The Eternally Optimistic IMF

The International Monetary Fund believes that ringing alarm bells on global economic growth is not its job, especially with many observers spotting signs of improvement in the past few weeks. But with economic conditions set to worsen before they improve, complacency is likely to have a high cost.

Ashoka Mody

mody24_MANDEL NGANAFPGetty Images_imf

PRINCETON – In April 2018, the International Monetary Fund projected that the world economy would grow robustly, at just above 3.9% that year and into 2019. The global upswing, the Fund said, had become “broader and stronger.” That view quickly proved too rosy. In 2018, the world economy grew only by 3.6%. And in its just released update, the IMF recognizes that the ongoing slowdown will push global growth down to only 3.3% in 2019.

As always, the Fund blames the lower-than-forecast growth on temporary factors, the latest culprits being US-China trade tensions and Brexit-related uncertainties. So, the message is that growth will rebound to 3.6% next year. As Deutsche Bank points out, IMF forecasts imply that fewer countries will be in recession in 2020 than at any time in recent decades.

But the forces causing deceleration are still in place. Global growth this year will be closer to 3%, with rising financial tensions in Europe.

The IMF keeps getting forecasts wrong because it misses the big picture. The economically advanced countries – which still produce about three-fifths of global output – have been experiencing a long-term slowdown since about 1970. The reason, Northwestern University’s Robert Gordon says, is that despite the promise of modern technologies, ever-slower productivity growth has dragged down the growth potential of these rich economies.

As a result, China has come to play a dominant role in determining the pace of global growth. Besides its large size, the Chinese economy has extensive trade links that transmit its growth to the rest of the world. When China grows, it sucks in imports from other countries, giving the global economy a big boost. Rapid Chinese growth revved up the world economy between 2004 and 2006, in 2009-10, and in 2017.

But China’s once-heady growth rates have necessarily fallen as the country has become richer. By historical standards, an economy as rich as China today should be growing at 3-5% a year, rather than the 6% or more that the Chinese authorities are trying to achieve through fiscal and credit stimulus.

Pushing too hard for extra growth has increased China’s financial vulnerabilities to worrying levels. By standard measures of credit growth and asset-price inflation, the country should have had a financial crisis by now. The Chinese authorities have therefore played yin and yang, stimulating growth to prevent a rapid slowdown, but reining in the stimulus to contain financial risks.

The latest cycle has been no different. In 2017, Chinese policy stimulus spread through the world, leading to the celebration of a “synchronous upsurge.” The most significant beneficiary was Europe, which depends heavily on trade. European Central Bank president Mario Draghi patted himself on his back for deft “monetary policy measures,” which he said had supported “broad-based” momentum.

When China withdrew its stimulus in early 2018, the IMF, the ECB and other forecasters blissfully continued to project high growth rates, even as the global economy slowed rapidly. Soon enough, Europe swooned, sending Italy into a technical recession and Germany to the threshold of one. (Oddly, the United Kingdom’s economy, for all its Brexit-related troubles, is doing marginally better than both.)

In the past few months, China’s leaders, concerned about their economy’s slowdown, began a new round of stimulus. Although data are not yet available, world trade growth appears to have risen slightly since then. European growth rates have ticked up, although only enough to alleviate immediate recessionary risks.

For the world economy, the continuing problem is the short-lived nature of Chinese stimulus. The OECD has already warned that the latest stimulus will drive up the worryingly high volume of corporate debt, and that over-indebted local governments will borrow more to finance wasteful infrastructure. Faced with the choice of financial crisis or slower growth, the Chinese authorities – and the rest of the world – will once again prefer slower growth. Thus, China’s deceleration will resume in the coming months, dampening world growth yet again. For now, no other country is in a position to take China’s place.

Darkening the global outlook further, the US economy is coming off the “sugar high” of fiscal stimulus and corporate cash repatriation from overseas. In addition, Germany’s slowdown in 2018 and early 2019 may not only reflect its sensitivity to slower world trade growth. Its economy may be finally descending from its high pedestal as its vaunted diesel-engine-based car industry struggles to meet pollution standards and growing competition from electric cars.

