Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: my interview with Mayor Suarez, Bitcoin as a hedge, TikTok sale goes awry, and a look at Central Bank Digital Currencies. To sign up for the Capital Note, follow this link.
Escape from Silicon Valley
I spoke with Miami mayor Francis Suarez yesterday in a discussion sponsored by National Review Institute. Suarez has made a high-profile push to lure tech and finance businesses out of San Francisco and New York. He’s had surprising success so far: Hedge funds Elliott Management and Icahn ES have relocated down south, as have a number of prominent venture capitalists, including Keith Rabois and Shervin Pishevar.
Suarez described the inflow to Miami as the combination of “flywheel” effect and a “FOMO” effect (“flymo,” in his words), whereby the city’s high-profile early adopters attract more capital and more talent, spurring a virtuous circle. The mayor’s success in bringing businesses to the city is a testament to the power that engaged, responsive politicians have in reshaping their cities. While low taxes are certainly part of the rationale for moving to Florida, another part of the inflow is hype, which Suarez embraces to great effect.
The mayor also announced recently that he was exploring integrating Bitcoin into the city’s finances by giving municipal employees the option to get paid in Bitcoin, allowing residents to pay taxes in Bitcoin, and potentially adding the cryptocurrency to the municipality’s balance sheet.
Suarez acknowledged that boosting Bitcoin is a way to attract the crypto community, which rewards loyalty. “Every time I would tweet something about crypto it would go viral,” he noted. Suarez has leveraged the enthusiasm of the crypto community to send a signal that Miami is eager to embrace emerging technologies. When the mayor posted the white paper behind Bitcoin on the city government’s website, the link on Twitter generated over 2 million impressions. He has since been embraced by a wide range of figures in the crypto community, such as Brian Armstrong, the CEO of cryptocurrency exchange Coinbase, and Cameron and Tyler Winklevoss, the CEOs of Gemini. In our interview, Suarez stated for the first time that he plans to make a public purchase of Bitcoin on both of those platforms in the near future.
Beyond the hype, though, Suarez made an economic case for Bitcoin as a safe-haven asset, arguing that federal deficits and central-bank money printing risk a debasement of the dollar. He told me he believes in the “mathematical principals and concepts that underlie the technology,” noting that it cannot be “manipulated by a federal authority.” Suarez argued that the appeal of Bitcoin is driven by ballooning federal spending and the “manipulation” of the dollar by economic authorities. “It doesn’t allow for the expansion of the [money] supply,” he added.
Asked whether he feared raising the ire of federal regulators, Suarez said they should “get their act together” and compete with cryptocurrencies rather than try to quash them. Should Suarez go through with his plan, Miami would be the first city in America to invest in cryptocurrency, and could drive more competition between jurisdictions to alter their asset allocations.
For skeptics, it’s impossible to deny that Suarez has succeeded in generating more business activity in Miami. The question is whether the influx of businesses is more than a fad. While that remains to be seen, the city’s streamlining of permitting and business incorporation indicates there are real reforms behind the hype.
Around the Web
Our world is beset by financial crises, geopolitical risks and very loose monetary policy. There is growing demand for safe haven assets that are a hedge against inflation, currency depreciation and debasement and tail risks. Gold, inflation-indexed bonds, commodities, real estate and even equities are all reasonable candidates.
Risky, volatile bitcoin doesn’t belong in the portfolios of serious institutional investors. Many of its retail backers are suckers being manipulated by an army of self-serving insiders and snake oil salesmen. Tesla’s Elon Musk and MicroStrategy’s Michael Saylor may be betting the house on bitcoin. That doesn’t mean you should.
The TikTok deal — which had been driven by then-President Donald Trump — has languished since last fall in the midst of successful legal challenges to the U.S. government’s effort by TikTok’s owner, China’s ByteDance Ltd.
In light of Miami’s potential purchase of Bitcoin, today’s Random Walk looks at the potential for a Central Bank Digital Currency (CBDC). Two Fed economists published a good literature review in November:
Some worry that a digital currency would compete with the traditional fractional-reserve funding system and cause disintermediation:
Fundamentally, CBDC can serve as an interest-bearing substitute to commercial bank deposits. Faced with such a substitute, commercial banks may respond by changing the deposit rates they offer to savers and, because of the resulting impact on banks’ funding cost, the terms of the loans they offer to borrowers. As a result, both the quantity of bank deposits and the volume of bank-intermediated lending may change with the introduction of a CBDC. In this respect, this strand of the literature can speak to the concern of some policymakers that the introduction of CBDC may replace banks’ main source of funding and cause disintermediation of commercial banks, which in turn may lead to a decrease in their lending.
On the other hand, a CBDC could lead to better monetary policy transmission:
As a new form of central bank money, CBDC has the potential to affect central banks’ wider policy objectives, either by acting as a new monetary policy tool or through its effects on the portfolio choices of households and the probability of bank runs. Crucial to these mechanisms is the flexibility provided by CBDC in responding to macroeconomic shocks.
Barrdear and Kumhof (2016) build a dynamic stochastic general equilibrium (DSGE) model with sticky prices and adjustment costs to study the long-run and cyclical effects of CBDC for the macroeconomy. Under the assumption that newly issued CBDC is exchanged one-for-one with government debt, they find that the introduction of CBDC decreases interest rates and distortionary taxes, thus increasing long-run GDP. Over the business cycle, counter-cyclical CBDC issuance can lead to a smaller fall in GDP in response to a liquidity demand shock. This shock leads to a flight to safety in which households demand more CBDC. If the central bank can increase the quantity of CBDC to satisfy this demand, the reduction in real economic activity is less severe, attenuating the decline in spending and therefore welfare.