Bitcoin- The big Bang to End all Cycles
Part 2-Bitcoin and The long Term Debt cycle
In this piece I want to analyze the long term debt cycle thesis popularized by Ray Dalio in his fantastic book Big debt crises. I then want to explain why I believe there will be no conventional ‘’beautiful deleveraging’’ in the form of a debt deleveraging described in the book. Rather the beautiful deleveraging will come in the form of hyperbitcoinization, as willing participants around the globe leave our irreversibly broken current financial system and voluntarily opt into using the soundest money our civilizations ever seen.
Many agree our current financial system is irreversibly broken and we will thoroughly explain how that is today. By analyzing the 80 year long term debt cycle and the history of hundreds of prior currency collapses it will become clear our economic destiny is inevitable. However, many believe the collapse is many years, even decades into the future.
I believe we’re watching some canaries in the coalmine that suggest the stability of the legacy financial system is deteriorating at a rapid pace.
These canaries in the coalmine lend me to believe the collapse of the financial system could come sooner than many imagine possible. I expect this to be a potential catalyst that can radically accelerate the unravelling of the cultural and revolutionary cycles discussed in part-1.
· Long Term Debt Cycle
· Comparison to the 1930s and 40s Long term debt cycle
· The second stage of the long term debt cycle
· Walking the political tightrope to justify monetary debasement
· Exponential printing- ‘’transitory’’ inflation or early signs of hyperinflation ?
· Historical Inflation tipping point ?
· REPO Market madness and QE infinity
· Unwinding of the petrodollar system
· Possible solutions to the Long term debt cycle ??
The Long Term Debt Cycle
Learning how the long term debt cycle drives our financial system is pivotal in understanding macroeconomics and what truly influences geopolitics. Keynesian economists believe they can create new branches and schools of economics like Modern monetary theory and pretend history doesn’t apply to them.
Imagine a PHD ‘’economist’’ making such claims as ‘’debt doesn’t matter, we owe it to ourselves’’.
Now despite what Keynesian economists say about modern monetary theory- make no mistake, there’s nothing modern about a fiat currency. We covered the hundreds of examples of currency collapses in the precursory article ‘’The 50th Anniversary of the fiat fiasco-1971 2021’’.
The debasement of money has been tried for millennia without success and hundreds of prior countries have explored whether ‘’debt doesn’t matter’’ on their path to destroying their currency and economy through a hyperinflationary implosion.
This kind of MMT rhetoric is especially dangerous here in 2021 as the majority of people are unfamiliar with the concept of the long-term debt cycle let alone the world altering implications it carries when it unwinds.
The reason why many are unfamiliar with the long term debt cycle is because it repeats very rarely, about once every 75–100 years. Most people are familiar with the 5–8 year short term debt cycles, but most people live their entire lives without experiencing the conclusion of a long-term debt cycle. Deleveraging a debt bubble has devastating effects on the economy and society.
The chart above depicts how total debt in the system is slowly accumulated throughout the first 50 years of the long term debt cycle. Each small slow down or recession in the short-term debt cycle is generally met with an interest rate cut, which encourages more borrowing and more debt accumulation. This stimulates the economy and total debt in the system continues to rise. The total levels of debt continue to make higher lows and higher highs (just like Bitcoin does in it’s 4 year halving cycles), until unsustainable levels of debt are reached.
Once extremely high and unsustainable levels of debt are accumulated and interest rates simultaneously reach zero, the economic system needs a debt deleveraging, or a ‘’beautiful deleveraging’’ as Ray Dalio puts it in his book Big debt crises.
In the later stages of a long-term debt cycle central bankers have their hands tied with their monetary policy tools rendered less effective with interest rates at zero and debt loads reaching a ceiling.
Our current long term debt cycle
The entire world is simultaneously experiencing a debt crisis and approaching a mass deleveraging event.
The global reserve currency in the United states, currently has a debt to GDP ratio of roughly 128% and growing as it nears $29 trillion in debt. Hirschmin Capital released a fascinating report showing that since 1800, 51 out of 52 countries that reached sovereign debt levels of 130% of GDP ended up defaulting within 15 years. The default came through either devaluation, inflation, restructuring, or outright nominal default on the debt.
Governments and central banks globally, have shown no interest in practicing austerity or fiscal responsibility. This was especially clear in the 2008 global financial crisis bail outs. Debt restructuring also appears to be unlikely meaning the only options left to escape this debt crisis is outgrowing the debt or devaluing the currency.
Jeff Booth makes some important point’s regarding global debt in his book ‘’The Price of Tomorrow’’. He notes that in 2000, the world’s cumulative debt was $62 trillion, almost twice its collective GDP of $34 trillion. In early 2020 the numbers rose to $247 trillion and $80 trillion respectively, so debt is now three times GDP. In those two decades, it took $185 trillion of debt to produce $46 trillion of GDP growth. GDP growth is stagnating and requiring more and more debt to increase the nominal growth number. The inflationary monetary system requires prices to rise into perpetuity but the economy is facing many deflationary headwinds in the forms of ageing demographics, debt and technological deflation which are naturally forcing prices lower.
Those figures have gotten even more absurd in late 2021 as global debt is fast approaching $300 trillion and the debt to GDP ratio approaching 4–1.