The real risk, however, lies in Italy. Running down the checklist of crisis indicators, all of Italy’s are flashing red. The economy has zero – possibly negative – productivity growth, which makes it impossible to generate internal momentum to pull out of recession. The ECB has no room to help. Italy’s debt-to-GDP ratio is above 130%, and the European Union’s absurd budget rules, in any event, make fiscal stimulus nearly impossible. Tremors along the Italian fault line will spread quickly to France, which has only slightly better indicators and also little scope for an effective policy response to a serious downturn.

The IMF, always reluctant to ring alarm bells on the global economy, is especially unwilling to counter the recent upbeat sentiment. But with economic conditions set to worsen, complacency is likely to have a high cost.

Ashoka Mody is Visiting Professor of International Economic Policy at the Woodrow Wilson School of Public and International Affairs at Princeton University. He is a former mission chief for Germany and Ireland at the International Monetary Fund. He is the author of EuroTragedy: A Drama in Nine Acts.

Trump, Tariffs and China Spell Trouble for American Steel

The vanishing levies on Canada and Mexico could be just the beginning of the industry’s problems

By Nathaniel Taplin

It was all just a fleeting, pleasant dream.

U.S. steelmakers woke last week to the brutal reality of evaporating tariffs on Canadian and Mexican steel. But an even greater problem is waiting in the wings: China may soon be tempted to ship more of its unwanted steel to foreign shores.

President Trump said Friday that the 25% tariffs he imposed on Canada and Mexico in mid-2018 would be lifted and that both countries would drop retaliatory levies. That removes a major hurdle to congressional approval for Mr. Trump’s revamped Nafta, the U.S.-Mexico-Canada Agreement.

U.S. steel companies will certainly take a hit, given that the tariffs boosted U.S. prices significantly above the global average for most of 2018, at the expense of steel-consuming industries like oil and autos. Even with the 25% tariff, imports of Canadian and Mexican hot-rolled coil steel are roughly 5% cheaper, according to Moody’s.

           Bad news is coming down the pipe for U.S. steelmakers. Photo: staff/Reuters

Meanwhile, Chinese steelmakers are raising output nearly as fast as property investment, the main source of steel demand, is growing. If that trend continues and Chinese mills send their excess production abroad as they did in 2014, it could sink global steel markets.

The big global steel rally that began in 2016 was made in China. The country’s stimulus pushed property investment sharply higher, while Chinese President Xi Jinping’s signature campaign to reduce excess factory capacity and pollution, launched in 2017, gave steel output a hard knock. Close to 10% annual growth in real-estate investment, paired with falling steel output, sent China’s monthly net steel product exports sliding about 60% between late 2015—when they ran to nearly 10 million metric tons—and late 2017.

Unfortunately, nothing lasts forever. Weakening economic growth in 2018 led to weaker controls on production. Property investment is still growing at about a 10% clip, but now steel output is too. Margins have narrowed, and net exports have begun to creep higher.

One cause for optimism is that regulators appear to be aware of the problem. China’s two biggest steel cities will extend seasonal winter production restrictions into June, Reuters has reported.

This is helpful, but it also puts the global steel market once again at the mercy of Chinese officials. April industrial growth was bad. If May doesn’t show a significant bump, or the Chinese job market keeps worsening, pollution restrictions might be watered down again.

Beijing doesn’t want domestic steel prices to collapse. Given the strained state of trade relations with Washington, sending more steel abroad look tempting. The U.S. steel industry needs to prepare for a bad day.

China’s Fake Numbers And The Risk They Pose For The Rest Of The World

Not so long ago, London Telegraph’s Ambrose Evans-Pritchard was one of the handful of must-read financial journalists. He probably still is, but since he disappeared behind the Telegraph’s pay wall his work is invisible to non-subscribers, only emerging when a free outlet runs one of his stories.

