I was struck by two headlines yesterday. The first was about our treasury secretary threatening China with removal from dollar payment systems including SWIFT (though it doesn’t belong to us) if they didn’t get serious with North Korean sanctions. The second headline concerned Jamie Dimon’sopinion about bitcoin. On the surface these topics seem related only that they loosely translate to being about money, but I think they have even more in common.
I also had reason yesterday to discuss with someone the nature of large institutions with large investment in the status quo and what happens when something new comes along. I’m not talking conspiracy or even any conscious intent at all. We were discussing what legacy systems do when new knowledge comes along. It’s kind of like that old Gandhi quote: “First they ignore you, then they laugh at you, then they fight you, and then you win.” What these two headlines have in common is that they are expressions of legacy systems reacting to something new.
For Mr Mnuchin’s entire life, the US dollar has been the world’s reserve currency. It doesn’t matter that for most of human history the dollar didn’t exist or that, as a reserve currency, it’s held on longer than most and is part of an aging system, or that history shows that all reserve currencies eventually fall from high status. Anyone remember the $4 British pound? What matters in his thinking is that, in his experience, it’s never been any other way. So it can never be any other way.
Until it can. And that will come as a rude awakening.
We ignored China for decades. Then we laughed at China. “Made in China? Haha.” Now we’re scared. They’ve been buying gold and suggesting their people buy gold for years. They’ve stockpiled an unknown amount because they’re keeping it secret. They’ve recently suggested opening their own bourse where they’ll price oil in Chinese RMB and possibly suggested backing that with gold. We’re scared, and we’re going to start fighting.
Don’t get me wrong, we won’t lose right away. The US dollar isn’t going anywhere. My grandkids will probably be paying for things in US dollars. The problem is that they’ll probably be paying about $150 for a Big Mac, if people are still eating that stuff that far in the future. We owe a lot of debt and can’t pay it off. The end result is that we are going to inflate and we can’t do that as the world’s reserve currency. When you are the reserve currency and you print more, they just buy more. But there’s a new kid on the block.
Whether it’s gold, the SDR or the Chinese RMB, what won’t be the reserve currency in 30 years is the US dollar. The world won’t need them or want them, and they’ll all come back here. When that happens we’ll have inflation we have only read about (or those of us who were adults in the 70’s can vaguely remember imaging). One can almost imagine what the Chinese are thinking when they read Mr Mnuchin’s comment. “Throw me in that briar patch.”
That debt and the weakness of the US dollar brings be back to Mr Dimon. Why do we have all that debt? Where’d the money go? What did we get for that debt?
Well, Timmy, we printed the money and lent it to banks at 0% so that they could lend it to your mommy and daddy to buy a house. Only the banks didn’t do that because they thought your mommy and daddy didn’t have enough money to pay it back. So they invested it themselves and kept the profits. Only there was a problem and one day they lost a lot of money. So we printed some more and lent it to them again, and they gave themselves bonuses because they are very smart people. So when Mr Dimon makes fun of bitcoin, you should listen to him. You remember what Gandhi said about when they make fun of you, right Timmy?
This is Jamie Dimon standing up in front of a group of bankers showing them they have nothing to worry about from a immutable distributed ledger payment system that anyone can join without going through a bank. Sure, no problem for them. Ha ha ha, silly bitcoin. Next comes the fighting, then the losing.
Gandhi was right. This is what happens every time something new comes along. The old guys ignore it, then make fun of it, fight it and, eventually, lose. Whether it’s the heliocentric view of the solar system, home rule for India, the shifting of the reserve currency back to the east, or a new form of money, it all gets greeted the same way. There’s no conspiracy. There’s probably not even any bad intent. It’s just most human minds can’t see past what they’re comfortable with.
Thomas Kuhn, in The Structure of Scientific Revolutions, said something similar about paradigm change. He said, and I paraphrase, that new ideas don’t just spring up one day and everyone shouts, “Oh look, it’s a new paradigm.” What happens is that some young person outside the power structure looks at something and says, “That’s not right.” That person is ridiculed and suppressed, but quietly maintains his position, until the old guys running the system are die off or retire. The once young guy is now in charge. Boom, paradigm shift. And no one ever sees it coming. I wonder if Mr. Mnuchin or Mr Dimon have read Kuhn.