Why The Metaverse Is Inevitable And What's Going On In Finance?
I like the term extended reality. It makes a lot of sense to me and it doesn't yet have the power to completely shut down a conversation like the term "metaverse".
Why is the idea of the metaverse so offensive to some people that its mere mention makes them angry? If I utter the word to some friends they totally shut down because for them its impossible to imagine that a society that has been glued to screens since the 1950s could possibly want to move beyond the 5-inch screen they currently live their lives through.
These are the same people who scoffed at web 1.0 because who was actually going to spend time in front of a screen that wasn't a tv?
Then they scoffed at web 2.0 because the internet was for research, not buying things and interacting with your friends which you could do in person.
Now they scoff at web 3.0 because "No one is going to trust strangers and live their lives based on digital worlds." they say to me barely taking their eyes off the latest app they downloaded from an indy developer who now has all their information.
Why is it always so impossible to imagine what's next even when its staring you in the face? After the last 25 years of tech advances that has us barely recognizing our lives from from one five year span to the next we still can't ever imagine that it's going to keep going.
Think about it. In 1995 no one could imagine the internet mattering but a few geeks and teens.
In 2000 most people were connected and had email. We talked to each other in chat rooms, played games with people on the other side of the world, read news, bought a few things, shared files on napster, and we'd begun to organize billions of websites, texts, and images with google and yahoo.
In 2005 we got Youtube and social media and blog platforms. We could be the news. We could interact and curate personas and also easily buy almost anything we wanted and have it within a few days. Our lives were going online and the wire that attached us to the internet was starting to be replaced by wireless signals.
By 2010 we'd have smart phones that were starting to link the digital and physical worlds. You could do silly things like have your phone listen to a song and tell you what it was. We had airbnb and uber. Yelp was in your pocket and you could take a pretty decent photo or video and send it to your friends instantly. The hub of the digital world stopped being your computer sitting home on your desk and we could communicate like never before. We got the phrase, "there's an app for that" because there really was. Commerce was shifting from buying the odd thing you didn't feel like shopping in 5 stores to find to more everyday purchases like groceries and toiletries.
By 2015 we could buy anything we wanted on our phones. Instagram and other social media brought us the concept of influencers. We could take a picture or a video and instantly send it not just to our friends, but to the world. Social movements and protests like occupy wall street and Arab Spring picked up steam in those 5 years as organization became easier and information was instant and widespread. Your smart phone was a serious tool by this point and everyone had to have one.
By 2020 we were came into the covid era of Zoom and NFT's and digital communications dominating everything. In two short years it's become perfectly reasonable to live hundreds or even thousands of miles away from your office and still somehow be just as available. I don't think most of us could imagine waking up tomorrow and having everything be like it was in 2019, let alone 2015.
But somehow we think coming out of covid era we're just going to stop all this and revert back to whatever we had before. We're going to all go back to the office and give up on digital expansion as they hook up 5G all over the world. If you think that, I got news for you - 2025 is not going to look like 2015.
Here's a few things we're looking at happening by 2025.
By 2025 Microsoft has said we will be firmly into virtual metaverse office meetings complete with NFT avatars and personas. Microsoft dominates the office space so it would make sense they'd have some idea of what's coming. But let's not forget, they also own xbox and just spent $70 bullion on Activision. So I'm guessing they aren't going in with just an office approach of adoption.
Meanwhile Facebook just changed their name to Meta and adoption of Oculus is coming along quite nicely. It's looking like they are on the verge of hitting network effect growth of selling hundreds of millions of units by 2025. Think smartphones in maybe 2012 level of adoption.
We also have Apple who has been making their phones (and now computers) so powerful that there hasn't been a use for their power since 3 generations ago but they keep adding to it by leaps each year. They have also been building AR applications while perfecting what a great companion device needs to be with 7 years of work on Apple Watch and now AirPods.
I have to say I got an Apple Watch a few months ago and they've done a fantastic job with it. It's not intrusive. It doesn't take up your attention. It just gives you just enough information and utility without distracting you and that's going to be needed when they bring this all together with their next sensation: Apple Glasses.
The next level of the companion device blends their augmented reality experience with their ability to give you just enough data to be invaluable but not so much to overwhelm you or become distracting and it will be able to take advantage of all that extra phone power.
We should also be expecting major 5G rollouts to be finishing up by 2024-2025 with the beginnings of 5.5G rolling out by 2025.
And all that is great and everything because it shows the tech is either here or coming very soon but there's another major reason its inevitable.
Brace yourself. There's a lot here.
