Will Bitcoin be a life-jacket?
As central banks kamikaze global monetary policy, will Bitcoin be a life-saver, or a pair of cement shoes?
All your bubble belong to us
The last 40+ years gave us the most monumental asset bubble in the history of the world. It’s not just a housing bubble, or a stock market bubble.
It’s an everything bubble.
This is a direct consequence of monetary “stimulus,” which is just a euphemism for inflation. Or, more accurately, monetary debasement.
When media pundits and econo-hacks discuss “inflation,” they’re usually referring to the Consumer Price Index (CPI). A collection of consumer goods that is theoretically supposed to inflate at roughly 2% per year.
What they never mention is asset price inflation. The grossly simplified version is that monetary debasement is “absorbed” by assets, while consumption goods (ideally) stay relatively stable.
Basically, if you don’t hold assets, such as stocks, buildings, equipment, etc., you’re running on a financial treadmill that gets steeper every year. Meaning, Joe and Jane average lose their wage-generated purchasing power year after year, while asset holders do not.
At the end of the day, this system cannot work in the long-term. Variations on monetary debasement have been tried for centuries. From clipping coins, to reducing precious metal content, to peg schemes, to you name it.
Sooner or later greed, incompetence, corruption, or external shocks will cause the sovereign to debase their currency. The sovereign will, in all cases, “print” money for expedience, political persuasion (bread and circuses), grift or economic weaponisation.
Once the debasement process has begun, it’s all downhill until the resulting malinvestment is removed through war, depression, or crisis. Unfortunately, our current “floating” fiat system was born with debasement built-in.
There never was, and there never will be, a smooth way out of the natural and predictable consequences bearing down upon us all.
Zombies kill slowly
If you want a quick lesson in how to destroy an economy, look no further than Japan. Through the late 70s and 80s, Japan embarked on a monumental money printing spree.
For those of you not old enough to remember, nearly every movie in the 80s was mentioning something about Japan taking over the world. And, for those not well-versed in Austrian economics, it seemed like they just might.
The Bank of Japan (BoJ) was actively “stimulating” (debasing) the Japanese Yen to encourage spending and “investment.” What they really did was blow up a mega-asset bubble.
Trouble is, the bubble they blew up was such a massive distortion, once the bubble popped, no amount of monetary debasement since has been enough to blow it back up again. This includes the unprecedented monetary debasement in response to the pandemic.
This is what it looks like:
As you can see, despite near constant debasement of the Yen, asset prices have never recovered from the 1990 all-time-high. Many speculate on the reasons for this so-called “zombie” economy.
The true reason is asset price saturation. Too much currency is chasing too few assets, whether they be real estate or stocks. Effectively, the structure becomes a Ponzi-scheme, where as long as “new” money is coming in, the price continues to rise.
Once the “new” money dries up though, it all falls apart. The trouble with the Central Bankers of the world is, they keep debasing their currencies in an effort to create “new” money out of thin air.
The intractable problem they have is, it takes exponentially more “new” money to keep asset prices inflating faster than they debase the currency.
Inevitably, the exponent becomes too large to sustain “growth” (number go up), so the best they can manage is “sideways” despite ever increasing money supply growth.
What happened to Japan though was worse than “sideways.” Their number went down as their money supply went up.
It has been over 30 years since the Japanese bubble popped and even with the massive monetary debasement that occurred with COVID, the Nikkei has never recovered from it’s all-time-high in 1990.
A global zombie, coming soon to a country near you
Japan is a sovereign nation. They embarked on a monetary policy experiment in the 1980s that they’ve never recovered from.
Today, the landscape is different. Not only did the world not learn from the Japanese experiment, they copied it! And, of the brainless copy-cats, no country was a bigger offender than the United States.
The thing the United States has going for it (that no other country does) is the global reserve currency status of the dollar. When a country debases a currency, the holders of that currency lose purchasing power.
If you’re a country like Japan, the loss of purchasing power is essentially limited to Japan. But, when the United States debases the dollar, the whole world loses purchasing power.
What reserve currency status does is allow the United States to export its inflation over seas, especially where it matters most to the politicians and financial elite:
The Consumer Price Index.
Basically, the United States has been able to inflate asset prices domestically, while dumping increasingly diluted dollars overseas in exchange for cheap consumables to keep John Q. Public fat and happy.