That happened this morning when the Sydney Morning Herald carried his analysis of the financial Ponzi scheme that is China.

After taking on more debt in a single decade than any other country ever — in the process helping to pull the US and Europe out of the Great Recession — China recently shifted into an even higher gear, creating a world record amount of credit in the most recent reporting month.

And – more important for headline writers and money managers – it reported exactly the right amount of GDP growth.

This brings to mind a long-ago interview in which economist Nouriel Roubini asserted that China just makes its numbers up, frequently reporting GDP immediately after the end of the period being measured, something that even the US can’t do.

But it’s one thing to for the rest of us to suspect and/or assert that China is just giving the markets what they want to hear, and another thing to understand the implications and explain them coherently. Evans-Pritchard does this in his latest article.

Maximum vulnerability: China (and the world) are still in big trouble
China’s majestic and elegantly-stable GDP figures are best seen as an instrument of political combat. 
Donald Trump says “trade wars are good and easy to win” if your foes depend on your market and you can break them under pressure. 
He proclaimed victory when the Shanghai equity index went into a swoon over the winter. This is Trumpian gamesmanship. 
It is in China’s urgent interest to puncture such claims as trade talks come to a head. Xi Jinping had to beat expectations with a crowd-pleaser in the first quarter. The number was duly produced: 6.4 per cent. Let us all sing the March of the Volunteers.
“Could it really be true?” asked Caixin magazine. This was a brave question in Uncle Xi’s evermore totalitarian regime. 
Of course it is not true. Japan’s manufacturing exports to China fell by 9.4 per cent in March (year on year). Singapore’s shipments dropped by 8.7 per cent to China, 22 per cent to Indonesia, and 27 per cent to Taiwan. Korea’s exports are down 8.2 per cent. 
The greater China sphere of east Asia is in the midst of an industrial recession. Nomura’s forward-looking index still points to a deepening downturn. “Those expecting a strong rebound in Asian export growth in coming months could be in for disappointment,” said the bank. 
China’s rebound is hard to square with its own internal data. Simon Ward from Janus Henderson said nominal GDP growth – trickier to manipulate – is still falling. It dropped to 7.4 per cent from 8.1 per cent in the last quarter on 2018. 
Household demand deposits fell by 1.1 per cent last month. This means that the growth rate of “true” M1 money is still at slump levels. It has ticked up a fraction but this is nothing like previous episodes of Chinese stimulus. It points towards stagnation into late 2019. “Hold the champagne,” he said. A paper last month by Wei Chen and Chang-Tai Tsieh for the Brookings Institution – “A Forensic Examination of China’s National Accounts” – concluded that GDP growth has been overstated by 1.7 per cent a year on average since 2006. They used satellite data to track night lights in manufacturing zones, railway cargo volume, and so forth. 
“Local officials are rewarded for meeting growth and investment targets,” they said.  
“Therefore, it is not surprising that local governments also have an incentive to skew the statistics.” 
Liaoning – a Spain-sized province in the north – recently corrected its figures after an anti-corruption crackdown exposed grotesque abuses. Estimated GDP was cut by 22 per cent. You get the picture. 
Bear in mind that if China’s economy is a fifth or a quarter smaller than claimed it implies that the total debt ratio is not 300 per cent of GDP (IIF data) but closer to 400 per cent. If China’s growth rate is 1.7 per cent lower – and falling every year – the country is less able to rely on nominal GDP expansion whittling away the liabilities. 
Debt dynamics take an ugly turn – just at a time when the working-age population is contracting by two million a year. The International Monetary Fund says China needs (true) growth of 5 per cent to prevent a rising ratio of bad loans in the banking system. 
China bulls in the West do not dispute most of this. But they say that what matters is the “direction” of the data, and this is looking better. Stimulus is flowing through. It gained traction in March with an 8.5 per cent bounce in industrial output – though sceptics suspect that VAT changes led to front-loading. Suddenly the words “green shoots” are on everybody’s lips. 
The thinking is that China will rescue Europe. Optimists are doubling down on another burst of global growth, clinched by the capitulation of the US Federal Reserve. It will be a repeat of the post-2016 recovery cycle. 
Personally, I don’t believe this happy narrative. But what I do respect after observing late-cycle psychology over four decades – and having turned bearish too early during the dotcom boom – is that investors latch onto good news with alacrity during the final phase of a long expansion. A filtering bias creeps in. 
So sticking my neck out, let me hazard that heady optimism will lead to a rally on asset markets until the economic damage below the waterline becomes clear. 
Let us concede that Beijing has opened its fiscal floodgates to some degree over recent weeks. Broad credit grew by $US430 billion ($601 billion) in March alone. Business tax cuts were another $US300 billion. Bond issuance by local governments was pulled forward for extra impact. But once you strip out the offsets, it is far from clear that the picture for 2019 has changed. 
Nor is it clear what can be achieved with more credit. The IMF said in its Fiscal Monitor that the country now needs 4.1 yuan of extra credit to generate one yuan of GDP growth, compared to 3.5 in 2015, and 2.5 in 2009. The “credit intensity ratio” has worsened dramatically. 
I stick to my view that the US will slump to stall speed before China recovers. Europe is on the thinnest of ice. It has a broken banking system. It is chronically incapable of generating its own internal growth or taking meaningful measures in self-defence. 
Momentum has fizzled out in all three blocs of the international system. We are entering the window of maximum vulnerability.

