Fintech Revolution's role in the global economyđ¸
Understanding the current context for a better investing future
Much like everyone else, at SAIP, weâre sitting here wondering how the events of the last rollercoaster-of-a-year will affect the economy of the future. So in this newsletter, weâll look into what we believe will shape our world post-pandemic and therefore will be important to investors. By our estimation, weâre living through a generational change in how the economy functions.
Sounds like a nice, light topic, right? Letâs dive inâŚ
Since the middle of the 20th century, weâve been living in a world dominated by global institutions that are now approaching 80 years old. Our view is that this world order is in decline and that new technologies are rising to form a 21st-century alternative. In previous memos, we've discussed the energy transition and how itâs changing the way we live. Now, weâre going to open a dialogue on what we think is the next big trend:Â
The Fintech Revolution and its impact on how we do business and exchange value.
Economic Cycles
Throughout history, human societies and economies have functioned cyclically. Since the 18th century, Adam Smithâs philosophy and the British Industrial Revolution have unleashed prosperity and innovation via the adoption of capitalist economic systems and the widespread provision of credit in the economy. These forces have been accompanied by the rise of a large and powerful financial system.
This financial system has become central to how modern society functions. As credit becomes available, people and businesses borrow and spend and the economy expands. This is great, except that this supply of credit results in increasing debt in the economy. The debt build-up eventually results in a period of difficulty where the economy shrinks as people pay back or restructure their debts (recessions/depressions).Â
Broadly speaking, demand in the economy is closely tied into this debt cycle, as demand is strong as credit is growing, and weak when credit is shrinking. Examining the long-term debt cycles and historical fluctuations that have occurred since at least the 15th century, we can see that these long-term cycles follow an approximately 70-100 year flow. This pattern has been called the Long Cycle Theory, the Strauss-Howe Generational Theory, and the long-term debt cycle.
Generational cycles are punctuated by shifts in how society and the economy work. These cycles are encapsulated by major historical events like the Protestant Reformation in 16th century England, the discovery of the âNew Worldâ during the 16th and 17th centuries, Revolutionary Wars of the 18th century, Great Power conflict, and World Wars of the 20th century, to the financial crisis and COVID-19 pandemic in the new millennium.
When measured on human achievement, large shifts have been a massive success. Across the generations, we have succeeded in exponentially increasing humanity's standard of living and economic output via technological innovation and rising productivity brought on by these changes.
The most recent restructuring of society and the global financial system occurred 77 years ago (the beginning of the Millennial cycle) with the signing of the Bretton Woods agreement in the aftermath of WW2.
This agreement resulted in an explosion of economic activity, as the world rebuilt and the United States became the dominant global power to usher in a new era of globalization. With the new power structure came a new financial system, based on the US dollar and US-based institutions.
Our Financial Situation
Since the Bretton Woods agreement, national governments and central banks have responded to debt and financial crises with the two principal levers at their disposal:Â
creating and spending money
raising or lowering interest rates
Since President Nixonâs breaking of the âpegâ between the US Dollar and Gold in 1973 and accelerating since the crisis of 2008, governments around the world have begun to experiment with a new idea: âWhy donât we increase the supply of money and reduce interest rates so that we donât have to deal with the âbummerâ of financial crises and debt squeezes?â
In short, they are now doing exactly that.
This approach allows governments to create money, lend to themselves at 0% interest, and continually roll over the debt so that it never has to be paid back. This deliberate strategy has resulted in the rapid printing of money by central governments to finance payments and stimulus expenditure (thanks for the free money! đ¸ Furlough Scheme, CERB, CARES Act, etc.) that has kept the economy ticking over during COVID-19 shutdowns.
The United States, as the dominant financial and economic power and the creator of the worldâs reserve currency, has minted a huge quantity of money to support the economy during COVID-19. Approximately 20% of all USD in circulation has been created during 2020. The $1.9 trillion stimulus package and proposed $2 trillion infrastructure plan of 2021 will only push this trend.
This activity is viewed as necessary to maintain the functionality of the economy but exacerbates wealth inequality, increases public debt, and can lead to price inflation. It also dramatically increases the value of assets such as real estate and stocks while simultaneously reducing the value of the currency relative to other assets.Â
Not such a rosy economic picture for the future, eh?