Now using some ‘’simple grade 11 maths’’ from Greg Foss, lets quantify just how dire this situation is.
If we assume the debt to GDP ratio is *roughly 4–1 we can make an equation.
Everybody has seen the movie ‘’The Big Short’’. We’re currently at the point in the movie where we’re merely waiting for everyone else to figure out the inevitable.
The global GDP has to grow at 12% per year just to keep up with the 4/1 Debt to GDP ratio. To nominally decrease that ratio the GDP has to grow even faster than 12% per year. Lets have a look at some historical GDP growth figures to analyze whether these levels of growth are achievable to pay down the $300 Trillion of global debt.
Over the past 150 years the average GDP growth has been close to 3–5% at best, EVEN when looking at the government’s own curated statistics.
The chart above shows that over the past 150 years, GDP growth rates haven’t exceeded 6% growth for longer than a year or two in a row. Unless we stumble upon a technological revolution that’s able to DOUBLE the economic growth rates that we’ve had, even in the MOST productive years of the past 150 years, the debt simply can’t be repaid.
The chart below comes from Shadow Stats, which is a website that simply tracks the way the governments used to measure GDP, inflation and unemployment. The blue line tracks these figures before the metrics were heavily manipulated in the 80s and 90s to justify irresponsible government spending and currency debasement.
The chart above from Shadow Stats is measuring GDP growth in the US over the previous 40 years. The blue line shows the US economy has actually been slipping in and out of an economic depression ever since the 2008 global financial when you measure GDP growth the same way governments used to measure it. When looking at the correct statistics it becomes clear that the 2008–2019 period is actually very similar to the decade of the great depression of the 1930s in our last long term debt cycle. The official, government approved GDP metrics claim the economy was growing by 2-4% for the majority of the decade after the GFC.
With global debt to GDP at historic levels the economy can’t ever dream to outgrow the debt . Put very simply, the debt is mathematically impossible to pay back, interest rates must be held artificially low and as Greg Foss says so eloquently in this video- ‘’it’s a 100% mathematical certainty that fiat currencies will continue to be debased ’’.
The global debt bomb is mathematically impossible to pay back and that’s why interest rates are at 5000 years lows. The money has never been more worthless and broken in 5000 years.
Now each nation state has no other option but to debase their currencies at an ever increasing rate to service the debt burden. The US FED currently owns 26% of all treasury bills and has monetized over 50% of the US debt issuance since 2020, the ECB owns 45% of it’s debt and has directly monetized 100% of new issuance in 2021 and the BOJ takes the cake as it currently owns 75% of current Japanese sovereign debt and is also on track to monetize 100% of new debt in 2021.
In Europe they’ve even pushed interest rates into the negative territory in an attempt to pile on more debt and prevent another repeat of the 2010 European banking crisis.
At the end of a long-term debt cycle, debt levels get so large relative to the size of the economy, that it becomes impossible to deleverage them nominally without crashing the economy. This is why you see strategies like yield curve control implemented to pin interest rates artificially low, while the government runs large fiscal deficits to nominally inflate away some portion of the debt.
Either the currency will be sacrificed to nominally decrease the debt load as a percentage of nominal GDP, or the policymakers let the debt unwind, which would ignite an economic depression. When you have a magic money printer and the ability to enrich yourself and your cronies via currency debasement and asset price inflation, the temptation to debase the money is generally too great to ignore.
Comparison to the 1930s and 40s Long term debt cycle
The previous long term debt cycle has many similarities to our current predicament and can serve as a guide for the overall direction policy makers may steer us in this long term debt cycle.
This chart from Lyn Alden’s report highlights the similarities of the 2008 global financial crisis with the 1929 stock market crash. This is because the conclusion of the long term debt cycle has 2 distinct stages. The first of which is triggered by a banking crisis which is shown below.
In the first stage the private sector significantly decreases it’s debt to GDP ratio; lets look at how this played out in the 1930s.
Non-federal debt (the orange line above) looks like it decreased a lot on that chart in the 1930s and early 1940s. Indeed, non-federal debt as a percentage of GDP fell from 225% to 75% from peak to trough, which seems like a huge deleveraging. However, in nominal dollar terms, non-federal debt only decreased by about 20% from peak to trough during that period.
Instead, along with that partial nominal deleveraging, the U.S. dollar value peg to gold was reduced from $20.67/oz to $35/oz, combined with some degree of fiscal stimulus and a big expansion of the monetary base, which reinflated the broad money supply and nominal GDP and therefore reduced the debt-to-GDP and debt-to-M2 ratios. The numerator went down 20%, but the denominator skyrocketed.-Lynn Alden
The first stage of the long term debt cycle is generally characterised by deflation and a deleveraging of the private sector.
The infamous bank run of the 1930s should serve as a reminder that in an economic depression and deleveraging event in the debt cycle, money in the bank is not yours. Bitcoiners commonly echo the importance of this, not your keys, not your coins my friends !!
Similarly today in the uncertain economic times of early 2020, people rushed to the bank to withdraw their money as rumours swirled surrounding bank insolvency due to the stock markets crashing in March. Central banks globally were required to begin unprecedented monetary policy, injecting trillions of dollars into bankrupt corporations and institutions. As the everyday person was witnessing the system faltering, policy makers were scrambling to keep the illusion going and retain faith in the system. This video highlights this pandering and gaslighting of the public, as the chairman of the FDIC board, Jelena McWilliams, was required to try and save face and reinstall faith in institutions with this speech.
