Children come with a loaf of bread under their arm, Black Swans come with debt. This is the conclusion we can draw from this chart. It summarizes global debt as a percentage of GDP for governments, individuals and corporations. We have a global debt of 256% of GDP. So don’t say that “we didn’t see it coming”. Take a look at this graph of the International Monetary Fund (IMF)
In the US the national debt is over 30 Billion, about $91k per citizen, quite a bit more if you spread it out among citizens who can pay taxes. Tax revenues are only 4 Billion per year, i.e. they collect about $13k per citizen against a debt of $91k.
The US would need 8 years of tax revenue (and zero spending) to repay the debt.
I don’t say so, the IMF says so.
But it can’t be, surely these great economists have something in mind, we are in good hands, the federal reserve, the ministers of economy, the professors, surely they are up to something, some trick that will get us out of the eye of the hurricane.
The trick is that if the economy grows faster than the interest rate, theoretically you can refinance your old debt with new debt, in such a way that you will reduce the percentage of debt with respect to GDP and thus, extending this effect infinitely in time, you will reach the paradox that you will never have to pay the debt because your growth capacity is greater than your indebtedness. Sounds good, doesn’t it?
No, it doesn’t. In the last 30 years it has barely happened 3 or 4 times in a ridiculous percentage that has never broken the trend.
But in whose hands is the debt? Investors, funds, other countries? A large part is going to traditional banks, after all, this is their business. But you know what they say, banking always wins, they are too big to bring them down, they are systemic, without traditional banking, there is no financial system and the whole world economy would simply collapse. It is unthinkable. For that to happen we would first have to invent an alternative banking system, one that does not depend on the debt of the states.
Fintechs, for example, are eating up the market in a remarkable way. I am not saying this either, the IMF is saying it 😉
Take a look at this graph:
These neobanks are just slightly more modern forms of traditional banks. They assume more risk in asset and portfolio management, consumer credit, but above all the big difference is that they are digital natives. They do not have a physical structure, offices, large organizational charts, … they are structured as Internet companies, offering massive automated low-cost services that allow them to compete on price.
But there is one thing that the IMF does not explain.
This is just the beginning. Defi’s are catching on. They are not just digital natives, they are a much deeper and more significant change. They already allow you to do things like:
- Lending and borrowing
- Yield farming
- Decentralized exchanges
Services that were previously only offered in traditional finance. Defi are Open source and Censor resistant while traditional ones are opaque and censurable.
But let’s not be romantic. This is not about a freer and fairer society. It is not about new technologies VS old institutions. Defi’s are going to dominate for a very simple reason:
They are cheaper!!!
That’s the elephant in the room. There are no expensive middlemen.
That ‘s the key.
Yours in crypto.