Contrary to popular belief, a fiat monetary system is not inherently bad or evil. Fiat allows for an expandable supply of capital when we need it.
The problem commodity backed currencies like the gold standard is without new gold discoveries there's no room for economic expansion - only transfers of wealth. This means one group can't prosper without another group suffering (think the US in the 1950's vs the rest of the world). And if new discoveries of gold outpace economic expansion, money can still rapidly lose value in the same way fiat systems do when printing is greater than the economic expansion.
The fiat system is far from perfect though and it comes with two major problems of its own:
- Central mismanagement which I'd argue just as easily happens with a gold standard.
- It needs to be attached to a constantly expanding economic system.
Fiat systems require a way to issue currency that gives it value. The way that's always worked is by lending it into the economy at interest. Having lending standards a borrower must meet and knowing the amount borrowed must be paid back with interest maintains the value and scarcity of money throughout society even when it is created out of nothing (not really true but we'll go with it).
This lending mechanism for money creation means fiat systems are usually debt based systems as currency creation also creates a debt. This isn't the evil it sounds like though.
To loan currency into a system is to believe that the currency lent out can create more economic growth which will ultimately fill in the value of that new currency so it's able to be paid back. If you don't believe in the potential for economic growth, you stop lending.
A point many people miss in debt based systems is that every loan payment retires the principle and therefore shrinks the money supply back down which ultimately shrinks the economy.
Fun fact - this means a country can't actually ever pay back its debt without retiring its money supply but no one will ever tell you that because you're supposed to spend your time fighting about it.
What it also means is if lending lags behind payments, the economy shrinks which makes it impossible that other loans will be able to be paid back with interest. Growth in the money supply is where that interest comes from.
Yep, it works just like a Ponzi scheme but in reverse. The banks need to keep lending you money if they are ever going to get what's owed to them from others and their whole lending pool will never be fully paid back ever. There is always a push to lend more money than is coming back in because if that doesn't happen the last loans that went out aren't paid back.
But what happens when there is nothing to invest in because growth is tapped out?
Well, that's where we are right now and it's where we have been for most of the 21st century which is why we're watching monetary policy lose control.
I'm from the US so I'm going to talk about this from that lens.
In the 50's the US had a massive economic boom. Why? Because WWII gave the US one of the largest transfers of gold standard wealth in the history of the world. We had all the gold and tons of land and resources for physical expansion. The best of what the world had to offer was sent to the US in an attempt to get some of that gold back and we were buying.
New household gadgets and technologies created new juggernaut US based companies since they had unfettered access to the pocketbooks of the exploding middle class. Demand for everything was booming. We built highway systems and expanded telecommunication systems for greater efficiency and we spread out far and wide. We dominated the resources of the world. Producers were forced to sell cheap because the US was the biggest buyer and there were tons of sellers for most of the resources we needed.
Of course this also meant what it always means for wealthy societies with plenty of food and resources. We had a baby boom and large amounts of immigration. This meant more houses and goods manufactured and service purchased. It meant lending was easy because opportunity and expansion were everywhere.
This is the America that politicians sell Americans every election cycle by telling us the other side screwed it up. What really screwed it up though was exactly what started it.
Eventually the the absolutely massive amounts of gold the US had to back all this economic activity just wasn't enough to cover. As other countries began growing again and rebuilding their own economies, this put even more strain on the gold supply because they also had claim to it. Remember, lots of economic activity doesn't mean more gold is created and this was quickly becoming a problem.
To put it frankly, the only way to allow the world to grow to the levels it got to in the mid 60's was for the Bretton Woods countries to collectively pretend there was enough gold in Fort Knox to cover it all. But as it became clear there wasn't, trade slowed. Jockeying for claim to that gold heated up. This caused countries and companies to charge more for their resources and inflation picked up (yes inflation happened while on the gold standard) and this put more of a spotlight on a straining system.
By 1971, there was no pretending anymore. Countries knew if they didn't claim their gold, someone else would. Everyone was in debt. Several countries bailed from the Bretton Woods agreement while others were starting to claim their gold from the massive - but still not enough - stack in American vaults. Knowing a run on gold would destroy the entirely of the financial system and plunge the US into darkness, Nixon severed the tie by saying (temporarily lol) no country could convert US Dollars to gold anymore.
Of course this led to its own problems as foreign exchange got all out of wack and inflation went nuts, particularly on foreign goods and supplies. Nixon even instituted 90-day price and wage freezes so prices didn't go crazy. The thing the US had going for it though was there was so much manufactured in the US that it could be contained. Still anything from outside the country was rapidly going up.