Lots of good data here – something notably lacking in most reporting on China’s “miracle.”

But the best — and scariest — single stat is the dramatic decline in the marginal productivity of debt.

China, like the US, is getting progressively less bang for each newly-borrowed buck. There’s a point at which new borrowing doesn’t just product less wealth but actually destroys it. The US and China are heading that way fast, while Europe might be there already.

As Evans-Pritchard, notes, the result is “maximum vulnerability.”

Britain is once again the sick man of Europe

If treachery becomes part of the debate, there can only be total victory or total defeat

Martin Wolf

David Cameron, the 'essay crisis' prime minister, resigns after losing the EU referendum in 2016 © Getty

When I was young, in the 1960s, the UK was known as the “sick man of Europe”, for its prolonged economic weakness. But after Margaret Thatcher’s time as prime minister, this grim epithet no longer seemed applicable. Yet now, once again, as I go abroad — and especially in continental Europe — people ask me, with a mixture of bewilderment, pity and Schadenfreude, “What is wrong with Britain?” I do not pretend to know the answer (or answers). But I can describe the symptoms: the UK is undergoing six crises at the same time.

The first and most important crisis is economic. The starting point was the shock of the 2008 financial crisis. But, today, the most important aspect of this is the stagnation in productivity. According to the Conference Board, output per hour in the UK rose by just 3.5 per cent between 2008 and 2018. Of all significant high-income countries, only Italy’s grew less. Yet that is not because the UK’s productivity is already high. On the contrary, output per hour in the UK lags behind that of Ireland, Belgium, the US, Denmark, Netherlands, Germany, France, Switzerland, Singapore, Sweden, Austria, Australia, Finland and Canada. High employment and low unemployment are good news. But stagnant productivity means stagnant real incomes per head. This means that one group can only get better off if another does worse. This does not make for happy politics. A long period of fiscal tightening has made it unhappier.

The second crisis is over whether national identity has to be exclusive. That question soon turns into one about loyalty. Many are comfortable with multiple identities. Others insist there must only be one. One way of looking at this division is as one between “people from somewhere” and “people from anywhere”, as David Goodhart defines it in his book, The Road to Somewhere. But, once politicised, this becomes far more bitter and divisive. It has been, in Brexit.

The third crisis, Brexit, has weaponised identity, turning those differences into accusations of treason. Normal democratic politics are subsumed within (and managed by) appeals to a higher shared loyalty. Once the idea of “treachery” becomes part of political debate, only total victory or total defeat are possible. Such perspectives are incompatible with the normal give-and-take of democratic life. And so, in fact, it has proved. The country is so evenly divided, and emotions are so intense, that resolution is at present impossible.