This stage of the long term debt cycle normally lasts around a decade and then the next slowdown in the short term business cycle triggers the second stage of the long term debt cycle.
The second stage of the long term debt cycle
The second stage of the long term debt cycle is highlighted below by the spike in the blue line, as the monetary base is expanded. By this stage of the cycle interest rates are already at the zero bound and can’t be lowered further so currency debasement is the last option. This period is generally characterized as a more inflationary period where the federal government runs large fiscal deficits as we enter a period of secular inflation. The government works in tandem with the central banks to keep interest rates artificially low and anyone holding bonds or cash lose out in this deeply negatively yielding environment.
As an Australian I’m privileged to watch the extravagant monetary policy used in the conclusions of long term debt cycles first hand. Our central bank, the RBA has promised to try and stop yield curve control by 2024 and promises to balance the budget by 2060.
No that is not a typo, welcome to the banana republic down under, where our local currency, the Australian Peso, is sacrificed at the expense of our enormous housing bubble.
Now how did we get here ?
The macroeconomic events of 2019 signalled the beginning of the second stage of the long term debt cycle unwinding was near. The yield curve inversion of 2019 signalled a potential recession was looming. Over the previous century it has predicted 9 out of the 10 prior recessions within 12 months of the inversion occurring.
The yield curve inversion signalled a recession was inevitably coming. Then the overnight repo market interest rates spiked to over 10% in September of 2019. This was the first time cracks appeared in the overnight lending markets since the 2008 GFC, suggesting there was serious issues with the internal plumbing of the financial system.
The FED was then called into action by printing hundreds of billions of dollars all the way through September, October, November, December and January, but remained adamant there was nothing wrong with the plumbing in the financial system.
Now the stock markets globally didn’t begin to crash until February when lockdowns were beginning to be mentioned. Everybody knows the unprecedented actions that followed by central banks globally as trillions were printed in late March in response to the liquidity crisis as all assets across the globe begun to sell off.
When talking about the 2020 recession, everybody focuses on the 3 trillion balance sheet expansion circled in red below, that came after the stock market crash in March of 2020. Few people mention the fact the FED was already expanding it’s balance sheet in September 2019 through to February which is circled in green.
Now my question to you is, when the FED was printing hundreds of billions of dollars in 2019, why was Jerome Powell so adamant that this shouldn’t be regarded as QE and that the financial system was in good shape. These 3 events in 2019 are interestingly often overlooked when this recession is talked about in the mainstream media. The narrative claims that this recession was a ‘’black swan event’’ that nobody saw coming….. the 3 signals we discussed above dispel that narrative.
A paper written in August of 2019 by former FED vice-chair, Stan Fisher titled ‘’dealing with the next downturn’’ is particularly illuminating when looking at this conclusion of the long term debt cycle. It outlined how in the next recession central banks would have no other choice other than to monetize the government fiscal spending and pin the interest rates down to prevent rates rising.
Luckily for central bankers the unprecedented money printing has been attributed to helping the economy recover from the government mandated lockdowns and stock market crash of early 2020 because of a ‘’health crisis’’ and not the repo market madness of 2019 or overleveraged global debt bomb.
I want to remain within the overton window in this article and be more quantitative and less opinion or speculation based. Draw your own conclusions from that interesting chronological ordering of events discussed above.
Walking the political tightrope to justify monetary debasement
During the conclusion of the long term debt cycle in the 1940’s, policy makers struggled to gain the votes of the people to accept the extreme currency debasement and financial repression needed to decrease the nominal debt load. The US sold it to the people as it was their patriotic duty in the face of an oncoming WW2, to purchase the deeply negative yielding war bonds for the countries ‘’freedom’’.
Similarly today in 2021, the US and most central banks globally look set to attempt to inflate away their debt and debase their currencies in the name of fighting the ‘’war on covid ‘’.
After the historic 2008 bail outs and occupy wall street protests it would be politically untenable to not have an excuse for the ‘’QE INFINITE’’ monetary policy.
As we analyzed in part 1, protests and civil unrest have been on the rise across the globe since the 2008 GFC bailouts and the appetite for change and revolution is ripe as we near the end of this 90 year fourth turning cycle.
All we know is when the lockdowns and ensuing stock market crash occurred in 2020, the central banks globally had the perfect excuse to increase the balance sheets from $20 trillion to $29 trillion.
The currency debasement needed to execute a deleveraging in the second stage of the long term debt cycle is politically challenging for policymakers to achieve. Secular inflation is a destructive environment for anyone with their wealth denominated in bonds or fiat currency, as real yields can be greater than -10% per year as the debt is inflated away.
The infamous 6102 gold confiscation law in 1933 passed by US president Roosevelt ‘’forbidding the hoarding of gold coin, gold bullion and gold certificates’’, meant the everyday person in the US was subjected to having their value debased, as their only store of value safe haven asset was deemed illegal to hold.