Well, here at SAIP, weâre eternal optimists and believe that humanity can do better than being sucked back and forth between jubilant economic expansions and crushing recessions that only result in the rich getting richer and everyone else getting left behind.
Previous long-term cycles have ended with the rise of a new powerful country, a war, and the restructuring of financial systems by the winners. However, we believe that the power of modern technology and global interconnection has made this process obsolete.
When thinking about the future of the economy, humanity needs to create a system that does not result in huge wealth inequality and that is not manipulated by central authorities.
Right now around the world, entrepreneurs and institutions globally are working hard to solve these problems in how we transact, save, borrow, and invest. New business models are emerging that will change the way in which we engage with financial services and the economy. Broadly speaking, we will consider these new financial businesses and technologies as Financial Technology (FinTech).
FinTechđ¸
It is hard for many in the millennial generation to imagine walking into a bank branch to undertake a transaction. Heck, it's hard for us to even imagine carrying change or bills. In the western world companies like PayPal, Square, Venmo, Klarna, RobinHood, WealthSimple, and many more have become the benchmark for financial services. In Asia, Alipay, WeChat, Ant Financial, Ola, and Du Xiaoman Financial are rapidly taking market share.
These services offer clean app-based interfaces and ease of use without physical locations. Many in the traditional banking space are scrambling to catch-up (try visiting the Royal Bank of Canada Direct Investing portal đ¤Ž).
While smartphones and the internet are remaking how we bank, money itself is also being disrupted. The versatility and potential of cryptocurrencies have led to an explosion in their value. A cryptocurrency (or âcryptoâ) is a digital currency that can be used to buy goods and services but uses an online ledger with secure communication to validate transactions. Unlike traditional currencies, cryptocurrencies are not backed by governments. Instead, they rely on networks of powerful computers to safeguard value.
The most valuable crypto is Bitcoin, which has a capped supply and recently passed $1 trillion in total value due to skyrocketing demand. This interest is driven by a younger generation, with 67% of millennials in a recent survey saying that they preferred Bitcoin to gold as a way to safeguard their wealth.
These new services and asset classes offer an alternative to the traditional financial system. In many cases, they are digital and decentralized by design, allowing people to transact directly without banks or other institutions.
As a result of these innovations and the speed of change, the post-war institutions and systems are finding themselves unsuited for a digitized and decentralized world.
The FinTech Revolution
Hundreds of years of history suggest that we are reaching the end of a cycle. A shift in the world order seems to be on the horizon. Our view is that there are many benefits in moving toward a more decentralized and technology-enabled financial system. New business models and ways of transacting we hope will reduce wealth inequality and create a wave of innovation to improve lives.
At SAIP our aim is to help people understand these trends, and take advantage of the opportunities that they present. In this issue, weâve investigated some of the big themes that are going to be important to investors. This exploration is helpful context for our upcoming letters, which will look into the specific strategies weâre employing to take advantage of this shift. Stay tuned! đ¸
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If you are interested in learning more about how the economy functions, we would encourage you to check out this video by Ray Dalio.
As always, we would love to hear from you and your thoughts on this monthâs newsletter. Please reply to this email or comment on the post with any comments or questions, or rebuttals (we love a good debate!).
The data đ
For this newsletter, we used three different datasets for two different charts. For âTime for history to repeat itselfâ chart, we used the Wikipedia page with StraussâHowe generational theory generation categories and layered it over World GDP data from Our World In Data. The World GDP Data had inconsistent yearly data, so before 1960s, there is one number for several years (i.e. one number for 1500s), which is why thereâs little to no annual growth for most years before 1960. For the âMoney printer go brrrâ chart, we used Federal Reserve Economic Data and 2020 annotation was from CityAM.com. The values in the dataset are âM2 Money Stock (DISCONTINUED), Billions of Dollars, Quarterly, Seasonally Adjustedâ. If you have any questions or need any clarification on our data calculations or visualizations, please reply to this email or comment on the post.
Fintech Revolution's role in the global economyđ¸
Thanks for including the historical context and concept of cycles. Here is an interesting article by Ray Dalio's thoughts to bitcoin and other digital currencies. https://www.bridgewater.com/research-and-insights/our-thoughts-on-bitcoin. (This was sent to me by one of the SAIP writers!) There are other interesting articles on their website as well. worth checking out.
You guys, this is great! Very much looking forward to adding this into the newsletter rotation. Keep em coming!