In his column yesterday, the FT’s Robin Wigglesworth asked whether the Fed’s move to buy riskier corporate debt “could prove the monetary equivalent of President John F Kennedy’s 1961 decision to dispatch US troops to Vietnam.” He continued:
Just as Kennedy’s first escalation of the Vietnam conflict inexorably led to a series of seemingly rational but ultimately ruinous decisions and progressive entanglements in Indochina, future central bankers could end up ruing the Fed’s current path.
Among a host of facilities announced on March 23, the Fed unveiled two programs that would allow it to acquire corporate debt. Initially this was just for safer debts judged to be “investment grade” by the big credit rating agencies. But on April 9 the Fed crossed another Rubicon and announced plans to buy corporate debt rated below that threshold — territory often termed pejoratively but not always inaccurately as “junk”.
Its primary market facility will still only buy bonds that were rated investment grade as of March 22 and have solely been downgraded to junk as a consequence of the coronavirus crisis.
But the Secondary Market Corporate Credit Facility will buy exchange-traded junk bond funds. The Bank of Japan has been buying ETFs for a while, and the European Central Bank has hoovered up some high-quality corporate debt, but coming from the de facto global central bank, this amounts to a watershed moment in the history of monetary policy. At the same time, a financial crisis-era program restarted in March was expanded to support top-rated slices of bundles of “leveraged loans” and commercial mortgages. Together, the three facilities come to $850 billion — nearly half the size of the Fed’s entire first round of quantitative easing in 2008–10. The intervention has buoyed credit markets, helping a smattering of riskier companies raise financing even before a single dollar has been spent.
Nonetheless, there are many thorny aspects to the Fed’s recent actions. While the difference between investment grade and junk debt is somewhat arbitrary, the central bank’s move is fraught with hazards, both moral and practical.
Many lowly rated companies are owned by private equity firms that have layered on unwise levels of debt on their investments to juice their own returns. Even if they haven’t been rescued directly as banks were in 2008, this still arguably constitutes a de facto bailout. The Fed’s motives may be pure — sub-investment grade companies are huge employers — but a repeat of the pattern of socialized losses and privatized gains is distasteful.
To say the least.
Some (like me, for instance) would argue that Fed’s recent moves to buy “riskier” corporate debt are more January 1968 (Hue) than May 1961. We are well down the path of throwing hundreds of billions of dollars into “the war effort” and creating an ever deeper quagmire. There is no way to unwind what has been done. The only certainty is that a reckoning awaits.
What might that reckoning be?
One of the world’s most prominent and successful investment managers, Paul Tudor Jones, says inflation. In a market outlook note he entitled “The Great Monetary Inflation,” Mr. Jones calculates that $3.9 trillion of money, the equivalent of 6.6% of global economic output, has been printed since February.
“It has happened globally with such speed that even a market veteran like myself was left speechless,” Jones wrote. “We are witnessing the Great Monetary Inflation — an unprecedented expansion of every form of money unlike anything the developed world has ever seen.”
His answer on how to hedge the reckoning is…..bitcoin. Bloomberg reports:
”The question for a macro investor like Jones was how to hedge. He said he considered various bets on gold, Treasuries, certain types of stocks, currencies and commodities before recognizing a “growing role for Bitcoin.….”
According to Jones, investors need to throw away the financial playbook of the past decade and return to the monetarist theories of Milton Friedman and old-school indicators such as the M2 money supply.
The post-pandemic recovery will be different from what happened after the last financial crisis, he argues, partly because bank balance sheets are stronger now and the Federal Reserve is allowing them to lend aggressively.
While the current collapse in demand will keep prices of goods and services from rising in the short run, Jones doubts that the Fed can prevent that from happening over the longer term.”
““How reasonable is it to expect that in the recovery phase the Fed will be able to deliver an increase in interest rates of a magnitude sufficient to suck back the money it so easily printed during the downswing?” he asked. Government and corporate debt levels are exploding, making it harder for the economy to “digest” increases in borrowing costs, he said. That, and the possibility — “no longer a sacred cow” — that the Fed chairman becomes a political tool of the administration in power raises the likelihood that rate hikes will be slow to come and smaller than needed, he added.”