The Treasury offered people a fixed price of $20.67/oz to turn in their gold to the Treasury. The penalty for violation of this executive order was up to a $10,000 fine and/or up to 10 years in prison. After purchasing gold at the price of $20.67/oz from its citizens, the US government raised the fixed price of gold to $35/oz using the Gold Reserve Act on January 30, 1934, in an effort to increase inflation and debase the dollar.
Executing store of value confiscation at the conclusion of the long term debt cycle is particularly challenging as wealth inequality tends to be at extremes. Power tends to centralize at the top by the conclusion of the long term debt cycle and policy makers grapple to tame the anger of masses seeking change through revolution.
Capitalism has wrongly faced the blame
Capitalism has wrongly been accused of the causing a lot of this wealth inequality present today in modern society. People fail to realise that ever since the federal reserve was introduced in 1913 and central banks got a stronghold on the monetary supply, our financial system has been drifting further and further from a truly free and open capitalistic financial system.
Concerningly at the conclusion of long term debt cycles with wealth inequality at extremes, very extreme populist movements and ideas are called for by the people to implement change. The people feel the inequality and understand that something’s fundamentally wrong with the system. The masses are misplacing their blame upon the rich for the inequality they feel, who are merely playing and taking advantage of the corrupted game they find themselves trapped 1within.
This demonstration of people placing a guillotine out the front of Jeff Bezos’ house is a clear example of the masses misdirecting their frustration with the system. Anyone focusing on the individual actors and not the systematic inequality created and enabled by easy monetary policy is missing the big picture.
The irony is outstanding watching AOC attend a privileged $35,000 ticketed event wearing a dress smeared with slogan ‘’tax the rich’’ plastered all over it. Hypocrisy.
I expect headlines below should be watched closely as the current system continues to implode. Nation states look to be implementing the classic ‘’divide and conquer’’ tactic to distract the masses from the real problem causing the hyperinflation and wealth inequality. I anticipate this kind of propaganda to be used extensively in the coming years and will be explored more in part 4 where we explore the separation of money and state and the ‘’3rd world war- the war on reality’’.
Now before we look at how this long-term debt cycle may resolve, I want to focus more on quantifying just how broken our money is and highlighting some key similarities and differences present with us today that weren’t present in the 1930’s and 1940’s. One of those differences will become apparent when analysing what’s happened as a result of adopting a global fiat standard after Nixon closed the gold window in 1971. In this precursory article ‘’50th anniversary of the fiat fiasco’’- we explore the Nixon shock and it’s impacts on asset bubbles, wealth inequality and the consequences of this unprecedented monetary experiment.
Exponential printing- ‘’transitory’’ inflation or early hyperinflation ?
Policy makers need to be careful today in the 2020s as there’s no ‘’plan b’’ for the financial system. Through the conclusion of the previous long term debt cycle in the 1930s and 1940s the US was able to use a plan B to devalue the currency as the world was transitioning off a gold standard to fight the 2 world wars. By confiscating gold and then revaluing the gold years later they were able to devalue the dollar further, as the currency was moving further and further away from a gold standard. The 1971 Nixon shock acted as a plan C if you will, as policy makers were able to kick the can down the road even further by closing the gold window. This was an implicit default by the US and begun the 50 year experiment of free floating global fiat currencies being used by every country across the globe.
This time around in the conclusion of the long term debt cycle there is no plan D. The next step is either hyperinflation of the currency or a totally new financial system emerging.
Since 2005 alone the global base money supply has grown from $4trillion to $29 trillion in 2021. That’s over 600% growth in only 15 years but central banks remained adamant that this wouldn’t cause inflation.
The numbers get even more mind boggling when looking at the Broad M2 money supply which has increased from $20 trillion to over $90 trillion since the year 2000.
As we covered in section 1, once the currency debasement begins to go exponential there is no other option but to keep debasing the currency at an accelerated rate. The chart above shows how the bail outs continue to get larger and larger by necessity of the ever increasing debt burden.
The chart below of the US deficits comes from an article, which looked at the previous 250 years of data.
“The United States printed more money in June than in the first two centuries after its founding,” Morehead wrote. “Last month the U.S. budget deficit — $864 billion — was larger than the total debt incurred from 1776 through the end of 1979.”
Over the previous 6 months we’ve seen one of the largest surges in inflation seen over the previous 50 years. This should serve as a significant warning signal the central banks are losing control.
In this recent video I took a deep dive into shadow stats and showed how CPI inflation in the US and Australia wasn’t just 5–7% like the government’s claim it is, but much more like 12–15%. We looked at a number of other commodities like sugar, wheat and corn that are all up by between 50 and 100% year over year. I apologize in advance for my mildly colourful language in that video; I get a little fired up when talking about the most egregious form of theft, that is central banking targeted inflation.
The chart below is another one from Shadow Stats. The blue line on the chart simply measures how inflation used to be measured before governments heavily manipulated the metric throughout the 80s and 90s. It suggests inflation is much closer to 15% as opposed to the 5% governments are claiming in their heavily curated basket of goods.
The illusion becomes even clearer when looking at the annual base money supple change year over year. This chart from https://cryptovoices.com/basemoney tracks the annual growth of the monetary supply since 1970. It shows most countries have expanded their money supply by around 10% per year over that 50 year timeframe. Meanwhile governments continue to claim that inflations averaged 1–3% since the 80s.
