- An American economist has delved into the two things he believes the crypto crowd has yet to understand about monetary economics.
- One of them is that the U.S dollar isn’t going anywhere and while some believe Bitcoin will rise to challenge the USD, he believes this would never happen in the real world.
The rise of Bitcoin has come with a lot of misconceptions about the world’s monetary economics and in a recent op-ed, an American economist has sought to set the record straight. Tyler Cowen, an economics professor at the George Mason University in Virginia identified the two mistakes that the ‘crypto crowd’ makes. He believes that while crypto is here to stay, the height to which it will soar has been greatly exaggerated.
Mistake one: The USD misconception
The first mistake the Bitcoin faithful makes is believing that the crypto will rise to take over the U.S dollar’s spot in global economics. Granted, the U.S Federal Reserve has been rather liberal with the printing of the greenback. However, according to Cowen, this doesn’t mean that the USD is under threat.
In his op-ed for Bloomberg, Cowen reiterated that the U.S still has the strongest economy, the strongest network of alliances and the largest military. Inflation may go up over the next two years, but in a ten-year period, it will even out.
Some have pointed out that the ever-rising debt levels in the U.S could lead to the detriment of the USD. The debt-to-GDP ratio looks set to hit 200 percent. But the academic, who hosts the economics blog Marginal Revolution, sees this as a slightly exaggerated extreme. “The poorer and smaller nation of Japan is doing OK with similar debt levels,” he observed.
Despite the debt levels, the U.S national wealth is about six to eight times higher than the GDP. This means that the debt-to-wealth ratio could be as low as 25 percent. “Think of how comfortable you’d be if you paid off “only” 75% of your mortgage.”
If anything, it’s the poor and unstable nations like Venezuela that face the biggest risk from crypto.
Mistake 2: Crypto prices won’t go up forever
Bitcoin has been the best performing asset class in the past decade by a country mile. This has brought in all kinds of investors who have made great gains on their investments. BTC has kept on going up and up, even when it seems like it has already hit the ceiling.
At some point, the BTC market will have to cool down, however. Despite having some great economic models, like money supply deflation, built into some cryptos, or new and valuable use cases coming up each year, the market will calm down in the future.
At some point the market will figure out the value of crypto and incorporate that information into a high level of price for those assets. From then on, expected rates of return will be — dare I say — normal.
This may seem like a bad thing to some, but Cowen views it rather differently. The economist, who has been included in several lists of the top 100 economists globally, and is a regular columnist for the New York Times and the Wall Street Journal noted:
If we eventually arrive at a world in which equities are expected to rise by say 5% to 7% a year, and Bitcoin by say 1%, then that will be a sign crypto has made it.