Where is your money right now? If you’re like me and most other Americans, you have between a few hundred and several thousand dollars sitting in a checking account. You’ve had this account for many years with a bank that you trust to not lose your money. I don’t think about my relationship with the bank that provides my checking account, Bank of America, very frequently; it goes without saying that, day-to-day, nothing changes. I put money in, as I earn it, and take money out, when I need cash or to pay bills like rent or my credit card.
In exchange for keeping your checking account open, the bank pays you interest. Again, if you’re like me, you probably don’t think about this interest very often. After all, it’s practically nothing. My bank pays me 0.01% APY — 0.00083% each month – on my checking account. A $1,000.00 balance becomes $1,000.83 and $1,001.66 the month after that. Again, practically speaking, nothing changes.
Unless I deposit or withdraw money from my account, I expect my $1K to remain around $1K, and when I go to spend it on a post-Covid vacation next year, I expect to receive $1K worth of vacation. In reality, I will only receive around $950 worth of vacation. Assuming I didn’t withdraw any money and can rule out illegal activity (hacking, bank robbery, etc.), what happened to my $50? To answer the question of what happened to my money, I must first ask and answer another, more philosophical question…
What is money? Ross Stevens, CEO of Stone Ridge Asset Management, a manager of money for institutions (university endowments, pensions, and other large organizations) with $4.9 billion in assets under management¹, opened his annual letter to shareholders² asking the same question:
Shortly before the genius David Foster Wallace died, he delivered a college commencement speech that opens with a beautiful critique of our “default setting.”
“There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says ‘Morning, boys. How’s the water?’ And the two young fish swim on for a bit, and then eventually one of them looks over and the other and says, ‘What’s water?’”
Wallace goes on to teach us that sometimes “the most obvious, most important realities are the ones that are hardest to see.” For Americans alive today, one of our ‘What’s water?’ questions is ‘What’s money?’. While Wallace asked the graduating seniors that day to think about fish and their relationship with water, I’ll ask you to think with me about our own relationships with money and, as Wallace also asked, “bracket for just a few minutes your skepticism of the totally obvious” and reconsider “what is real and essential, hidden in plain sight all around us all the time.”
… Money is, and has always been, technology. Specifically, money is technology for making our wealth today available for consumption tomorrow. …Money is unique among all the goods we seek because we value money not for its own sake, but rather solely for its prospective exchange utility. That’s a fancy way of saying we hope it keeps its value long enough to enable us to trade it in the future for stuff we actually want.
By no fault of my own, my $1,000 isn’t keeping its value long enough for me to trade it next year for that vacation. Put another way, the price of the vacation is going up so the quantity of vacation I can trade each dollar for shrinks! For example, when I break down the individual costs of my prospective vacation, I see that the price of domestic plane tickets has increased 24.1% since May, 2020³ which means that I can only trade for 75.9% worth of airline tickets.
It isn’t particularly surprising that I’m getting less bang for my buck, after all who doesn’t need a much-deserved post-Covid vacation! As we learned in high school economics, increased demand for goods and services which have inelastic supply (there are only so many flights per day to Europe, planes, pilots, etc.) results in higher prices. This is called Price Inflation — a shrinking of your Purchasing Power — and we (you, me, the rest of Americans, and people across Western Countries) are living through a period of price inflation inexperienced since the early 1980s. I should simply wait until the travel bug dies down and so I can trade my $1,000 for $1,000 worth of vacation.
This vacation example is intentionally dramatic in order to illustrate how supply and demand can cause price inflation. For the vast majority of stuff that we purchase in our everyday lives (“The Cost of Living”) — gasoline for our cars or food at the grocery store – inflation is much less dramatic; it ranged from 3% to 0.7% between 2011 and 2020⁴. Put another way, a cheeseburger that cost $2.50 in 2010 cost $2.60 in 2011 because prices inflated by 3% in 2011.
A $0.10 increase in the price of a cheeseburger over the course of a year may seem insignificant, and in isolation it is, but when you start to add up price inflation across all of the stuff we buy each year, and the number of years we are alive, our loss of purchasing power becomes staggering. The average American spent $63K in 2019 when inflation was 2.3%⁴, a $1.5K decrease in purchasing power. Multiply that $1.5K out across your expected lifespan (wishing you a long, happy, and healthy life!) and join me in feeling the pain.
