The Velocity of Cash in a Bubble
The “everything bubble” has been discussed in the financial press for years.
This is the idea that — across the board — asset prices have severed their link with reality, with P/E ratios in the stock market going far beyond what we used to call “overvalued.”
Now, we’re seeing retail price inflation and rapid increases in asset prices.
It’s no shock that the Federal Reserve’s excessive money printing is at the heart of this issue.
But asset prices aren’t the true bubble.
According to Weiss Crypto Sunday Special host Chris Coney, the bubble we're looking for is hidden underneath: a cash bubble.
You can watch this week’s video here, or read on for the full transcript …
Hi there, guys. This is Chris Coney speaking. Welcome to this week's edition of the Wiess Crypto Sunday Special.
Now, I have no guests today, but the idea for today's episode came from Juan Villaverde. I’ve decided to call this episode “It's Not an Asset Bubble, It's a Cash Bubble.”
The everything bubble has been spoken about in the financial press for years. This is the idea that asset prices, across the board, have severed their link with reality, with P/E ratios in the stock market going far beyond what we used to call even overvalued. So, they've gone way beyond reasonable.
You've got retail price inflation and the rapid increase in asset prices. But both are more of emergent effects than a root cause.
The root cause of the problem is the Federal Reserve's money printing. That we know, but seldom do we take that a step further and realize that this is the bubble we're looking for. It's a cash bubble.
Actually, it's almost a reverse bubble. When I was trying to get my head around this, I'm like, "It is a reverse bubble. It's like a negative bubble."
Typically, in a bubble, you have an asset that skyrockets in price, then the bubble bursts at the top and the price rapidly comes back down to what we would call a reasonable level.
But the cash bubble is the opposite.
Cash has crushed in price, creating a negative bubble. And what happens if it bursts? Well, the price of cash will rapidly go back up. Meaning we'll get fewer assets for our money.
That's like deflation, isn't it?
So, we would normally look at this thing the other way around and say that asset prices were crashing when money printing is out of control. But consider instead that it's the rapid fall in the value of cash that will be correcting upward when the bubble bursts.
It literally is flipping your thinking upside down.
Typically, you only need a larger money supply when the velocity of money is high, i.e., when the same dollar is involved in many transactions in the same day.
The classic example I usually give to illustrate this is of a customer who pays for an Uber (NYSE: UBER) driver, who in turn gives the money to the gas station, which then pays an employee, who might even be the partner of the original customer.
So that cash cycles four times, creating the monetary velocity of four in that case.
"Why do people transact?" was the next question I asked myself.
According to the Austrian school of economics, value is subjective. So, a transaction starts with the rise of a human desire that needs to be satisfied. I mean, there's no economic activity that doesn't come from that. The desire has to be there first. A thinking, feeling human being has to have a desire, they then act out.
I've been in digital marketing since I started my career. So I studied Google search marketing and stuff like this, and people literally type their intentions into the Google search engine. That's how the consumers let their desire be known.
So, say someone searches for ice cream on Cleethorpes Beach, which is where I live. They would then find an option, say Oliver's Eatery on the sea front, and head there to conduct their transaction and buy the ice cream.
But that started out with them having a desire. They expressed it, in this case, through the Google search engine. And then if Oliver's bothered to create a Google Maps listing, they would appear in the results, and that would be an economic transaction, as well.
So that creates some money velocity on a micro level. On a macro level, it's not just about spending money. It's about that same dollar circulating faster and faster.
That's what velocity of money is. So, the question is, why would people transact more and faster?
Well, my answer to that is because a desire arises for something they want. And that I think is where the problem lies: If you want to increase the velocity of money, you have to stimulate more human desires, which then want to be satisfied by the spending of some money.
If we think of the economy like a plumbing system in a house, there is a certain amount of liquidity in the system, a certain amount of water in the system for optimum performance.
The water supply to your house and to my house, and the drainage system, connects to the wider plumbing system. And the whole system, on a micro level, my house, and the macro level, the whole national plumbing system of the U.K., is optimized for water flow.
So the only time more water would be added to the system would be, say, if some new houses are built, and then they have their own set of pipes.
I don't know how much a house plumbing system holds, say, I don't know, 100 liters at a time. Then every house, when it's built and filled for the first time, there's a 100-liter capacity that is added to the overall system.
When a new house is built, that's another 100 liters of water that needs to go into the system. This is a metaphor for the money supply and the economy at large.
