• MicroStrategy CEO warned about the toxicity of cash and traditional assets on recent Blockworks webinar
  • The never-ending expansion of the supply of money has created stampedes of capital into other assets which perpetuates the effects of inflation

When Michael Saylor wants a loan from a bank, like any other businessman he gets an accountant to prepare a financial statement that represents his assets. Once it’s signed, it goes to the bank’s credit officer and because there’s trust in place from a decade-long business relationship, the loan is approved.

The inefficiency of it all. The relationship took a decade. The three letters behind the accountant’s name took seven years. And what’s the loan denominated in? Cash—an asset that’s expensive to move around and devalues by the day with the world’s ever-increasing money supply. 

“How do you get a loan from a Japanese bank for 13 days? It’s impossible,” Saylor quipped on Blockworks webinar today. “It takes six months to establish a relationship with a bank.”

But a version of the impossible scenario Saylor describes happens in DeFi all the time thanks to the blockchain. There are dozens of lending protocols that allow an individual seeking credit to post their digital assets as collateral, and for lenders to inspect them and offer a credit line they feel comfortable with. And all of this happens in seconds through smart contracts—programmable money automatically fulfilling one of the oldest functions of a bank. And the term of these loans? Sometimes as little as 10 minutes — flash loans that settle in the course of one blockchain transaction. 

This example, made possible with the trillion-dollar global monetary network called bitcoin, is one of the major paradigm shifts we are facing today, he said. The second is an unprecedented explosion in the cost of capital due to inflation. 

Inflation and toxicity 

With the Fed rapidly increasing the supply of money, that hypothetical cash denominated loan is becoming a problem for the lender. Inflation allows borrowers to pay lenders back with money that is worth less than it was when it was originally borrowed, benefiting the borrower. If you’re a company holding billions of dollars of cash or cash equivalents like debt, the coming inflationary supercycle might just make your balance sheet worthless, he noted.

“CPI is a misleading measure of inflation. CPI is only measuring the rate of consumer price inflation. It isn’t measuring the rate of asset inflation and it isn’t measuring the rate of elite price inflation,” Saylor said, arguing that there are multiple inflation rates and calculating real yield on CPI alone isn’t going to create an accurate result. 

“Cash equivalents are now toxic. If central bankers are inflating money supply by 15% per year, that means you have negative real yields of -15%,” Saylor said. “Toxicity of the assets is a product of the rate of monetary inflation.”

As a result, corporate treasury managers have gone on a “stampede” to alternatives. The first was equities. But Saylor explained that these can be as frustratingly toxic as cash itself. Considering the 15% increase in the money supply, this creates a discount rate that can be crippling to value stocks. In order to actually turn a profit with these equities, treasury managers will need to find stocks that grow at 20% a year for a decade — which 90% of stocks won’t do and the 5% that can pull it off are “incredibly risky”. 

The second stampede was into real estate. “But [real estate] looks like a long bond,” Saylor said. “Especially if you can’t increase the rent at a rate faster than CPI.”

Main Street vs. Wall Street 

These are tough times for those in the profession of corporate treasury management. And worse for those on Main Street. 

“When we inflate the money supply by 24%, that means that on Wall Street people that own assets did nothing to make 24% more money,” he said. “And that means on Main Street, people that create things for a living that manufacture things had to work 24% harder to get nothing.”

This is something that’s happening worldwide, he said, giving the example of Turkey. Fears over interest rates and inflation were at the core of the firing of the country’s central bank governor — and the double-digit spike in the rise in Google searches for Bitcoin

But there is hope on the horizon. March of 2020 to Feb 2021 was year zero, when bitcoin rebounded from $5,000 to $50,000.

And now we are in year one — where “bitcoin and digital assets became the solution to monetary inflation.”

“There’s an awareness that isn’t going away,” Saylor said.

Learn more about about digital assets. Sign up for our next webinar on March 30th at 12:00 PM ET: Building Institutional Grade Market Structure.

  • Blockworks
    Reporter
    Sam Reynolds is a Taipei-based reporter, covering digital assets and regulation throughout Asia. Before joining Blockworks he was an editor at Forkast News and an analyst with IDC.