It's only a matter of time before Bitcoin "death spirals" down to its true intrinsic value, which is $0, said Steve Hanke, professor of applied economics at Johns Hopkins University.
As Bitcoin prices breach new all time highest and continue to climb higher. What really is the actual value of this cryptocurrency and this assets that's taken headlines by storm. Steve hanky, professor of applied economics at Johns Hopkins university. He's here to discuss cryptocurrency valuations along with monetary policy professor hanky.
Welcome back. We're speaking on the second day, Jerome palace testimony with Congress. So we'll touch on some of the calls that he's made in regards to our economy. But first I want to visit Bitcoin. What do you think of Bitcoin? You and I have never spoken about this subject before, and I'm very interested to get your thoughts about why the price has climbed up to $50,000.
It's climbed because there's a tremendous amount of speculation and, and our herd of speculators bidding on Bitcoin. That's why it's going up. So it's, it's market price. It's market value is what it is, you know, it's about 49,000, almost 50,000. Today per Bitcoin, but then there's another issue. And that is well, what's the fundamental value of Bitcoin.
And the fundamental value is zero. Uh, and people say, how can you say that the price is almost 50,000? It was up to almost 60,000 all time high. How can you say the fundamental value is zero and the fundamental value is zero. And the easiest way to get that under your hat is to think in terms of the flow of income generated by Bitcoin and the, and the flow is zero.
It's not like money, money broadly define most Viet monies broadly defined. Yeah. Have a fundamental value because they pay interest. If you look at the 14 components of M four, that's the broadest money major in the United States, 10 of those components. For example, like treasury bill, that's a component of broad money.
The treasury bills pay interest, a Bitcoin doesn't pay. That's why you can say on ambig U S laid that it has a fundamental value of zero. It pays no interest. Okay. Uh, let's talk about valuations for, um, an asset that doesn't generate cashflow. I had a, a bring up an interesting question that I remember being asked by one of my professors in finance way back when I was still in university.
And the question was, suppose scientists get a hold of a dinosaur DNA. And they reverse engineered and then the rebirth, a new dinosaur. So now we have a dinosaur for the first time, since their extinction, and now people are starting to bid on it. There's an auction on how much this dinosaur will be worth.
How would you value this dinosaur, this new asset, this new thing that no one's ever seen before? Well, uh, the, the fundamental value would be if you could put it in a zoo and you could. Charge people for coming in and looking at the thing and you, and you could copyright it. So pictures would generate royalties and things like that.
It would have a fundamental value and you could figure out the present value of what those income flows from viewing the dinosaur and doing whatever you want to do with a dinosaur medic medical tests and all the rest of it. That would be the fundamental value is a present value of the, of the cash flow net.
Free cash flow that was generated that the market value might be quite divergent from that you might get huge speculation in the thing, or maybe it would be discounted at a very high discount rate or something like that, because you thought that dinosaur, that all of a sudden was. Brought to life would die on you and the free cash flow that you were projecting would carry a lot of rooms, the risk associated with it.
So if you dinner, risk adjusted, discounting of free cash flow, maybe use a very high interest rate in the present value. It'd be quite low actually, because you think that thing is going to keel over tomorrow and then no one would be able to see it again. So you think Bitcoin doesn't have any of those?
Properties. It doesn't have any fundamental value. It doesn't have the inheritability to generate cashflow. And so it should be where the zero is that your view? Well, that, that is the fundamental value. The value in the market is a value what's the market participants are putting, they're just two different things.
It's a, it's obviously a highly speculative thing. It's very volatile. And that gets into the fact that it is not a currency because. It is not a stable unit of account to be a, to be a currency. You have to have a pretty stable unit of account, uh, a yard stick. That is, that is, uh, shall we say constant, that that would be the ideal kind of thing that isn't changing around.
So as a result, as a result of that, David, it's not used in transactions, plus it's very costly to use Bitcoin and transactions. It's not, it's not used as a. Uh, is, uh, prior pricing or invoicing unit of account because it's too unstable. Nothing has priced in Bitcoin and it's not all used as a, as a unit for calculating deferred payments.