For the rest of the 70's the fed tried to manage this. shifting the price of money up and down so erratically that we ended up in a period of stagflation with a big side of inflation. Growth largely stopped because no one knew what to do anymore and it didn't help that useless wars were soaking up resources. Then in the 80's Volcker came in and pushed interest rates above 20% to stop inflation and send a clear signal to the market that they were taking decisive action.
These high interest rates led to new financial schemes giving us the junk bond and savings and loan crises and this led to a new culture on Wall Street. The 80s in were filled with Wall Street and finance movies, lots of cocaine, and a buying spree of goods from other countries. The high interest rates made it hard for businesses to manufacture here and pay people so they began offshoring jobs and manufacturing.
This led to a boon to their balance sheets which was celebrated by Wall Street and banks as economic growth and they lent more and rates came down further. This continued into the 1990s but by 1992 it all came to a screeching halt. We'd run out of growth. We'd sent all the manufacturing away. We weren't yet connected enough to be a service based economy in a way that would cover what we lost.
The savings and loan crisis ended in the mid 1990's. By that time the internet was a geeky little thing no one cared about. In the finance world, they'd been trying to jumpstart growth for a few years as glam rock turned to grunge and cocaine use turned to heroine use across pop culture.
It was this time when the fed came in and injected capital into the markets. This money had no where to go in the then current economy but eventually it found its way toward computers and the internet. Within three years we all had connected computers. .com was everything and the narrative about changing the world was on and tech stocks were soaring like nothing before it.
And damn did it change the world but it didn't do what it was supposed to do. We'd gone through the 90s with sluggish growth. We were tapped out. We'd already offshored our jobs to balloon company balance sheets so stock prices were back on the rise in a big way. Companies took it a step further and started a spree of mergers and acquisitions and eliminating overhead by cutting more jobs but stocks were up.
Then in 2001, the fed pulled the plug on one of the biggest stock bubbles in history. To save it though and in the wake of 9/11, they added more money into the economy. And while everyone had a bad taste for stocks, houses were concrete. They weren't magic internet stocks. But here's what people don't realize about the housing boom. There was purpose behind it.
Houses made more sense to government because what they needed was sustained growth and every house bought and sold had a ton of services and materials and goods and jobs that came along with it. Houses going nuts was a perfect source of real economic growth unlike internet companies who's whole revenue source was "I'll pay you $2 to show my add on your site if you'll pay us $2 to show your ad on our site."
When housing bottomed out we saw one of the worst deflationary spirals in our history. The whole thing almost came down so to stop the damage from the MASSIVE amount of loans going bad and money disappearing, they injected trillions of dollars to replace it. They begged the banks to loan it out but again, what makes someone lend money into an economy? A belief that it can create economic growth.
The banks knew companies were tapped out. They knew the balance sheets of the American people. They knew how much we were making and what we were spending on. They knew growth wasn't going to happen so they didn't lend.
From that point forward, there's been no growth beyond single events. Banks still needed to lend money so they only lent to borrowers they knew didn't really need it. Money was so available that companies could basically get it for free and they used it to buy back their own stock and buy out other companies. Inflation hit us hard but but the fed claimed it didn't exist because they needed it to look like real growth.
Money flowed to the top because there was no reason to pay it out below. The little guy as it were had limited prospects in most cases. People who had prominent jobs before the housing crash were now working at Starbucks and we called that full employment to keep the illusion of growth going.
Every time the Fed tried to pull back on some of the money we instantly crashed violently as there was no substance to our growth. Assets prices were spiking across the board. Money was going into commercial real estate because it had nowhere else to go to the point that in NYC, in the midst of its biggest boom time when it had the most people living there and traveling there and the skyline was being transformed daily, storefronts in Times Square sat empty for years even though a million people a day walked by them.
I worked in Times Square for years. Right outside the gym I worked in there was a restaurant that'd gone out of business 5 years earlier that was still empty. Eventually someone came in and built a massive shopping center there. Spent half a billion dollars to build it. It was finished in 2014. It is still empty to this day. Why?
Because the value of building wasn't to rent it out. The value was to improve the balance sheet so they could borrow more and use that to buy up more assets. Would they have loved to have rented it out if they could? Sure. But they couldn't.
In order for the bank to give them the valuation on the property they needed to finance the owners balance sheet, the owners had to claim the rent they could get was astronomically high. So high that even with millions of tourist walking by those buildings waiting to overspend on Times Square touristy stuff, it would not have been enough for a store owner to pay the rent and be profitable. So, storefront after storefront became abandoned and stayed that way.