Another massive red flag about this recent inflation should be the fact food stamps are being raised by 25%. Is this another sign validating the shadow stats estimations that overall inflation in the US is much closer to 14% as opposed to the 5% ‘’official’’ rates.
The price of chicken has increased 100% in the last year and beefs increased by 50% year over year and 700% in the last decade. More and more indications this is not a transitory phenomenon.
Now some economists claim that supply chain issues and shortages in chips are to blame for the soaring price of used cars, which have increased by 100% year over year. Now it is true, there are some serous supply chain issues that’ve arose as a result of many different factors; one of those being the government mandated lockdowns.
Lynn Alden and Preston Pysh done a great interview discussing the supply chain interruptions that I highly recommend you watch.
If it was only used cars that’ve increased by 100% and a couple of individual items I might buy into the ‘’transitory’’ inflation argument more. However the concerning logical inconsistencies surrounding the narrative have me concerned the inflation won’t be ‘’transitory’’ as the goal posts continue to be moved. I love to speculate, and I fear the constant government mandated lockdowns and supply chain interruptions will be used as scapegoats for the coming inflation to be blamed upon.
Kamala Harris in a recent interview was talking about how climate change could impact shipping ports and interrupt the supply chains leading to inflation.
History sure seems to be repeating today in the 2020’s. The same way all of the inflation was blamed on external forces in the 1970s, which we covered extensively in this article 50th anniversary of the fiat fiasco’’, the same is occurring today. Governments and policy makers refuse to accept that monetary debasement and easy monetary policy is responsible for the now surging inflation.
The discontinuation of the M2 money supply chart just before Biden embarked on another fiscal spending bill is just another sign that suggests the state is trying to suppress the inflation narrative.
Drew Macmartin points out another strikingly similar comparison of the US money supply chart in 2021 to the chart of the German monetary base during it’s hyperinflationary event in this tweet.
“The Chancellor would accept no connection between printing money and its depreciation. Indeed, it remained largely unrecognised in Cabinet, bank, parliament or press.” -When Money Dies.
This quote originated during a speech given by the German finance chancellor in the summer of 1922. Policymakers were desperately trying to dispel the fears of rising inflation which was blamed on any reason except the expansion of the monetary supply. The supply of German milliards was 35 Milliards in December 1919 and increased to over 200 Milliards by July 1922. The monetary supply had grown by 500% in 3 years and the chart above of the German hyperinflation shows the hyperinflation was only just getting started by July 1922, but all the warning signs were there for anybody to see…
The same narratives and refusal to acknowledge the facts are evident today in the 21st century. Joe Biden’s response in this video when asked about the rising inflation should leave you scratching your head. Claiming that printing trillions more money and expanding the money supply further is somehow going to ‘’reduce inflation’’?
In this video Biden’s National Economic Council Brian Deese says if you don’t count beef, pork and poultry, grocery price increases “are more in line with historical norms’’.
This video should be horrifying for anyone doubting hyperinflation could occur. House Democrats argue “we can’t go bankrupt because we have the power to create as much money as we need to spend…”
Drew Macmartin points out another ominous comparison of the US money supply chart in 2021 to the chart of the silver contents in the silver Denarius coin.
The Silver Denarius was the currency used by the Romans during their empire collapse nearly 2000 years ago. As with any currency debasement, notice how the debasement of the Denarius is slow and gradual at first.
Through the first 150 years the Denarius lost 35% of it’s value, then proceeded to lose 95% in the final 60 years as the Roman empire collapsed. The long term debt cycle and currency debasement isn’t anything new, the same way the collapse of the Roman empire was influenced by currency debasement, we’re watching the modern day nation state central banking system battling the same fate.
When comparing our present day monetary experiment to prior currency collapses the number of eerily similar red flags should make the hairs on the back of your neck stand up.
Inflation tipping point ?
When looking at countries who've had the most insidious inflation levels and currency collapses over the past couple of decades a trend appears. The faith in the currency appears to be lost when the everyday persons shopping bill is rising at more than 15–20% per year.
The ‘’suddenly’’ phase of the currency collapse appears to accelerate as inflation begins to get above 15–20%.
This is the classic example of the frog in a pot of boiling water.
2–7% inflation rates year after year and the populace seem to turn a blind eye to the inflation and loss of purchasing power of their savings. But once inflation begins to creep above 10%, more and more people begin to feel the heat and begin to question the value of their currency. Hyperinflation is a psychological event and as people come to realization their money is losing purchasing power by the day, they increase their spending. This creates a death spiral in the economy as inflation surges, which awakens more and more people to the problem.
A lot of these latan American and African countries who’ve had inflation rates north of 10% for many years on end, also coincidentally have the highest per capita Bitcoin adoption rates.
Yes, the heightened levels of Bitcoin adoption in a lot of these countries can be attributed to many other factors. Many of these countries have a general distrust in government as 87% of people are born into autocracy and 4.3 billion people live under authoritarianism. These people naturally use Bitcoin as a necessity to evade capital controls and egregious remittance fees.
However there are many cases where inflation surges above 15% per year in these countries and then so does Bitcoin adoption. Nigeria tried to ban Bitcoin in early 2021 as people were beginning to adopt Bitcoin at a rapid rate, as the local Nigerian currency, the Naira, was experiencing 20% annual inflation.