You, you don't have mortgages that are, that are made out of Bitcoin. You'd have to be insane to sign a mortgage. That w that w that was denominated in Bitcoin. So it's a unit of account thing that, that actually is that the real clencher on the thing. And the reason why something, like, for example, the U S dollar is the international unit of account for almost all commodities.
And, and many, many manufacturing items, even manufacturing items manufactured in Europe. What, what a lot of them priced in and invoiced in us dollars. Not, Euro's not, not pound Sterling the same as the Japanese yen. The Japanese produce a lot of manufactured goods. A lot of those are actually priced in us dollars.
They're not pricing. Yeah. Professor hanky the, uh, the Bitcoin price then. Okay. So do you think it's fairly valued at $50,000 because of the fundamental, uh, what would w if the, if the face value here is solely driven by. Demand and this herd mentality. Well, right now I can tell you that most of the sentiment around Bitcoin within the crypto community at least is very bullish.
So is that a bull case for you then? Because if the herd keeps going into this with, with a bullish mentality, isn't that just going to keep driving the asset up? It could, we don't know. It's a speculative asset that isn't used for much of anything is not unreliable store of value, not used in transactions.
It is used in a lot of illegal activities because they, they say it's hard to trace and it's anonymous. It's it's actually could be traced a lot more effectively than people actually think. But the bottom line is I I'm, I'm not speculating in it. If you, if you want a speculation and something highly volatile.
Or, or, or you want to take, make some kind of bet that you, you have some insight as to where things are going in. You think it's going up, right? You buy, I think the fundamental value is zero. And I think there will be competitors in there that are much superior. And that ultimately that this is going to go into a death spiral and Bitcoin will it's its value will eventually approach is fundamental value.
No, I ha I have no crystal ball to tell you what happened. Well, no one knows when, but how, what about the question of how or why, why would people all of a sudden come to the realization that it's value is zero? How are you going to convince the crypto community? Uh, that's heavily invested into this asset that everyone's wrong because there'll be, there'll be very serious.
Real reliable cryptos, all ultimately that are okay. That are put into the market and it will be the com the competitive currency market that determines ultimately the value of this speculative asset. And I think there's a pretty good chance that I'll go down to close to zero. Okay. So let's, let's talk about this new crypto, uh, ideal crypto, just a bit, but one final question about Bitcoin people have been comparing Bitcoin to gold, and we know that goal, like most commodities follow cycles.
Up and down, up and down, do you think Bitcoin is currently in the Supercycle of, of bullish action? All right. I have no clue. I mean, it's not in the same CA to compare it to gold as a joke, actually, goals thousands, thousands of years, the golden constant is that over the, over the long run, you can purchase a.
Constant and consistent bundle of goods services with gold, uh, today the same basket the, you could with an ounce of gold and a hundred years ago. And that'll probably be the same going a hundred years going forward. So it's, it's gold is a currency by the way. Bitcoin is not. So, so you're comparing apples and oranges here, David.
And they, they, these, these crypto fanatics, I, I would say they're, they're not analytical. The, the, they, they might be making lots of money. I'm not, I'm not arguing about that. That's, that's not the point. The point is that. Bitcoin is not a currency and you can't compare it to gold and gold is a currency.
So let's talk about, uh, this competitor to Bitcoin that you mentioned. So suppose a new coin were to come out that could out-compete Bitcoin and people would realize, okay, Bitcoin is really not an ideal asset. What would this coin look like? Well, first of all, does it already exists in the market and not really like.
It doesn't exist. There have been attempts. This whole so-called stable coins and space people have tried to, to, you know, come up with something that's more stable, shall we say and reliable than before, but the way to go. And, and the, the geeks who have been invited and the cryptos just don't understand money very, very well, or the history of money.
What you should do is establish a private. Currency board that would issue a liability and that issue would be a currency. And that currency board currency would be back to a hundred percent with some anchor asset. And that anchor asset could be another currency like the U S dollar, or it could be gold.