I mention all this as prologue to yet another missive on a News Items obsession: Libra, Facebook’s digital currency.
Isn’t that over, you ask? Hasn’t it been consigned to legal and regulatory purgatory? Everybody says so. A website called Futurism chronicles Libra’s “demise” as follows:
In June 2019, Facebook announced plans for a global cryptocurrency called Libra. The dream: let everybody, no matter where they are in the world, buy and sell goods and services without a credit card or bank account.
Almost a year later, Facebook’s Libra project looks like an abject failure. Its updated white paper, as The New York Times reports, makes what was once a dream of a unified global currency look like an unreleased PayPal clone.
Over the last ten months, Facebook’s dream of a global currency has taken beating after beating. Experts called it Facebook’s downfall, French ministers shunned it, and even U.S. president Donald Trump said he was “not a fan.”
Then high-profile backers who initially invested in the project started jumping ship. PayPal, Visa, MasterCard, and eBay all announced they were withdrawing from the Libra Association, the body that was meant to oversee Libra’s creation and rollout.
Now, instead of building up an entirely new financial system, Libra 2.0 is focused on providing a way for people to buy and sell using different kinds of coins that are each tied to a local currency. A unifying coin backed by multiple currencies would allow for transfers between the coins.
“I suspect this round will be better received, but that depends on how the story is told, and the accuracy with which it is told,” Dante Disparte, the vice chairman and head of public policy at the Libra Association, told the Times. (Ed. Note: bolded emphasis added)
So — case closed — abject failure it is.
Except, of course, it’s not.
When dealing with Facebook, which is one of the most astonishing companies of this century and one of the most astonishing companies in the history of mankind, it’s best not to confuse retreat with defeat.
The original vision for Libra was a bit too descriptive; you didn’t have to be Jay Powell to see that what Mr. Zuckerberg and company were proposing was something that competed with and perhaps displaced national currencies. That was scary! The central bankers didn’t like that idea one bit and the various finance ministers and presidents and premiers who were paying attention to the issue were equally alarmed.
Libra’s partners — PayPal, Visa, Mastercard and eBay — sensing regulatory ire, scurried to safety post-haste.
The All Knowing Commentariat, no fans of Facebook among them, established a narrative that revolved around anti-trust and the “break-up of the digital Standard Oil.” Watching all this, it seemed like Facebook didn’t have an ally or a friend in all the world.
But of course, that wasn’t (and isn’t) true. Facebook has roughly 1.73 billion friends (or “daily average users,” as they are called), all around the world. And if those “friends” can be persuaded to adopt Libra as currency for even routine transactions, then the balance of power begins to shift. And as ever more Facebook users adopt and adapt to Libra currency, enticed by ease of use and reduced carrying costs, the more they will want to use it for all sorts of transactions, including mortgages and stock and bond purchases and student loans. And the more they use it for those types of transactions, the closer Libra gets to what might be called “critical mass.” Critical mass is when Paul Tudor Jones (or someone like him) says, “my hedge against inflation isn’t Bitcoin. It’s Libra.”
Why would he (or she) do that, you ask. What’s wrong with Bitcoin?
Two big things.
First, “decentralized” currency may well be “more democratic” and free of meddling government regulators and facilitators, but centralized currencies are part of political mankind’s economic DNA. It’s the way we do things. We do them that way because we fear that if we don’t, we’ll lose control and fall headlong into some kind of financial abyss.
Fear of entropy constrains and will always constrain Bitcoin. Paul Tudor Jones’ investment in it is “low single digits” because that’s about as much as one can reasonably risk given the absence of oversight and the (distinct) possibility that some kind of black swan some day will glide in and wreak havoc across the blockchain. If there is no central bank or finance ministry “with full faith and credit” serving as a backstop, what follows is chaos.