Turkey is another country with high levels of Bitcoin adoption as the populace got dropped into a pot of boiling water. Earlier this year when the Turkish Lira was devalued by 15% overnight google searches for Bitcoin surged by 566%.
There are many more examples of this similar phenomena but in the interests of keeping this article relatively short I’ll leave it there. It appears the everyday person is awoken to the boiling water of inflation as it begins to get over 15–20% per year and now that we’re beginning to see double digit REAL inflation in western countries, the time to pay attention is now.
NOW, I’m not saying the western world is about to experience a hyperinflationary collapse this year, inevitable does not mean imminent.
But remember, after Bretton woods and the Nixon shock, policy makers have no plan D. The next step for our currency is hyperinflation. As we looked at with the shadow stats statistics, real inflation levels are now around 13%-15% for the US, which should serve as a significant warning for the populace to start paying attention.
This YouTube video illustrates how quickly hyperinflation can occur when faith is lost in the currency.
Hyperinflation occurs quickly and it’s always the everyday worker whose hurt the most as their generally unaware of what’s unfolding. That’s why it’s important to highlight people of the warning signs that signal inflation might not be ‘’transitory’’.
Another warning sign that should be observed alongside the inflation metrics and the logical inconsistencies surround the ‘’transitory’’ narrative, is what the smart money is saying and doing.
This is a great thread that shows how, Blackrock, which is a subsidiary of the FED, is buying entire suburbs of family sized homes and paying 20–40% premiums over asking price for said houses. This is only further adding to asset bubbles and wealth inequality which we explored in ‘’50th anniversary of the fiat fiasco’’. This is another indication to watch as history’s shown that in prior currency collapses the wealthy accumulate as many hard assets as they can before the impending collapse.
Another reason why Blackrock could be accumulating so many homes could be attributed to all the excess liquidity in the system highlighted by the reverse repo market madness of late.
REPO Market madness and QE infinity
Not only is inflation beginning to pick up, but ever since early May the REPO market has been showing worrying signs. The FED is having to take $1 trillion dollars of excess liquidity out of the overnight repo market on a daily basis and has been doing this for the previous 4 months. The problem is it’s accelerating as it’s reaching $1.5 trillion daily recently. which is a sign that there seems to be significant excess liquidity in the system, after central banks have unprecedently expanded the monetary base by 30%-40% globally since March 2020.
Another reason for the massive reverse repo market numbers could in fact be due to actors in the overnight repo market not feeling comfortable trading with actors they perceive risky. Could the Repo market have sniffed out the Evergrande debacle months before it occurred … ?? More on this is in a later video.
We briefly touched on Evergrande today, but be on the lookout for any triggering ‘’black swan’’ events that may act as the straw that breaks the camels back in this monetary transition I’m anticipating we’ll go through in the coming handful of years.
While we’re talking about how broken the financial system is, it’s noteworthy to point out the plumbing of the entire financial system broke in the 2020 March stock market crash. Generally bonds are bought in risk off environments as equities sell off and the traditional 60/40 risk parity portfolio protects investors. This held true until the final week of that dramatic March crash, when bonds begun selling off as well as stocks. The US 10 year treasury yields spiked from 0.3% to 1.3% in under a week as panicked investors even begun selling the safest of safe haven assets. I’ve highlighted the rates spiking in the US 10 year and 30 year bonds below, as investors dumped the worlds ‘’safest safe haven asset’’ in the final week of that dramatic sell off.
This phenomenon of the bond market breaking caused central bankers to go into damage control as they called on Neele Kashkari, president of the Federal Reserve Bank of Minneapolis, on the 22nd of March 2020 to make a historic claim. In this video Neele infamously went on the record and claimed central banks have an ‘’infinite amount of cash’’ to bailout the system.
We all know what came next as stocks bounced back to all time highs priced in the depreciating fiat currency. The next time equities sell off, I’d be very interested to see how the treasury market behaves. Most are under the impression that capital will still run to the dollar in a risk off environment. I do too, but with each progressive sell off in equities and Bitcoin continues to bounce back the strongest from the short term correlated correction it undergoes; don’t be surprised if Bitcoin becomes the safe haven asset overnight in the next sell off. Bitcoin was thought of as a joke before 2020 and the odds of it being considered a safe haven in an equity sell off were extraordinarily low before 2020. However today in 2020 it continues to be more respected amongst the traditional financial money managers, pension funds, institutions and even nation states whose making it legal tender.
I discussed this in more length in this thread and will discuss this dynamic more in the next piece, but I digress again.
Now if the inflation is in fact ‘’transitory’’ and the trillion dollar daily reverse repo meltdown ‘’isn’t anything to worry about’’, then why are all the globalist organizations talking about how an ‘’economic reset’’ is needed.
The world economic forum seems hellbent on implementing their version of a ‘’great reset’’. Klaus Schwabb, the CEO of the WEF, is constantly parroting lines like ‘’the 2020 covid outbreak has provided us a unique opportunity to implement a great reset and we need to completely reimagine capitalism‘’
The IMF is also calling for a ‘’Bretton woods 2.0’’ financial system restructuring. They also announced in 2020 that the globe should have their ‘’social credit score based upon their internet search history’’. This may seem unrelated to the long term debt cycle at face value, but once you see the WEF and IMF also very interested in implementing CBDC’s, the seemingly unrelated dots begin to line up.