You could have a gold. All right. See board and that the money or liability issued by the currency board would trade or the fixed exchange rate and be freely convertible to whatever the anchor happened to be. So if it was a gold backed currency board, uh, you would have, uh, the, the unit of gold that was in the currency being issued.
That's all I ability. And that would be a clone of a unit of a gold. Or you can have a dollar backed and that would be the currency being issued by the currency board would be a clone of the us dollar or the Swiss Franc. But why would it be based on fee that, I mean, people are, what, what is, what is the U S dollar anchored on professor?
What is Fiat money based on? Well, it isn't based on anything. It does. Most of it does pay interest though. So it does have some fundamental value, but, uh, it's a, it's a Fiat currency. Gold is not a fiance currency. And furthermore gold has the advantage. It's not issued or a liability of anything. Okay. It's not an issue.
It's not a liability ability of a sovereign. So it makes it very attractive for. Places like Turkey or Iran, Russia that want to de dollarize and get away from the dollar. Right? They should, they should install a currency board based on gold. And, and then you would have a Turkish Lira that was a clone of gold or a Russian ruble.
It was a clone of gold or a Uranian reality. It was clunk. So, so some, something like a gold cryptocurrency is what you'd like to see. Well, that that's one possibility you could have the main thing. The main thing, if you're going to have a crypto, that is, that is used and, and really drives out things like, you know, drives on all the cryptos that are in existence.
Now, if you had a currency board based crypto, Believe me, it would drive all the cryptos that we see in the market right now, or off to the sidelines. It would be much farrier. I like to find ed, uh, Dr. Kurt Schuler and I have all the legal bylaws and everything else for one of these things it's very straight forward.
Okay. All right. Great. Let's do it would be very easy. Let's turn the page now to monetary policy and talk about, uh, some of Jerome pals, uh, notable quotes that we've, uh, I've jotted down for you to comment on. I know you and I, uh, did, uh, did an entire episode. On why the empty money supplies growth is going to contribute to GDP GDP growth.
But listen to this, this was one of Paolo's quotes from his testimony this week, the growth of doesn't have a relationship with economic growth anymore. The relationship with the money supply is something we have to unlearn. Is he right? Do we have to unlearn everything? You just, you just told me two weeks ago, the chairman Paul's clearly delusional.
I don't know. I, I, I can't believe the chairman of, of a central bank actually said that I can, because they're all singing from the same song book. They, they produce money and they're telling us that money is irrelevant. Th th this is a ridiculous statement, uh, just on the face of it. Uh, the guy's coming up for a reappointment next year.
I, if I was. Uh, in the us Congress, believe me, I I'd be doing some questioning of the, of the chairman of the federal reserve. W why is he saying that for, for the, for the, for the people who haven't watched our last episode, can you give us a one minute run down of the relationship between M two and growth and why you think he's wrong?
Okay. When we're talking about growth, you have to be careful. We're talking about the there's a link. That's almost one-to-one between the growth and broad money. And, and M two happens to be the broadest major that the fed has M four put out by the center for financial stability is, is actually a better measure.
Uh, in my view, those broad money majors are linked very closely to growth in nominal GDP and nominal GDP includes real economic growth plus inflation. So if, if you have. No. If you have the money supply broadly measured going up fast, let's say it's going up at 20% or 25%, 30% that's fast. And you have the max amount that you can squeeze out of the economy in terms of real growth.
Let's let's say it's 5%. You subtract the 5% from whatever the money supply growth is. And you got inflation is the reason Joel. The remainder that's left. So right now, what do we have last year? grew at 26% per annum. That's the fastest growth in M two since 1943. We know this year, given what the fed is going to do, they've already told us they're going to be monetizing debt at the rate of.
$120 billion per month. If you add those up over the year, you get a 12% increase in this year, 2020 ones am two without even increasing bank credit or anything else. So that is what 12% to put that into context. That's twice as fast as M two has been growing over the last 20 years. So we got a lot of juice in the system already, and a lot of money is baked in the cake already.
