The US Dollar is better at holding its value than people realize
This article will change the way you see the US Dollar as a store of value
A while back, I stumbled upon a LinkedIn post from Marco Pabst, a macroeconomist. He created a point that I think should be repeated often, that the US dollar has declined in value only when you store cash under your mattress. In the image below, we will find the difference between how much one dollar is worth in 1834 when you include interest received and when you exclude interest received. The blue line, which does not account for interest received, is the chart that runs popular among the crypto community.
Like Ethereum, the US Dollar does not have a supply cap. This means that they have the potential to be inflationary. We all know the dollar is inflationary. But for Ethereum, it’s commonly known for being deflationary.
While the Ethereum network is known for being deflationary because it burns a portion of its supply within the transaction fees it generates, there are times when the network becomes inflationary due to a lack of activity. Remember, for Ethereum to be deflationary, it needs higher network activity. Ethereum burns a portion of its supply by burning a portion of its transaction fees. With lower network activity, the amount of supply that grows with staking rewards will outpace the supply burned through transaction fees, resulting in inflation.
The idea behind Ethereum’s staking program is that users would be compensated for any supply increases that occur in the network while simultaneously trying to decrease the supply in the form of burning a portion of their transaction fees. This is similar to the USD where it compensates people for money supply created in the form of interest. As Pabst found, the dollar grew by 37x in real terms because of the interest that dollar holders received in the form of interest. Staking income in Ethereum-land is interest income in the real world.
As for money supply, both the Ethereum network and the Federal Reserve have their ways of reducing the money supply. The Ethereum network reduces supply by burning a portion of the transaction fees and ensures that the issuance rate of Ethereum is less than the rate of Ethereum that is burned. As for the Federal Reserve, it can reduce the money supply through the sale of government securities onto the open market, raise the discount rate, and increase the reserve requirement. If the Federal Reserve wanted to make the dollar deflationary, it would do those things.
Personal Views
I give credit to the crypto maximalists and gold bugs for pointing out that fiat currencies are not perfect. But when accounting for the interest generated, they prove to be remarkably resilient stores of value. Gold, crypto, and other alternative assets have their place, but the narrative that they are vastly superior to the dollar as a long-term store of value is simply not supported by historical data.
I like all of the nuanced, data-driven analysis of the most popular arguments in the investment community. By challenging conventional wisdom, we are forced to think critically about these complex monetary and economic issues. Kudos to Macro Pabst for putting together such an insightful and thought-provoking post.
I credit the zero-interest rate environment for sparking this discussion. Before the era of zero interest rates, people got a good rate of return on their savings accounts and because of this, they did not worry about their money getting eroded by inflation. Because of the zero-interest rate environment, households got essentially nothing on their savings and meanwhile, prices for goods kept going higher and higher.
When interest rates start to rebound higher and households start getting better returns on their savings accounts, I’m curious to see if more people will still think the dollar is a bad store of value.
Photo by Kostiantyn Li on Unsplash