Blain’s Morning Porridge, March 19^th 2024: The Naira, BitCoin and the Dollar – lessons?

“The best way to destroy the capitalist system is to debauch the currency.”

Nigeria is under attack by cryptocurrencies, says the Government. The Naira has collapsed as locals flee to Bitcoin and Tether – where “crypto-predators” are scamming them. Is this the future? Could it happen to the dollar market as the global economy de-dollarises, leaving a monetary vacuum? What will it mean for the mighty Treasury market?

Writing the Porridge this morning is a nightmare. I did some brief tidying up in the front garden y’day and have a horrible spline/splinter embedded right at the tip of my index typing and guitar playing finger. It’s a damn pain.. It might even make me grumpy…

It’s going to be a relatively short Morning Porridge today – got to do some travelling. But there are a number of stories worth thinking about in terms of how the future might look. I am indebted to Vladimir Lenin for inspiring this morning’s Porridge with his pithy comment above:

I read yesterday that a number of analysts are predicting a recovery in the Nigerian Naira, which has collapsed nearly 70% this month. Their reasoning is its fallen so much, it’s now bound to bounce… Really… ?

Nigeria is a barely functional state, where the thriving industries are kidnapping, extortion and fundamentalist terrorism/crime, based upon a multiple economic omni-shambles of inflation, food shortages, govt mismanagement, forex weakness, a cost of living crisis and rising poverty. Naturally, because it’s not their fault, the Nigerian govt is blaming crypto for the currency crisis, holding two Binance executives on vague charges the cryptocurrency exchange has removed/nicked $26 bln in “suspicious” fund transfers from the nation. The Nigerians have apparently demanded $10 bln in compensation from Binance.

The Naira’s collapse has accelerated a massive shift from the local currency into crypto assets across exchanges like Binance and Paxful. (Nigeria is the third largest nation in terms of Bitcoin trading volumes, behind the USA and Russia.) With the Naira on a nose-dive as Buttcon hits new records, Nigerians have ignored govt bans on crypto trading – and the police are more than happy to take bribes to allow it.

Alongside Bitcoin, Nigerians have also been buying Tether, the dollar stable-coin. There is apparently a brisk scamathon going on as dodgy admin/service companies  demand “service” fees and charges for tokens that aren’t delivered. And here was I thinking crypto was supposed to make money independent and give users direct responsibility for their money? Nope. The feeding frenzy of crypto shysters around the crisis shows how empty the promises and ideals to “democratise” money and remove it from the clutches of rapacious governments have proved to be.

That folk are desperate enough to entrust their savings to intangible assets like Tether and Bitcoin raises a host of questions about money – what is real and what is not? I suspect it’s because Nigerians are caught up as much in crypto-FOMO on Bitcoin as they are nervous of their currency and government. In many ways the collapse of the Naira is testament to the success of the multiple narratives driving Bitcoin at present:

• The mass adoption by the regulated market.
• The success of regulated ETFs and willing participation of major investors in sponsoring ETFs
• The coming halving in Bitcoin – cutting new supply from mined bitcoin – can only push the price higher,
• Etc, etc, etc…..

We know these are all just marketing bunkum nonsenses, but folk believe. I wonder why Nigerians haven’t transferred their Naira assets into tangible assets like dollar or gold instead? (I am sure the crypto barkets will tell me there are reasons like the govt “confiscating” assets… which is very different from bad crypto actors predating them…)

Meanwhile…

Morgan Stanley is warning of a “dollar regime shift”; how the structural forces weighing upon the mighty greenback are threatening to spread to US equities. They cite a shift in dollar sentiment coming from the coming trade war and geopolitics with China, the end of NIRP in Japan pushing up the yen, and the attractions of the stronger Bitcoin as evidence of a shift in future expectations of the strong dollar continuance. They say the dollar bull-market cycle is “maturing”.

I would have said there is a larger long-term threat to the dollar from the issues surrounding the political competency of the USA: the risks its chaotic political polarisation drives the economy into protectionist isolationism, increased trade tariffs, and broken strategic alliances. The risk of a deliberate default engineered by squabbling politicians is one thing, but there are rising doubts on the sustainability of the massive US bond market if foreign powers and the global economy were to move the de-dollarisation of the global economy forward.

If payments and surpluses in dollars for commodities and goods no longer only get invested in dollar assets because they are priced and transacted in other currencies – including theoretically Bitcoin – then the US has a serious problem funding itself. If they world stops valuing everything in dollars, then the ability to keep funding the Treasury market becomes an issue.

There are signs it is happening, but in small ways like China and Russia in a bilateral oil market between each other, or China’s attempts to grow an alternative global banking system to SWIFT. Mighty landslides start with a few pebbles…

If the global economy de-dollarises – even to a modest extent – that’s when things could get… interesting. I very much doubt it would cause a collapse in the US, but could drive increasing insularity as the economy internalises – which would be simple given its scale, its social wealth and it is still the most effective, productive and successful economy on the planet.

The thing is…. Russia and China won’t have to do much to “debauch” the dollar – if US politicians do it for them…

Will we end up with apocalyptic vision of a US society riven by conflict or will the US remain rich, productive, but far less in the face of the global economy as the global economy de-dollarises? I suspect the latter.. the former is better for movies.

It has happened before. Successive European empires have risen and fallen without falling into immediate collapse. Following the First World War the UK’s relative role in the global economy contracted significantly, but it took decades for its slow decline to become apparent. (That decline began as the US economy accelerated post US Civil War and on a flood of immigration from the 1870s.)

Got to run as a big road trip is in the offing.. Out of time!

Bill Blain

Author of the Morning Porridge, Strategist

Wind Shift Capital