In an economy, instead of houses, we have businesses. Each business has a certain amount of liquidity — cash — flowing in and out. Cash flow.
But what determines the cash flow rates, or the velocity of money, through those businesses? My answer to that is the number and the size of the human desires they're able to fulfill.
There's a question though: Are all human desires satisfied across the entire world?
So why isn't the money moving faster? Why are all these unmet human desires not causing the velocity of money to move quickly? Why is it instead parked in assets as a store of value instead of being spent? What is that cash waiting for?
Well, I think it's waiting for an investible opportunity.
With so much cash around, getting funding shouldn’t be a problem for any business. There's a mountain of cash that's been printed, and it's all desperate to be put to work. That's what seeking yield is. It's cash desperately wanting to be employed.
I'm suggesting that the velocity of money is closely tied to the rate of innovation in the economy.
A rapid rate of innovation would bring to market a flurry of new creative products and services that would then stimulate human desire and get that money transacting.
Not only would the money then flow faster and faster on the consumer end, but on the other end, venture capitalists would also greatly increase their deal flow. They would end up investing in a greater percentage of the deals that come across their desks, which would continue the cycle in turn by stimulating more human desires and causing more transactions.
Now, this does ultimately bring us back to Bitcoin (BTC, Tech/Adoption Grade “A-”) and decentralized finance (DeFi) in general.
So due to the historic stranglehold on the financial system, more than 100 years of innovation — that would've otherwise been expressed — has been pent up, building like a pressure cooker.
Now, it finally he has an outlet thanks to the permission-less nature of Bitcoin, cryptocurrencies, blockchains and DeFi. The gatekeepers who previously acted as barriers between creators, innovators and consumers are being disintermediated by everything from DeFi to non-fungible tokens (NFTs).
Now, individuals don't have to go through a central authority to access consumers who may want their products. Those desires can be stimulated, and the money can flow instead of being cooped up in hollowed out assets.
But the middlemen of the financial system aren’t the only culprits locking up liquidity. The final culprits in all this are the publicly listed companies.
Decades ago, executives began to focus their attention away from creating innovative products and services to stimulate cash flow and redirected it to pumping the company's stock price and basically get rich quick.
So, research and innovation budgets were cannibalized in order to free up cash to pump up the appearance of profitability on financial statements and to engage in stock buybacks.
Cutting research and development budgets was seen as the one way to reduce costs. I would argue, based on this entire episode, that research and innovation isn’t a cost — it’s essential in assuring the future success of your business.
So, while cutting costs works in the short term, just as stock buybacks pump up the company's stock price temporarily, it costs the company — and the economy — in the long run.
Because, eventually, innovation dries up, and consumers become tired of more of the same for less. Their desire stagnates and the velocity of money slows down. And in an attempt to stimulate the economy (re: consumers), the central bank prints more money.
The problem is we don't need any more money. We never did. There was no shortage of money. There was a shortage of creative innovations that genuinely stimulated human desire to spend that money, rather than store it.
If the velocity of money then started to go crazy, and money was printed as a response to that. Great.
But printing money is just going to have no effect on the lack of velocity of money and the lack of innovation, because it's not addressing the root cause.
And that, fundamentally, is why I'm in the crypto education business. Because what my students end up doing with the knowledge that I impart to them, I would never have come up with myself.
It leads to innovation. And that's the beautiful thing about empowerment: Once you're empowered, God only knows what you'll do with it. And the same goes for all of the innovative products and services, and that could have happened.
Apple (Nasdaq: AAPL) is a good example of this. Steve Jobs is famously quoted as saying, "People don't know what they want until you show it to them."
No market research would ever have come out with the results saying, "We need to design a very thin, touch screen device, the iPad, because that's what consumers want." No one knew they wanted that.
That desire was latent, hidden. It took Apple creating it, introducing innovation and going beyond what anyone had imagined, and saying, "Look at this thing, this Star Trek-style data pad." And everyone went crazy for it.
That desire was then stimulated and then money flowed.
And that's what I'm saying is missing from the world. And that really, thanks to the permission-less innovation, permission-less nature of crypto and blockchain and DFI is why it's exploding at the rate that it is.
So, there we go.
Bottom line: It's not an asset bubble, it's a cash bubble.
That's all for this week's Weiss Crypto Sunday Special. Until next week, this is me, Chris Coney. Bye for now.