Zombies are already among us and they’re devouring the economy. Why crypto changes the narrative and how it might save your wealth.
Macro Monster Mash
Inflation dominates the headlines these days and rightfully so. With consumer prices skyrocketing globally, it’s no surprise people are concerned.
Yet a more sinister problem is lurking around in the dark. We’ve faced this enemy before and thought we had conquered it.
But we did not slay this beast. We merely sealed it away, hoping it would wither and die.
Instead the beast has been slowly regaining its strength. And now the seals holding it back are breaking. We’re about to meet the monster again. It’s name?
Deflation.
Taming the Beast with Paper
The last sustained global deflationary period started in the late 1920s with the Great Depression. Asset values plummeted while unemployment shot up.
The general consensus is the Great Depression lasted 10 years. But a quick look at the charts shows asset prices didn’t recover for nearly 25 years after the crash.
Economists have studied the Great Depression for decades. A prevailing theory says the Depression could have been shortened if the banks had been able to inflate their currency easier.
That’s a gross simplification, but the notion generally drives monetary policy to this day. The trouble the United States had then was the Gold Standard, which prevented printing money out of thin air.
To get around that problem, the US seized all privately held gold and changed the gold/dollar peg from 20:1 to 35:1. This devalued the dollar by 40%.
Put another way, it allowed the US government to add more paper money to the system, causing prices to go back up. This can only go on for so long though.
By 1970 the US had added so much paper money to the system, they couldn’t sustain the 35:1 peg either. Rather than restrain spending, they abandoned the gold standard altogether.
Since then the US has continually inflated the money supply to ensure prices keep going up. Their goal is to do this slowly — 2% a year is the target.
They’ve never really managed to do that though. Real inflation is actually much higher. The way they hide that is by changing the way they measure inflation.
The problem is, it takes exponentially more paper money to continually inflate prices. Sooner or later, it takes so much paper money to inflate prices, it becomes impossible to keep up.
That’s exactly what happened to Japan in the late 1980s. Now, even with all the COVID stimulus and decades of monetary intervention, Japanese markets still haven’t recovered from the 1989 high.
That’s what a zombie economy looks like. The money printer on full-throttle and negative growth at the same time.
In other words, asset prices come down (deflation) while purchasing power ALSO goes down (money supply inflation). As an investor, it means you can never keep up with inflation.
That’s why it sucks.
Crypto to the rescue?
The trouble with all the money printing is asset saturation. You can only pump stocks and real estate so far before the valuations become ridiculous.
In fact, even with all the money printing over the last 40 years, only 40% of stocks perform better than holding Treasury Bills. Worse yet, only 1.3% of stocks account for the vast majority of “growth” since 1990.
And if something happens, like a global pandemic for instance, how much more money has to be printed to keep that little game going? This much:
Those lines are the money supply in Japan, China, France, Germany and the United States since 2000. And if prices crash again, like they are doing right now, how much more money has to get printed to prop them up yet again?
Too much.
It’s impossible. Which is why the global economy is probably going to look like Japan’s has for the last 30 years.
Maybe.
There is one asset class that is not “oversaturated” yet. It’s global. It’s permissionless. And it’s available to anyone with a computer connected to the internet.
Where else you gonna put yer moneyz?
For the last 40 years (or more) the only logical places to put extra money were stocks and real estate. Where else would you have invested it?
T-Bills? Laughable. A savings account? Right, and watch your purchasing power slowly evaporate? A money market fund? Hah!
Compared to stock market gains, all of those “safe” investments would not have kept up with money supply inflation. But remember what happened in Japan.
Stocks can only be inflated so far before they burst. Same with real estate. There’s a reason tech stocks have been driving nearly all of the gains in the markets since the crash of 2008.
Tech stocks leverage future narratives far more than actual valuations. But that can only go so far as well. Sooner or later, that’s going to hit a wall too.
The recent Facebook/Meta price plunge should serve as a warning. It’s a canary in the coal mine.
So what’s left? Crypto.
Crypto Decoupling
The next few months are going to be illustrative. Chances are good crypto prices will fall as the broader economy keeps floundering.
But they might not. The asset class has evolved significantly. It’s proven highly resilient despite (or because of) it’s decentralised nature and hard-coded governance.
Billions of dollars of value is flying around the internet every minute on decentralised networks like Ethereum and Bitcoin. And, for the most part, it works fine.
Is it perfect? Of course not. Is it good enough to take a risk on if your home currency is taking a crap on your head? I’m betting “yes”.
Let’s put it another way. If you’re Joe or Jane average sitting around watching your 401k slowly dump into the toilet, but crypto keeps pumping, are you just going to sit and watch it happen?
Or are you going to jump in?
Never mind, if you’re Joe or Jane average in Tunisia, or Zimbabwe, or Turkey and your currency is plunging right alongside your emerging market dropping like a stone.
What happens to crypto prices when 20% of the global population starts ape-ing in? Or 30%, or 40%? Those prices go up.
Fast.
Like, stupid fast.
Conclusion
Is it a guarantee that crypto markets are going to go gangbusters during the next crash? Of course not.
Crypto might act just like everything else and dump right alongside the broader markets. But we’re also running head-on into the arms of a deflationary beast.
That beast is stirring and it’s about to smash out of it’s paper cage. When it does I can just about guarantee what the central bankers will do.
They’re going to flood the world with more paper money. The Bank of England has already started. As has the Bank of Japan, and the Bank of China.
It’s only a matter of time until they all do. That’s the only play they have.
The point is, whether you’re an individual, an institution, or a deeply indebted emerging economy, it seems to me there’s only one logical place left to hide from the deflationary monster.
Crypto.
Could I be wrong? Definitely. But I’m buying. I’m not all-in or anything crazy like that. I’ve probably got about 25% of my deployable capital in crypto right now.
I’m holding Bitcoin, AQUA, Axelar, DAG, Frax Shares, AAVE, NEAR and a few others. Is there a huge risk prices could go down further? Absolutely.
That’s why I’m not all-in. But if my thesis plays out, I’m making sure I have a ticket for the ride.
I’d be crazy not to.
These are just my opinions. I’m not a financial advisor, this isn’t financial advice, and always DYOR. Following any of these ideas might cause you to lose all of your money. I am 100% serious about that. I like tinkering with this stuff, but I’m on record acting like a total baboon. Invest accordingly.
Until next time, be safe, be smart and be sure to tie the camel.
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