How then can you beat inflation? There’s only one way: to own an asset that goes up in value at a rate greater than inflation. For example, you could purchase shares in an index fund — like Vanguard’s S&P 500 ETF – which are designed to deliver returns that match the stock market 1-for-1. They are easy to purchase (you can do so on Robinhood in a few minutes), are beginner friendly (no research on individual stocks is required), are low risk (S&P 500 ETF is made up of the largest companies listed on stock exchanges in the United States such as Amazon, Caterpillar, and Walmart — only in a major economic downturn are all 500 negatively effected), and historically tend to beat inflation (the stock market has gone up an average of 9.2% annually over the past 140 years⁵). However, purchasing shares of the S&P 500 ETF is out of reach for many Americans who do not earn enough money in wages (i.e. trading the asset that you’re born with —your time — for money) to cover their Cost of Living expenses and have enough left over to invest.
For Americans who cannot afford to purchase assets to buy as much as they did in a previous year, their wages must increase at a rate that beats the rate of inflation! All the while, after these wages are earned but before the money is spent (deposited in a checking account earning 0.1% APY), it is slowly losing its value. Interest earned after accounting for inflation is called Real Interest; with consumer prices having risen 5.4% since this time last year⁶, the real interest rate on my checking account is -5.3%, a 5.3% reduction in my purchasing power! It’s easy to see why many Americans feel like, no matter how hard they work, it is impossible to get ahead. After all, the American Dream of buying a home will always be out of reach when housing prices are increasing by 5.24% annually⁷ and the money required for a down payment must be saved and then beat inflation.
Beating inflation isn’t limited to individuals — businesses with excess cash on their balance sheets need to ensure that it stores its value long enough so that it’s tradable for stuff the business needs in the future. This is why, at the beginning of 2021, you kept hearing about big name corporations buying Bitcoin. Companies with hundreds of millions of dollars in cash needed a place to invest it, looked around, and found limited options. Their best option, in spite of its wild price swings, was Bitcoin. The day-to-day price volatility of Bitcoin was not an issue because they were not looking to spend this cash tomorrow or the next day, when the price of Bitcoin could be down by 30%⁸. For you and me? Too risky. If I’m not okay with $950 worth of vacation, I’m definitely not okay with $700 worth of vacation. What then are my options?
I asked myself this question in April of 2021. My business had earned $50K that month and I needed a place to put this money knowing that I might spend it tomorrow or I might not (such is the case in startups). After spending several weeks researching and evaluating my options, I settled on a high-interest account from BlockFi. Here’s why:
At the time, a BlockFi Interest Account was paying 8.5% APY (now down to 7.5%), an 850x better rate than I could get on a Bank of America Business Advantage Savings account⁹. BlockFi Interest Accounts store money in the form of cryptocurrency and my business’ $50K was already in a cryptocurrency called US Dollar Coin (USDC). It would be very easy for me to withdraw and spend my USDC as necessary.
BlockFi’s model is no different than my bank’s (BofA)— they use my money to make loans, charge the borrowers an interest rate around 11% APY, pay me 7.5%, and keep the 3.5% as their fee. BlockFi is able to charge a much higher interest rate on their loans than my bank because borrower demand for my USDC is greater than borrower demand for my USD.
At this point you may be wondering what inflation has to do with the Infrastructure Bill¹⁰ just passed by the United States Senate. In order to pay for the Bill, the Senate introduced changes to how taxes are reported and collected, including Section 80603, a provision that specifically changes how taxes are reported and collected on cryptocurrencies. Unfortunately, the provision was poorly written: its vague language demonstrates regulators’ lack of understanding as to how the technology underpinning cryptocurrency works and how individuals and businesses actually use cryptocurrency to not only beat inflation but earn their livelihoods. Subsequent amendments to address public backlash only reiterated this ignorance, adding language that privileged specific crypto-technologies over others (e.g. Proof of Work vs. Proof of Stake) and would ultimately result in the government having preordained which companies will win and which will lose.
Rather than making it easier for Americans to build wealth into the future, Section 80603 makes it harder for companies like BlockFi to offer inflation-beating interest rates. Will a better road make you so much more productive that your wages increase at a rate that beats inflation? No. Americans deserve an Infrastructure Bill that is singularly focused on improving our country’s infrastructure. Instead Congress has passed a Bill packed with wide-ranging consequences that affect American life beyond infrastructure, consequences that deserve their own independent debate and intelligent regulation.
I call upon our Congress to soberly discuss the state of inflation within the United States and to take the time necessary to understand cryptocurrencies and their relationship with inflation. Only then can smart regulation – regulation that protects people from predatory scams and investment schemes that have plagued the cryptocurrency ecosystem — be crafted. The alternative is heavy handed governance which will ultimately hurt individual Americans by reducing their opportunities to beat inflation and prosper.
Thanks to BH, LOC, and JI for reading drafts of this.