Investment Strategy

Bitcoin’s Fight Against the Debt Boom

Bitcoin’s Fight Against the Debt Boom
By Andy Gordon
Date March 28, 2018

Bitcoin has made a lot of people a lot of money. That’s a fact.

But that’s not why bitcoin was created.

Bitcoin was created to fight against Section 402 and things like it.

Now, it should be explained at the outset that bitcoin’s mysterious creator, Satoshi Nakamoto, didn’t know what Section 402 was.

But he did know a couple of things.

He understood that it was a fool’s game to trust fiat currency or the big banks that leverage and manipulate said currency… or to trust the biggest manipulator, protector and benefactor of money: governments.

I have no way of knowing for sure, but I suspect Nakamoto’s disinclination to trust big government, big banks, and misused and abused fiat money predated 2008.

And when the financial crisis of 2008 came perilously close to becoming an “extinction event” for U.S. and overseas banks, it probably confirmed his worst fears.

If excessive debt was the disease, then he created bitcoin as the cure.

Too Late?

I’ve heard some argue that while bitcoin was borne of good intentions, the danger of too much debt to our banking system has passed with the enactment of various rules around the world.

In the U.S., we had the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. It supposedly plugged many of the regulatory holes that allowed banks to engage in wildly risky behavior.

Following this line of reasoning, Satoshi Nakamoto was the equivalent of a five-star general fighting yesterday’s war…

And bitcoin was his unnecessary weapon of choice.

Section 402 shows what nonsense this thinking is…

If implemented, Section 402 could plunge us right back into another dangerous financial crisis.

It would loosen the capital requirements of banks precisely at a time when big banks need to build up their capital buffers ahead of mounting public and private debt that is reaching crisis levels.

So what is Section 402?

It’s part of the Economic Growth, Regulatory Relief and Consumer Protection Act the Senate passed two weeks ago today.

But what exactly does it do?

The 5% Rule

Section 402 would increase banks’ reliance on debt by weakening the 5% rule.

Adopted post-crisis, the 5% rule requires big banks to fund themselves with at least 5% common equity. This limits their reliance on debt to 95%.

Not much of a constraint, is it?

I mean, would you want your salary and savings to pay for 5% of your weekly expenses and your credit cards to pay for the rest?

In what world is that acceptable?

In the world of big banks, of course.

Section 402 would exclude all the money – and it’s quite a lot – that banks “lend” to central banks from this debt-to-equity ratio. In pushing down the debt number this way, the equity part of the ratio also falls.

Sheila Bair, former chair of the Federal Deposit Insurance Corporation, says it could lead to banks having as much as 30% LESS capital on hand.

She adds that even though the bill intends to limit these capital reductions to “custodian” banks, its definition of custodian bank is so broad that any big bank might qualify.

Another loophole for big banks to party with… Are you really surprised?

The U.S. will be treating its banks far better than other countries’ banks if Section 402 gets approval in the House. Only the U.K. is removing central bank deposits from its leverage calculations. But it also increased its leverage ratio to tamp down capital reductions.

So the U.S. stands alone here.

Section 402 would also exclude from the debt-to-equity ratio all deposits in less-than-stable countries like Turkey and Greece.

And it gets worse…

Dodd-Frank applies more stringent regulation and oversight to banks with assets greater than $50 billion. This legislation would raise that threshold to $250 billion, a change that would affect 25 of the 38 biggest banks in the country.

So much for the lessons learned in 2008…

And so much for bitcoin being outdated and unnecessary.

Bitcoin in the Age of Debt Booms

World debt is reaching unsustainable levels. My partner calls them “debt booms.”

Once again, the world finds itself in a state of denial about what’s happening in the precarious world of fiat money.

Bitcoin is NOT part of that world…

Peter Thiel says that bitcoin is like “bars of gold in a vault that never move,” and as such, it can act as a “hedge of sorts against the whole world falling apart.”

Nothing I wish for, of course.

But even short of the world falling apart, bitcoin is a welcome and needed refuge for hyper-inflation and bankrupt governments propping up bankrupt currencies.

This is not the case of some past-his-prime general fighting yesterday’s war. This war is here and now. It’s not going away.

If anything, it’s heating up.

Good investing,

Andy Gordon
Co-Founder, Early Investing

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