders reap the rewards if Bitcoin is adopted on a larger scale.  The better you are at manufacturing, the more your country will gain with an uptake of Bitcoin.  It is no wonder that Germany embraces Bitcoin.  Another large figure that embraces Bitcoin is Suning Appliance who stands to gain enormously.  They supply the depressed Chinese population with electronics.  Any uptick to the Chinese purchasing power is a windfall for Suning Appliance.

The United States stands to gain the most from a global success of Bitcoin.  In theory, if Bitcoin was the accepted currency of the world, not only will import/export be more balanced and merit orientated, but the debt built up on the old system will be reduced in correlation to the acceptance of Bitcoin.  A quasi Chapter 11 bankruptcy for the US.  And the largest creditor is China.  Every step in the direction of Bitcoin, is one more step that the US takes escaping the endless cycle of suppression at the hands of it’s largest creditor.  When the financial system almost derailed, it was the US Federal Reserve that was forced to be the “buyer of last resort” of its own country’s debt.  They have been devaluing the USD, ever since, to keep up with the payments by printing more USD. The reaction of the financial crisis by the US has forced other established central banks to do the same, devaluing their currencies as well.

This devaluation has forced owners of the fiat currencies to scramble for safety.  Gold became the vehicle to hedge this devaluation but we have hit a paradox.  As the price of gold goes higher, the incentive to mine increases.  At present pricing and difficulty, investors storing value in gold are not getting much “bang for the buck”.  Estimates of the market capitalization of gold is $8,487,797,102,400.  With only 5% of the world’s gold mined, there is a huge supply waiting to be mined.  And China leads all nations in production of the precious metal.  We are inherently trading fiat currencies for gold, and either case lead to the hands of China.

Bitcoin destroys gold as a method of value storage, as well.  The inherent properties of gold make the physical delivery and cost of protecting it, extremely difficult.  Investors gain exposure mainly through demand receipts of the metal.  If all demand receipts were settled at once, the resulting turmoil would put the 2008 financial crisis to shame.  Bitcoin protocol allows for theoretically unlimited storage vehicles to be created, although I would argue an investor only requires enough wallets to break their wealth down to least denomination of their liabilities.  Example, for an investor in the US who has $10,000,000 in cash, could create 1,000,000,000 Bitcoin addresses each storing $.01.  The technology to store, and subsequent access to the wealth is available at a minimal cost to mass produce.  Even though each address in infinitely harder to hack into than even a bank account, the reward for such disruption is $.01.  This is the “Bad Guys” worst nightmare since the creation of Bitcoin itself!

Add together the opposing demand of merchants exiting the currency game and the investors of the world seeking a more reliable and cost effective hedge to their fiat exposure, the resulting market has the disruptive capabilities greater than any financial vehicle before.  Freeing the central banks from the tyranny of the former system is a win for everyone.  Nobody bigger than the Chinese citizens.

-TCA