On paper, it seems like a pretty good deal for everyone in the United States. This is especially true for asset holders.
J.Q. Public gets cheap stuff, while asset holders roughly keep up with monetary debasement. Meaning, the asset holders preserve their purchasing power while J.Q. Public’s ability to buy assets (instead of consumables) quietly evaporates right before their eyes.
Much like Japan discovered over 30 years ago, stocks and real estate can only absorb so much before they become saturated. In the United States, the number has still been going up, but in relation to the amount of money circulating, it’s not looking so good.
Take a look:
Anything jump out at you from this chart? Like, maybe that huge gap in prices?
This is the S&P500 divided by the US M1 Money Supply. The red line is the S&P500 priced in dollars.
Let’s add the chart line for the M1 money supply in green and see what happens:
Well, whaddya’ know?
Gap gets filled almost perfectly. Let’s zoom out a bit and put this all into perspective:
The little dinosaur in the bottom left is telling you that is as far back as the chart goes, which is 1959.
What is important about this chart is, as you can see by the red line, the S&P500 priced in dollars has gone up significantly. Likewise, the M1 money supply has also gone up significantly.
But, asset prices as a percentage of money in the system have never been lower in the entire history of tracking the M1 money supply.
This includes the massive recessions in 1974, after the US defaulted on its debt in 1970, and the 1982 recession, where overnight interest rates were at 20%.
Just FYI, rates were at 20% because of the enormous amount of dollars that got printed after the US default in 1970. That, unfortunately, is dwarfed by the absolutely insane amount of dollars that got printed to pay for COVID.
Meaning, this shit show is just getting started.
Bitcoin to the rescue?
Maybe.
With all the major financial institutions sniffing around Bitcoin exchange traded funds (ETFs), I think it is a possibility.
What I can say with a high degree of certainty, is when this mess starts to unwind, it’s going to get ugly.
Note I say “when,” not “if.”
Considering six or seven FAANG stocks are driving almost the entirety of stock market gains, it won’t take much to evaporate all this paper wealth. The trouble for Uncle Powell is, they literally can’t print enough dollars to paper over the coming crisis.
They will certainly try.
Just like every other banana republic and failed country in the world has tried. From Germany in the 1920s, to Venezuela today, it’s always the same story and it always ends the same.
Debase the currency. Lose control. Debase even more. Collapse the economy.
Given this is now a global issue among the G7 nations, it’s impossible to say how it all plays out. As hyper-inflation slowly sets in throughout the United States and Europe, what becomes of us?
Considering the US and the EU have — at least for the last 40 or 50 years — been able to shunt their consumer inflation off to the third-world, there is no playbook for when the US and EU become the third-world.
If Bitcoin is still held out to be a valuable thing after the coming crisis, it’s fixed supply makes it an extremely scarce thing in such a scenario.
However, Bitcoin retaining its status as a valuable thing is not a foregone conclusion.
Consider, the vast majority of Bitcoin holders worldwide are middle class, educated men from the United States and Europe. If those folks are the ones with their heads on the financial chopping block in the next crisis, I’m not sure who will be left to pick up the slack.
Especially when those middle-class, educated men from the US and EU are dumping every asset they have to pay their bills after losing their completely unnecessary middle-class job.
Once the Bitcoin ETFs are approved, I think Bitcoin is going to moon. If that happens before the crisis hits, catching that ride may well be the last hurrah for the West.
Once the crisis does start to unfold, the only thing you can count on for sure is your standard of living declining rapidly.
If your standard of living is already minimal, then the transition will be a lot easier. If you’re living high on credit, with a ton of stuff to pay for, things are going to suck for you bigly.
Now, if Bitcoin ETFs are approved after the crisis unfolds, it may well be too late. Meaning, if the current, middle-class Western buyers completely dry up, then BTC may well end up on the dust heap along with all of the other malinvestment during the last 40 years.
Me personally, I stack sats (satoshis). Not a crazy amount. But, if Bitcoin does ending up being the last hurrah for the major Western economies, I want to have a seat on the train.
If not, we’re all kind of burnt anyway.
That is, unless you’ve got a simple life with some paid-in-full property, a garden and a little gold and silver tucked away. In that case, most of this stuff won’t matter to you too much.
You’ll probably be just fine.
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.