That means that nominal GDP is going up. It's baked in the cake. Paul Paul is missing it. He is refusing to talk about the product that the federal reserve is in control of. Yeah. Any, any saying that doesn't make any difference what the fed does? Well, most people thinks, I think it makes a lot of difference with the fed is doing Paul, as I say is really doing right.
Okay. All right. Well, he made another quote on inflation. Uh, I'd like to get your comment on this point as well. Inflation will be volatile over the next few months, but the effects won't be large or persistent. How you're reading that statement, is he, is he communicating that inflation is not a priority for him and the fed for the next few months?
Yeah. So that's what he, that's what he's saying, because he says money doesn't matter. I'm S I'm saying money matters. Money. Money is the engine and fuel fuel in the engine that drives nominal GDP growth. Which includes a real component and an inflation component. And anyone arguing against that is, is reading some, uh, tea leaves that I, I don't know about.
Maybe he could be reading the monitor, modern monetary theory, playbook.
I mean, this is Lenny. Well, yeah, the MMT theory, I mean the MMT thesis does suggest that you can print money with no consequences of inflation. That's what, that's what this theory subscribes to. Right? Isn't that? Yeah. Yeah. Yeah. That's the, that's the nub of the story. And, and I'm saying the quote, the quote, two quotes that you've given me by secretary or by.
The chairman of the federal reserve. Ron Paul suggest suggest that he's been reading that at night under the blanket with a flashlight. Let's let's do another episode, uh, another time and, uh, and just talk about MMT and why you think it's, uh, It's probably not a correct, but a fine final question. You and I were talking about Canadian inflation offline, and I I'm, I'm bringing up this example because I think it's interesting.
People were saying that the CPI doesn't accurately measure real life inflation. It's just, you know, government data is not reliable. Well, here's an example of a revision to CPI upwards. Can you comment on this? Well, the Canadians, uh, they didn't just revise the number they had. The annual inflation for January was printed at 1.5% per annum.
And they revise that up to 1.77. But the interesting thing, it isn't a normal revision in the sense that they said the methodology they were using to construct the CPI price index. And Canada was flawed. So the, so the, the th th the way they were measuring it, they said w was flawed, which usually isn't the case in a normal revision.
They just say, you know, we, we print 1.5% and then they come out with a revision saying it's 1.77, and that's the end of it. But the Canadian thing was unique in the sense that they said they, they really. Had used the wrong method to be measuring inflation in the first place. And they've changed the method.
How, how often do you see this from an industrialized country admitting that their revisions were based on erroneous calculations or methodology? It's pretty rare. Okay. I, I'm not saying that it doesn't happen. That the main thing is no one admits at that. Do you think the Bureau of labor statistics should be doing this kind of revision?
Well, the, the Bureau of labor statistics has such a grab bag of inflation metrics that they use, that they can choose to any one of them and they're all over. All right. So we won't be expecting this kind of inflation. Adjustment upwards from the U S anytime soon is what you're saying. Well, maybe, maybe not this kind of this, uh, I th I think inflation is going up.
And there will, there will be, if, if there are any adjustments in the us, there'll be up and the actual majors reported will continue to go up, up, up, up, up. I remember last time you spoke to me, you said that this year, uh, you could expect inflation to well surpass the Fed's 2% target. I think that would, you said that would be a real possibility, right?
I think Jerome would disagree with you. He says. Not going to be larger persistent. Those are his words. Well, no, he, he, he, he hedged himself. He, he, what he's really saying, he's agreeing with me. He, he knows, he knows it's banked in the cake and it will be above 2%, but he's saying don't worry about it. It's not going to be a long-term thing, just a temporary.
A temporary little blip and the thing I, I completely agree. Disagree with that. Yeah. Okay. Professor, thank you so much for, uh, for your thoughts and your update today. I look forward to speaking with you next time. Thank you, David. Good to be with you. Good to be with you as always. And thank you for watching Kitco news.
I'm David Lynn. .