The financial system plumbing is irreversibly broken, meanwhile the IMF and WEF are both simultaneously calling for financial system resets. These are more indicators I watch when assessing the possible outcome of this long term debt cycle and where policy makers could be steering us.
The rapidly deteriorating financial system is the first catalyst I believe that will significantly accelerate the timeline of this transitionary period. The red flags discussed in this section are awakening the largest money managers in the world to the problem of fiat and they’re racing to learn more about Bitcoin.
Unwinding of the petrodollar system
Transitory inflation, the reverse repo market madness and QE infinity monetary policies aren’t the only indicators signalling change is coming. We’re beginning to watch the unwinding of the petrodollar standard as countries begin to withdraw from globalisation. The Eurodollar and petrodollar system is an extraordinarily complicated beast and will receive a full piece of analysis at a later date; here’s just a few indicators I’m watching for now.
Nearly 90% of international currency transactions are in dollars, 60% of foreign exchange reserves are held in dollars and almost 40% of the world’s debt is issued in dollars, even though the U.S. only accounts for around 20% of global GDP. This special status that the dollar enjoys was born in the 1970s through a military pact between America and Saudi Arabia. This petrodollar agreement enforced the world to price oil in dollars and stockpile U.S. debt.
However the 2008 GFC appeared to be a large awakening event for global superpowers around the world as they begun dumping US treasury bills from their treasury reserves. They also started stacking gold for the first time in 50 years at unprecedented rates.
Russia accelerated it’s plan to de-dollarize in 2021 after being net sellers of US treasury bills and net buyers of gold since 2013.
Just 2 weeks after Putin’s historic speech at the annual Davos 2021 global meeting, announcing his plan to completely de-dollarize his country, something interesting happened. An anonymous entity in Russia received one of the largest Bitcoin mining shipments in recent history. Is Russia, one of the largest oil producers in the world, beginning to accumulate Bitcoin, in preparation to price their precious oil in digital energy. The first nation to explicitly declare their pricing their oil in Bitcoin will be an instrumental domino to fall in fulfilling Henry Fords nearly century old vision of a global energy currency.
The following charts further highlight the worlds desire to transition away from USD reliance after the 2008 global financial crisis.
In June 2021, foreign CBs owned $4.23 Trillion in US treasuries. In the second quarter of 2014 foreign CB’s owned $4.11 Trillion in US treasuries. In 7 years foreign central banks bought $120 Billion in US treasuries, but in that time US debt rose by nearly $11 Trillion, rising from $17.6Trillion to $28.1Trillion.
Smaller nations like Turkey, Iran and Venezuela are now settling trade in Gold and Bitcoin, in an attempt to escape the sanctions placed on them in the oppressive international swift petrodollar standard.
The more countries that begin to adopt Bitcoin to avoid sanctions and bypass predatory swift sanctions, the more chinks it puts into the petrodollar standards armour. The fact the US isn’t retaliating to these actions from foreign countries is another indication suggesting the US is aware their stranglehold on the global reserve currency is diminishing. In the early 2000s when countries like Libya and Iraq both tried to settle trade and price oil in Euros and Gold, the US acted swiftly to violently defend the petrodollar agreement.
The US recently passively withdrawing from Afghanistan without any real fight, could be another canary in the coalmine to suggest that they could be withdrawing from the middle east and globalization in general, as they feel the petrodollar standards days are numbered. Could the US be aware the only way to retain global reserve currency status on a Bitcoin standard would be to embrace Bitcoin. Could the Dollar Milkshake Theory turn into a Bitcoin Milkshake ? The countries who adopt Bitcoin earliest will have to dollarize to adopt stabile pricing mechanism as it’ll be too early and volatile to price goods in Bitcoin while it’s still so early in it’s monetisation phase.
Possible solutions to the Long term debt cycle ??
Ok, so by this point of the article you may be onboard with the idea that this monetary regime is inevitably going to change. You may even be of the opinion that the canaries in the coal mine suggest the change could come a lot sooner than most expect it to. But what will replace it ?
SDR’s- The IMF is no longer restrained by their printing of SDR’S and recently created $650 Billion dollars to ‘’help countries with covid’’. This move is interesting because it’s essentially replacing the US dollar as the global reserve currency and making countries dependant on the IMF.
Practically speaking though, when looking for a solution for the monetary system we just observed the negative consequences of a monetary system prone to manipulation and centralization.
Sure, SDR’s may help to alleviate some of the imbalances caused by the Triffin’s dilemma but won’t solve the underlying debt issue, NEXT.
Every western country is currently talking about implementing and working on a CBDC, which could work in tandem with the SDR system.
The IMF has long been talking about banning cash and in Europe where negative interest rates are implemented, many countries have even tried to phase out cash completely.
Gold backed currency- possible but I think it’s very unlikely. China is rumoured to have a lot of undisclosed gold holdings and seem to be winning the race in the CBDC arena. If hyperinflation got destructive and government’s needed to reinstall faith in the currency, it wouldn’t surprise me to see them attempt to back their currencies with a gold peg. However, considering the IMF has been trying to ban cash I highly doubt they’d back their currency with an asset that the individuals can store themselves in a self sovereign way to avoid negative interest rates in the bank.