The fourth crisis is political. The existing parties, based historically on class divisions, do not fit the current identity divisions between those who are gladly both British and European and those who insist that being the former excludes the latter (at least if by “European” one means “citizen of the EU”). Both main parties are being destroyed in the process, but a new political configuration is yet to emerge.

The fifth crisis is constitutional (by which I mean that it relates to the rules of the political game). Membership of the EU is a constitutional question. Use of referendums as the device to resolve such constitutional questions is itself a constitutional question. If referendums should decide such things, what must be the role of parliament in interpreting and implementing that decision? What, for that matter, is a sensible decision-rule for a constitutional referendum? Should it be a simple majority or a supermajority? Why did we stumble into this mess, without asking ourselves any of these questions?

The sixth and perhaps most important crisis of all is of leadership. The UK has stumbled from the “essay crises” of David Cameron to the mulish obstinacy of Theresa May. Now it can see before it the prospect of a general election, with a Conservative party led by Boris Johnson confronting a Labour party led by Jeremy Corbyn. These two men do not have much in common. But they seem to me the least qualified potential prime ministers even in a country that is, after all, still a permanent member of the UN Security Council. One is an inveterate buffoon and the pied piper of Brexit. The other is a hardline socialist and a life-long supporter of leftwing despots. With such leaders, the mess can only worsen — and it surely will.

Why so many crises have befallen the country at the same time and how they all relate to one another are really important questions. Poor economic outcomes, in terms of real income growth, are surely related to the rise of national identity as a salient issue, though there are other factors, notably immigration. What matters, however, is not what caused all this, but that it is going to take a long time to sort all this out. The UK will, alas, remain sick for a while.

Banking on the Future of Cryptocurrencies

Charlie Lee is lauded in cryptocurrency circles as the creator of Litecoin, an alternative to Bitcoin he conceived in 2011 as a Google software engineer. Today, Litecoin is the sixth-largest crypto with a market cap of $5 billion. It bears many similarities to Bitcoin, but also has important differences: Transactions are confirmed 75% faster, it has greater liquidity with four times more coins in circulation, and it is more resistant to manipulation by miners holding 51% control of the network.

In 2017, Lee sold his entire stake in Litecoin and now serves as managing director of the Litecoin Foundation, which seeks to advance Litecoin and develop blockchain technologies for the social good. At the recently held second annual Penn Blockchain Conference, Lee sat down with Knowledge@Wharton to talk about the philosophy behind Litecoin’s creation, whether cryptos will replace hard currency and what’s next for him.

Knowledge@Wharton: I want to establish an origin story for Litecoin. Could you tell us what made you create this cryptocurrency in the first place?

Charlie Lee: Sure. In October of 2011, I was playing around with the Bitcoin code base, and I guess the short of it was that I was just trying to create … a fork of Bitcoin. It was mainly a fun side Project.

Before Litecoin, there were about a dozen other altcoins (alternative cryptocurrency) and most of them don’t exist today anymore. Most of them were created by founders who wanted to strike it rich. So they would do something called a pre-mine — they would mine a lot of coins for themselves before they launched it, right in the beginning. Then hopefully if it becomes successful, it would make them a lot of money.

A lot of people didn’t like how unfair these coins were compared to Bitcoin, which was launched very fairly. One push was to create a fairer version of a coin called Tenebrix. [There were improvements but still] Tenebrix was launched with 7 million coins for the founder. Then I helped create this coin called Fairbrix, which is basically Tenebrix without the pre-mine.

Fairbrix was attacked in the beginning. There were some bugs in the code because the Tenebrix code was not very well written, so it kind of failed. After that I decided to do it right, to actually fork from Bitcoin and to create Litecoin. So I did that and made it fair.

It is one of the stories that people don’t hear about Litecoin, which is how fair it was. I made sure to launch it as fairly as possible. The week before [the launch, I released] the source code and binary so people can actually run Litecoin before the actual launch to test the mining, to see if it works on their computer, to make sure everything is OK.

