Do You Have Enough Outside Money?
Understanding the difference between inside money and outside money will make or break fortunes in the decade to come
When I was young I thought that money was the most important thing in life; now that I am old I know that it is.
Oscar Wilde
Back in March 2022, a strategist mostly known in financial circles rose to prominence after publishing a piece titled Bretton Woods III. His name was Zoltan Pozsar. A former New York Fed employee who had moved to Wall Street. In his note (#39 here, read the beginning and the very end if you don’t want to read all four pages), he explained why the invasion of Ukraine and Russia precipitated the birth of what he called Bretton Woods III. For my readers not well-versed in the monetary system, there have been two phases of the monetary system since World War II:
Bretton Woods I (1944 - 1971), a.k.a. the gold standard: all currencies were linked to gold, but only the U.S. dollar was directly convertible, effectively making it the global reserve currency.
Bretton Woods II (1971 - present), a.k.a. the fiat standard: currencies were no longer linked to gold, and governments, through their central banks, could print as much money as they wanted.
Anyone who has attended one of my conferences on blockchain and Bitcoin has heard me explain multiple times how the fiat system relies on trust. Trust that governments will not print too much money, which would debase the currency. Trust that governments will not seize your money. Trust that the banks that hold your money will not go bankrupt.
This trust was shattered in the past three years.
Governments printed like there was no tomorrow during Covid, which created inflation. In the U.S. alone, the money supply increased by 40% in just two years.
The U.S. government and the E.U. seized more than $300 billion of foreign exchange reserves (dollars and euros) belonging to the Russian central bank. This created a precedent that put the rest of the world on notice.
Two of the three largest banking failures in U.S. history happened this year. Silicon Valley Bank and First Republic both collapsed and had to be bailed out following losses in their bond portfolio caused by the decision of the U.S. Federal Reserve to hike rates. See the newsletter I published about the Silicon Valley Bank failure here. In Switzerland, 167-year-old Credit Suisse also collapsed this year.
The irony of the prophetic pieces published by Zoltan Pozsar was that he was working for… Credit Suisse! Had his bank better understood the tectonic shifts happening in the financial system and listened to their strategist, perhaps the bank would not have failed!
Zoltan Pozsar explained that Bretton Woods II was over the day the foreign exchange reserves of Russia were seized.
“Bretton Woods II was built on inside money, and its foundations crumbled a week ago when the G7 seized Russia’s F.X. reserves.” Zoltan Pozsar
So what is inside money? Inside money is money that only exists inside the financial system, such as bonds, credit, dollars, euros, etc. It is created through rules and laws, not markets. It’s money that exists in Excel spreadsheets, in databases, in centrally controlled ledgers. It’s money that doesn’t require ANY work in order to be created. You and I, we have to work to earn inside money. Sure. But governments? Central Banks? They can just print it. No work required. None whatsoever. Don’t take my word for it. Just listen to the Chairman of the U.S. Federal Reserve explain it.
For more than 50 years, the world played along even though the U.S. enjoyed what the French finance minister (and future president) Valéry Giscard d’Estaing called the “exorbitant privilege,” i.e., the fact that while the rest of the world had to produce goods and services to receive U.S. Dollars, the U.S. could just print them.
According to Zoltan Pozsar, now that the trust underpinning inside money has been broken, investors should make sure they own outside money. Outside money is money created through labor, time, and human ingenuity. It is tokenized human capital. It represents work. Not just digits in a spreadsheet that a central bank can alter. It cannot be created by fiat, i.e., by decree. Examples of outside money include gold, commodities, and… cryptographically secured assets like Bitcoin.
Gold has a track record of a few thousand years, commodities like oil are needed to run the economy, and Bitcoin is the only type of asset that doesn’t need any government to enforce property rights. Both gold and Bitcoin are bearer assets.
A bearer asset is a type of asset that is owned by whoever physically holds the asset or instrument, and it does not require the registration of ownership or track the transfer of ownership. ChatGPT
While gold can be physically stolen from you, a cryptographically secured asset like Bitcoin cannot. No judge decision or amount of violence can reverse or initiate a transaction on the Bitcoin blockchain without the private key that controls a particular wallet (if you have limited knowledge of Bitcoin, see my articles published in February 2016 Time to jump on the Bitcoin train? and the one published in May 2017 Why the blockchain is going to change everything, the price is up 72x and 15x, respectively, since I published them).
When you own outside money, you are protected from what is happening to Nigel Farage in the U.K. Farage is a divisive political figure and one of the architects behind Brexit. In recent weeks, all his bank accounts have been closed without any explanation, and he has been unable to open new ones. If this can happen to someone like Nigel Farage, it can happen to anyone. Because Nigel Farage is famous and has made a lot of noise, inquiries have been launched to understand why banks acted this way.