Second, amidst all the happy libertarian chat, Silicon Valley techno-gibberish and bitcoin-sponsored survey research, everyone gets that bitcoin is…dodgy. According to CipherTrace research, dark markets ”use Bitcoin for buying and selling of illegal drugs, weapons, and cyber and banking credentials. As demonstrated in previous research, a very small portion of the total bitcoin transactions are directly used to conduct criminal activities. However, it is also true that nearly all dark market commerce is transacted in cryptocurrencies.”
Capiche? Cryptocurrency is the coin of the realm in the criminal markets but it’s not used for criminal activities. And while we’re discussing improbable assertions, there is not one person on the planet who believes that money-laundering accounts for only 1% of all bitcoin transactions. If you talk to central bankers about crypto-currencies, one of the first “issues” they raise is money laundering. Put it another way: the sons of El Chapo don’t launder their money without crypto as part of the mix.
Libra, on the other hand, seems much less….problematic.
To begin with, there are those 1.73 billion average daily users, creating a vast pool of deposits that can be levered in the event of a destabilizing “event.” And that’s before Facebook begins to “bank the unbanked,” which is simultaneously its political and regulatory ticket to ride and “get out of jail free” card.
Roughly 1.7 billion people around the world are said to be “unbanked.” In partnerships with local governments and telco providers, Facebook can provide those people with a mobile device, a Libra account and discounted digital network connection fees. In so doing, in theory, it can almost double its “user base.” Let’s say that the combined “user base” is 3.4 billion people (for the sake of argument). That’s more than 40% of the world’s population. Risk spread out over 40+% of the world’s population is not that risky.
Second, and hard as it is to believe, given Facebook’s odious reputation, there is comfort knowing that atop Libra’s massive, global network sits a central authority. Yes, the central authority is Facebook’s “Libra Association,” but that’s much better than ‘decentralized libertarian Nirvana.” And far, far better than ending up in some chat room with “credit specialists” from the Sinolean cartel.
Finally, Facebook lends confidence to the success of a digital currency regime. It’s one of the two leading companies in the world in artificial intelligence. It employs one third (roughly speaking) of the world’s machine learning engineers. It has truly vast (and global disbursed) computing power.
It has roughly $50 billion in cash on hand and the ability to leverage that up to $1 trillion, if it chooses to do so. It’s rock solid and because it is essentially an unregulated monopoly, it will continue to be rock solid until it is broken up, if it is broken up. If it is broken up, the value of the parts will be greater than the whole. And by then, Libra will be the biggest of all the Facebook “parts.”
Paul Tudor Jones is a billionaire. He and his fellow billionaires and mega-millionaires and lowly millionaires control one-half of the world’s wealth (estimated, obviously). When they look around, what they see (everywhere they look) is printing presses gone wild; in the United States, in China, in Japan, in India and the EU. The scale of money creation, as Mr. Jones said, is unlike anything any of them has ever seen.
What they think is: there has to be a way to preserve my wealth, to keep it from being ravaged by inflation. As important (almost as important), they think they must do what they can to preserve their “stakeholders’’” wealth. Those stakeholders might be wealthy clients, family members, pension funds, sovereign funds, real estate investment trusts, SPACs. It doesn’t matter. Everyone gets burned when inflation runs riot.
And that’s why Libra or something very much like Libra will (eventually) succeed. The richest, most powerful people in the world want a stable currency. They look around and what they see is…unnerving. China’s debt is sustainable only if everyone agrees it will be forever refinanced. The US seems hell-bent on becoming Argentina. The EU is coming apart at the seams. Russia is terminally corrupt. The Middle East is chaos. India can’t get out of its own way. Swiss francs are fine, but they’re not global.
Libra is global, because Facebook is global. It has built the necessary infrastructure to support a global currency; the hardware, if you will. And no company on the planet is better than Facebook at writing software for a global network. That we know for sure. What remains is Facebook/Libra getting its foot in the proverbial door.
Maybe that means Libra starts as a “PayPal clone.” Good luck to PayPal if that’s the case. And good luck to all the others in Facebook’s way.
Facebook’s Libra project isn’t falling down. It’s just getting started.