Then at the time of the launch, which was a time that was voted in by the community, I released two constants that people can just put into their config file, restart their client and would just start mining coins. When I launched it, thousands of people were mining from the start. It was pretty much as fair as I could possibly make it.

Knowledge@Wharton: Your whole point was to create a more egalitarian cryptocurrency. Do you feel that you have succeeded?

Lee: Yes. I think one of the reasons why Litecoin actually survived and became popular is because of the fair launch. Everyone, including myself, had equal access to mining the coins and also buying it from the exchange. I didn’t pre-mine. I didn’t have a lot of Litecoins. I didn’t just create Litecoins and give a lot to myself.

Even a coin like Ethereum has a huge pre-mine. They sold however millions of dollars worth in the beginning and gave a lot of Ethereum or ETH to themselves. Given how fair Litecoin was, it is one of the reasons why it survived where other coins didn’t, I think.

Knowledge@Wharton: One of the things that would give a lift to cryptocurrencies is mass adoption, and it has been said that merchant adoption specifically is the Holy Grail of altcoins. Do you agree with that, and how do we get there?as ever seen. If Bitcoin is a better form of gold, for example, it doesn’t have to be used daily.  People [store but] don’t spend gold, right?

And you can actually build on top of that.

With Bitcoin and Litecoin there are Layer 2 solutions. Lightning Network [that sits on top of the blockchain to enable faster executions] is probably a better form of a payment network than just on-chain Bitcoin or Litecoin. I see that happening where people will build on top of it.

While I wouldn’t say [mass adoption] is the Holy Grail, I think eventually you will be able to spend your Bitcoins or Litecoins [more widely] and it is going to happen eventually, but it is not something that is needed today.

Knowledge@Wharton: Do you think there will ever be a time when we will do away with central authorities of monetary systems in the world?

Lee: I don’t know if that will ever happen. I think for sure cryptocurrency will be one of the currencies that people will use; it will achieve mass adoption one day and people would treat it as real money. The volatility will come down and things will be priced in cryptocurrencies. I truly believe in that. Whether or not the current system of currencies will still be around, I don’t know.

Knowledge@Wharton: Do you see that maybe one iteration of that future is that central banks would issue some kind of cryptocurrency?

Lee: I don’t see the benefit of that, to be honest. Because for me the benefit of cryptocurrency is decentralization — the censorship-resistant part, where no one can prevent you from spending your own money. If the central banks or the governments actually create a cryptocurrency, they still have full control, so what is the point? It is effectively no different than a digital version of a U.S. dollar.

Knowledge@Wharton: Do you see a world where cryptocurrencies in blockchain applications will be ubiquitous, just like mobile phones are now widely used to pay for things instead of just making phone calls? Do you see blockchain and cryptos changing the daily lives of people, and in what way?

Lee: Yes. I think in the future you will be using cryptocurrencies in your daily lives, and you may not even realize it. If Bitcoin really does become as ubiquitous as money, it will have to be easy to use. It will be very different from what we are doing today. Who knows what devices we will be using, but you could be spending Bitcoin, buying stuff, and you wouldn’t even know it. You may not even call it Bitcoin. It might just be money.

Knowledge@Wharton: There are many cryptocurrencies out there, and by some counts more than 2,000. Do you think we will get to the point where maybe a few will emerge as dominant, or maybe just one? How many do you think the world can handle?

Lee: Definitely not thousands. I think there is going to be more than one — Bitcoin, Litecoin, maybe a few others. Maybe a handful that would actually represent real value. The beauty of it is eventually they’ll be very interchangeable, so you can send Litecoin and the recipient can send Bitcoin, and it will be converted automatically, instantly. And you wouldn’t even have to worry about it, you wouldn’t even have to know. I think that is going to happen.