Watch Konstantin Kisin eviscerate a commentator on T.V. trying to defend the banks.
Now imagine a world where governments do not even have to request banks to freeze assets and money. A world where governments get to decide what you can and cannot spend money on. A world where you can be punished for donating to causes that the government doesn’t support. A world where you can be instantly de-banked because the government decided to. A world where governments can decide that your money has an expiry date. Spend it or lose it! This world is the world of Central Bank Digital Currencies (CBDCs). CBDCs are a dream for authoritarian governments. Watch the chilling description of what CBDCs could do. Straight from a panel at the World Economic Forum:
If you think governments won’t abuse this power. Let me leave another quote below.
“Power tends to corrupt, and absolute power corrupts absolutely.” Lord Acton
CBDC is the ultimate form of inside money and the ultimate tool for financial exclusion. Money that can be taken from you just by clicking on a button. In the U.S., debates around a possible CBDC have already started, with Florida governor and Presidential Candidate Ron DeSantis passing a law that would make a CBDC illegal in Florida and announcing that, if elected president, he would make sure there is no CBDC in the U.S.
After promoting ESG-friendly (Environment, Social, Governance) financial products for years, the BlackRock CEO said he would stop using the term. This followed a backlash led by several states in the U.S. that accused BlackRock of pursuing its own ESG agenda instead of delivering the returns needed for their investors and pensioners. BlackRock was quick to pivot and is now ready to help its clients get exposure to outside money through a Bitcoin Exchange Traded Fund (ETF). BlackRock was already offering exposure to gold through ETFs that have a combined market capitalization of tens of billions of dollars. Now, it wants to add Bitcoin to the list.
It is not the first time an application for a Bitcoin ETF has been filed. The first one was filed back in 2013. But so far, they have all been rejected by the Securities and Exchange Commission (SEC) in the U.S. Why is this time different? Because BlackRock doesn’t mess around. It is the largest asset manager in the world with $10 trillion of assets under management (that’s 10,000,000,000,000). BlackRock only files when it already knows the outcome.
After years of skepticism, look at who showed up on CNBC to explain that the $600 billion asset is now an international asset: Larry Fink himself, the CEO of BlackRock.
Watch his transformation over the years:
Why is it such a big deal? Because most institutions have ZERO exposure to Bitcoin despite being the 12th largest asset by market capitalization. Until an ETF is available, most institutions have limited options to gain Bitcoin exposure. Usually, their charters only allow them to buy securities, not crypto assets. A Bitcoin ETF would be a security. By applying for a Bitcoin ETF, BlackRock sent a powerful signal that Bitcoin was an investable asset.
The market has already reacted positively to the news. This year, the price of Bitcoin is up by more than 80%.
What about gold in all this? As Zoltan Pozsar predicted, the world is moving towards an inevitable de-dollarization. The BRICS (Brazil, Russia, India, China, and South Africa) are working on a new currency backed by gold.
It’s not the first time countries tried to de-dollarize. All previous initiatives failed and only time will tell if this one will be successful or not.
News of the fiat world
Violent riots rocked France over the past ten days. Something that is not sufficiently talked about is the underlying economic reasons for the discontent.
During Covid, France was one of the most generous countries in the world regarding stimulus packages. At some point, the French government paid for nearly half of all private sector salaries. This was financed by a very large budget deficit, financed with freshly printed euros provided by the European Central Bank. Now there is inflation, and it’s particularly bad when it comes to food prices.
The curve in red below shows nominal food prices, and the one in blue shows the quantity of food consumed. Translation: food prices have gone vertical, and many people struggle to make ends meet and put food on the table.
Another economy that has been a slow-moving train wreck in recent years has been the U.K. economy. Last year, Liz Truss bankrupted the U.K. pension system and crashed the British Pound in less than 50 days as Prime Minister. This was a very impressive achievement. Now one of the problems is also food price inflation. Same causes and same consequences as in France, but even worse because the U.K. is no longer part of the EU.
But dear British readers, you should not worry. The Bank of England is on top of things and focusing on what really matters at the moment.
This is it for this week! Hopefully, this newsletter will have gotten you to discover or think about the concepts of inside money and outside money. Act accordingly!
Disclaimer: The views and opinions expressed in this article are solely those of the author and should not be interpreted as legal or financial advice. Investments always carry risks, and this is particularly true for crypto assets, which can be highly volatile and subject to regulatory changes. Before making any investment decisions, consulting with a professional financial advisor and conducting thorough research is crucial. The information provided in this article should not be construed as an endorsement of any particular investment or asset.