Most people I knew were scoffing about it and saying the building owners should just lower their rent because what's the point in getting nothing when you could get 6 figures per month? But they didn't understand the game. To the owners it was better if it sat empty but the bank kept their loans active then having to tell the bank they could really only rent it for this smaller amount which would have been a technical default on their loan.
Before covid, the money supply was so high that it was actively shrinking the economy through examples like this. The new apartment buildings being built up were 70% empty. The whole game was to claim high value assets and keep borrowing against them to pay off your loans on other high value assets. As long as you could keep the cashflow ball in the air, you won.
When covid hit, we were so wound up in the game that had the Fed not come to the rescue, it would have been financial Armageddon not because people would have been without paychecks but because if the world panicked and sold everything off, any sustained drop in value of these balance sheets would have unravelled everything.
And what happened? We saw the fastest recovery in asset prices in the history of the world because we had to. We saw more money get injected than ever before. There was no limit to what they were throwing out there. Get the cash in their hands it out and deal with the consequences later.
But guess what?
Still no growth. In fact, average Jane and Joe just figured out we can make due with less. We might not need two cars. We can get more stuff delivered. We don't need all that office space. We don't need to go out to restaurants as much because we learned to cook. We don't need to travel to see each other because zoom. We'd rather not be on an airplane or go to a movie. Sure we had a small housing boom but that was a one time event that's already peaked. We pulled growth forward as people renovated their houses and bought new furniture for the home office and the exercise equipment. But all that is over.
In the middle of all this, the middle class had a minute to step back and decide what was important to them. They got to think about what they needed and wanted and what they could afford and in the middle of this time they watched the Nasdaq quadruple over about 1.5 years and their wealth ballooned. Suddenly they had choices and overwhelmingly those choices started moving toward opting out of the whole system. Leaving their job, starting their own small business or just becoming an investor trying to make enough to make ends meet while doing a little bit of freelance work on the side.
Companies who'd spent a few decades streamlining their workforce and supply chains and balance sheets, putting max pressure on workers without raising their pay to meet the inflation, suddenly found that those stressed out workers were done with them and their supply chains were a wreck.
Inflation can't be denied anymore in consumer goods but also the fed now has to admit something they've denied for years which is the Fed affects asset prices. With asset prices as elevated as they are, it not only stifles growth but it's directly causing people to opt out of the work force which is causing further inflation as companies lost productivity while also having to pay people more. This will shrink balance sheets and that is a very bad thing in a fiat system that needs the illusion of growth to survive.
Remember the Feds dual mandate is price stability and full employment.
For years, the fed has printed money and tried to kickstart growth to absorb that money and for years there's been no growth to be had.
Why? because we already tapped every source.
- Stagnant population through birth rates or immigration.
- Too much money in the economy disconnecting price and function
- Baby boomers downsizing and retiring
- Technology replacing legacy businesses but not adding anything new
- Already off-shored everything we can
- Further mergers are becoming dangerous to competition
- Work forces already cut as much as they can be
- No incentive to pay more because plenty of applicants for better jobs
- Buying cycle of durable goods already super short through planned obsolescence
- Most of the products we buy are already disposable so we're already always buying more
The fed can't actually vacuum up all this cash without breaking everything but they can't keep injecting more without breaking everything. They have spent over a decade just trying not to let it come crashing down while they wait for growth to come from somewhere. Something to come in and absorb all this money and give it value so it can be paid back.
And the first viable candidate in decades now is the Metaverse.
The metaverse is like finding a new world. We can double our population as everyone gets an avatar. No one owns anything there yet. Nothing we own in the physical world matters to our experience or status in the digital world. We all have to start from scratch.
Meanwhile, we have proven that we have an appetite for digital goods as we are already spending $500 million per week on just opensea PFP's and we can't even interact with them yet. So not only are we willing to spend but we are willing to spend big. And this spending will attract businesses and create jobs. There will be a land grab of investment coming in and the currencies we use in the metaverse will absorb trillions of fed fun bucks like they already have.
The metaverse is the first of its kind and its coming at a time when the banking system needs it the most. It's also got the full backing of multiple of the largest companies that have ever existed anywhere.
The Metaverse in inevitable.
PS: Sorry this was so long and there were no breaks for images. I just needed to get this out of my head. After I wrote it my internet connection was giving me problems so I just decided to post it rather than have it sit with my other 33 drafts. I hope you found it interesting. Comments are open if you just have to tell me I'm wrong about the gold standard or my timeline.
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