The important thing is that the user experience will improve, and a lot of complicated things will have to be abstracted away from the end user. Just like what happens with what you use today. You don’t really care what happens when you make a phone call or when you swipe a Visa card. However many institutions that get contacted to approve this transaction, how the money moves — you don’t really care. All you care about is that you [can] buy this product. The same thing will happen with Bitcoin and cryptocurrencies: Things will get simpler, and that is when things will take off.

Knowledge@Wharton: In a Utopian universe for cryptos, technology is everything. But since we don’t live in that world, social behaviors are also very important. What do you think will drive mass human adoption to make people trust them? Because trust is really critical for cryptos to take off.

Lee: Trust is definitely very important. A lot of the things that are hindering adoption today is the lack of trust in terms of securing your Bitcoins. A lot of people aren’t tech savvy enough to protect and store their own coins, and they rely on third parties like exchanges. And then the exchanges get hacked. Pretty much every month there is a story of an exchange getting hacked and losing millions of dollars of customers’ funds. And that really hurts. It hurts the trust in this industry and also the people who actually lost money.

So it is very important for us to build out simple yet secure ways of helping people store their own funds. Whether that is mobile wallets that are secure or hardware wallets, like the Ledgers or Trezors, and improvements to those which would make them simple to use yet still secure.

It has always been a trade-off, right? Simplicity versus security. Putting money on an exchange like Coinbase is extremely simple, but you are relying on someone else to secure the coins for you. And then there’s putting things [away yourself], like I [did. I] previously had coins on paper wallets, where you print out a piece of paper with your private key and then you put that piece of paper in the bank safe, or you split it up somehow.
You store it, secure it yourself. [But it makes cryptos] really hard to use. It’s like for long-term storage; you can’t really spend it. The compromise [is something] in between. We just have to find a good way … that is both secure and simple. I think that is a very important thing to achieve.
Knowledge@Wharton: Where do you see cryptos in terms of being an investment asset? Is that a good idea? How do you even do a valuation of that?
Lee: As the industry grows, people, at least initially, will value it as more of an investment asset or a speculative asset. But eventually when it becomes more stable, and prices become less volatile, it will become less of an investment asset and more of just money that people would hold on to. I think it is fine right now [for people to consider it as an investment asset], but I don’t see that being the future.

Knowledge@Wharton: Where do you see cryptocurrencies going? What do you think is its next iteration or use case? Do you see any new trends coming?

Lee: My focus is on the monetary aspect of cryptocurrencies. With Litecoin, I want it to be used as money. My focus for that is merchant adoption, where more and more merchants or people are actually supporting Litecoin or using it or accepting it. One of the key things I am working on is to improve the fungibility of Litecoin.

What that means is right now when you spend Litecoin or even Bitcoin, transactions you make have a history attached to them. People can track back and see where you got those coins and how that person got his coins to send to you. You can track it all the way back to the beginning, so you can almost see if I used the coins to buy illicit goods or gambled with it.

You’ve heard stories of Coinbase banning people from using their service if they found out that the coins you received were sent from, say, a gambling website or from a dark marketplace. That makes the coins not very fungible, because you have to pick and choose which coins to send to someone if you don’t want them to see how much you got paid or what you used with it.

In contrast, if you walk to a store and you have two $20 bills in your wallet, for example, you don’t care which one you spend unless you care about how pretty one of them is. Like the U.S. dollar, fiat currency is very fungible. Bitcoin, Litecoin today are not. That is something that we need to improve.

One of the requirements of fungibility is privacy. If the coin is not private, then it is not fungible.

Fungibility and privacy go hand in hand, and it is something that I am really looking into right now.

Knowledge@Wharton: What else is next for you? Are you running for president, like so many are doing?

Lee: No, but it would be cool if an Asian-American becomes president. I am still focused on Litecoin. I am working full time with the Litecoin Foundation on just everything around Litecoin, including development. Also on issues like, for example, what I was talking about with privacy and fungibility. And adoption of Litecoin, partnering with various companies supporting Litecoin, merchants, merchant processors and just getting more exposure for Litecoin.