Naturally those in control of the monetary order will attempt to retain that control and will attempt to transition us onto one of the above ‘’solutions’’. What ‘’black swan event’s’’ could be used to transition us off the old monetary regime and onto their next iteration of debt slavery ?
I get the sense policy makers are racing against the clock to get their CBDC’s ready before the current system melts down. All the precedence has been strategically positioned to explain the inflation that we’ve only just begun to experience. ‘’Supply chain interruptions’’ and ‘’climate change affecting our shipping ports’’ are just some of the scapegoats being used to explain the inflation. Don’t be surprised if a ‘’cyber attack’’ is the ‘’black swan’’ they use to transition us onto the CBDC model. More on this later.
Then there’s bitcoin, the only decentralized solution to the worlds biggest problem.
Now I hope in this first article I was able to highlight how irreversibility broken the current system is and the urgent need for change. Our inflationary monetary system is outdated and incompatible with our deflationary environment and the two opposing forces are causing catastrophic structural imbalances in the economy and society.
Now despite the many similarities economically and socially in this long term debt cycle compared to the one in the 1930s, I think the chance of revolution and a total restructuring of the financial system is far more likely than central banks being able to nominally decrease their debt load through currency debasement. Many claim that policy makers can kick the can of this fiat system down the road for another decade like they did in 2008; I disagree.
Like we discussed earlier there is no plan B for policy makers, the currency is no longer backed by gold and the next step is hyperinflation. In a similar way the long term debt cycle ended with a reorganization of the global financial system in the form of the Bretton woods conference post WW2; I expect something similar here in the 2020s with an entirely new system emerging in the coming handful of years. Not only is the collapse inevitable, but there are many canaries in the coalmine that could turn that inevitability into an imminent process.
“At this stage [in the long term debt cycle], policy makers sometimes monetize debt in even larger quantities in an attempt to compensate for its declining effectiveness. While this can help for a bit, there is a real risk that prolonged monetization will lead people to question the currency’s suitability as a store hold of value. This can lead them to start moving to alternative currencies, such as gold. The fundamental economic challenge most economies have in this phase is that the claims on purchasing power are greater than the abilities to meet them.” — Big Debt Crises
Many are beginning to question the suitability of fiat currencies and doing so at an exponential rate. Policy makers are becoming more and more exuberant with their monetary policy after crossing the rubicon in late 2019. The largest money managers in the world have now become interested in Bitcoin as a necessity to protect their wealth against the exponential debasement of fiat currencies. As Nation states, corporations, pension funds, HNWI’s and insurance companies are now all currently allocating to Bitcoin; we have a perfect storm for a potential super cycle brewing. Bitcoins beautifully designed game theoretical nature forces every economic actor on earth to pay attention and act.
The previous 100 years of central banking has not only funded the largest century of war and violence humanity has ever seen, but has also concentrated more and more power and wealth into the hands of the few. This inflationary monetary experiment has exacerbated wealth inequality to extreme levels and has instilled a false sense of reality into the free market. The constant bail outs and manipulation of the interest rates are rewarding those who make poor decisions and has consequently created the largest asset bubbles and price dislocations in history.
Human civilization is at an inflection point as the current inflationary monetary system requires for prices to increase into perpetuity to sustain the current enormous debt bubble. The inflationary monetary system is fundamentally not suited to our modern environment, as it’s fighting against many deflationary forces in demographics, debt and deflationary technology, which are all pushing the prices of everything lower.
The transition from an inflationary monetary to a deflationary monetary system would be naturally chaotic on it’s own. Then layer in other catalysts like the transition into the digital age and the separation of money and state and you have the ingredients for a David and Goliath showdown in the 2020’s.
Technological forces are not just changing how our economic system will look, but also how we organize as a society in the future. By briefly analysing the sovereign individual thesis in part 3, we will analyse how technology has completely altered the balance of power though history and for the first time 10,000 years a major shift is coming.
As we’ll explore in the next article I believe this is much bigger than just an 80 year long term debt cycle concluding with a new global reserve currency hegemon. This is a once in a 5,000 year monetization of a new monetary system, helping humanity transition into the digital age with self-sovereignty and freedom.
If you have any questions or comments or simply want to hear more of my incoherent ramblings, you can find me on twitter here- https://twitter.com/LukeMikic21.
For even more of my ramblings I’m also a co-host of the Bitcoin Made Simple Podcast Network.
Jeff Booths book The Price of Tomorrow , Greg Foss’ paper , Neil Howes book The Fourth Turning, Brandon Quittem’s paper on the fourth turning , Lyn Alden’s comprehensive paper on the Long term debt cycle, Dylan Leclair’s paper also on the LTDC.
Massive thank you to all of the following for their amazing work that’s helped shape by thinking for this series.
Inspiration and mentions: John Vallis, Brandon Quittem, Brady Swenson, Lynn alden, laserhodl, aleks svetski, brandon quittem, BTC magazine, Joel from Untapped Growth, Tomer Strolight, Ben Prentice and Colin who made WTF happened in 1971, knut svanholm, Greg foss, Mark Moss, Marty Bent and Jeff booth, and anyone else I forgot.
- Finally, thanks to everyone who sharpened my thinking through conversations on this topic over the last few months in twitter spaces.