2023-07-08 12:39:12
Inflation has now entered a new, sustained phase, which according to some estimates will not reach the 2-3% target set by the central banks for quite some time. According to Christine Lagarde, President of the European Central Bank, inflation has entered the second stage. Now it is not supply chain problems or energy price spikes that are driving up prices, but wage increases. In the US, all the bank governors who make up the Fed’s board of directors expect more interest rate hikes this year. Germany is already in recession, but there is still some growth in Europe as a whole. But the Fed also believes that the US will enter a recession this year. The recession will occur in the fourth quarter, they say now, and will last until the first quarter of 2024. But employment remains strong, potentially pushing up wages and thus inflation and thus interest rates. At that point, someone will ask whether central banks have lost control over monetary policy. With interest rates in the 5-6% range in the US, two-year bond yields on US Treasuries rose to their highest level since 2007 due to the redistribution of wealth. Yet the economy flourished in 2007. But banks can now take more risks because they generate more profits to cover losses. Since commercial banks create money by lending, the central bank may tighten but the commercial banks loosen. However, this is not an immediate process, especially since inflation is expected to fall, interest rates will fall, and perhaps even the money printing will also be restarted to speed up the economy. Why should inflation be kept at 2-3%? “Central bankers are too attached to 2% inflation targets.” – said one of Bloomberg’s columnists, and he is far from alone in his opinion. Why 2% and not 4%, some ask. However, this is a complex argument because, firstly, it suggests that central banks have lost control, since if they can’t keep the 2% target, why would anyone think they can keep 4%. And secondly, because if 2% sounds like a low value, then why is 4% already high. In fact, central bankers caused inflation. They created it because it was too low for too long and that led to speculators profiting a lot from it because there was no cost of capital at all. Now the likes of Elon Musk who borrow once morest their stock have to pay 6% interest instead of zero, while a profitable business hopefully doesn’t have to borrow at all. This might lead to a recovery rather than a recession. One of the reasons for this may be that creditworthy customers will take out fewer loans, so banks will have to lend to less creditworthy customers. According to the Fed, loans will remain scarce for those without good credit, and that may indeed be the case for the time being. But if the market starts to take the Fed seriously, if elevated inflation is here to stay, what constitutes good credit might easily change. The market doesn’t yet know where it’s headed For now, the market seems to believe that in the short term, the change will be for the worst. MSCI’s global stock index fell 1.5% on Thursday, its biggest drop in a year. However, there are also many opinions that it is not so dramatic. Just a temporary episode where the market goes down once it sees the Fed and once the Fed is out of sight it turns the rockets back on. And what does this mean for bitcoin? Well, if inflation remains high, the dollar’s purchasing power depreciates twice as fast as it should, so it’s not worth holding dollars. However, the interest paid on bank savings will rise, which will take some of the resources out of investments, but this can only affect bonds, since those who hold bank savings are the most risk-averse. This means grandmothers will have more money to spend as wages keep pace with current US inflation, but excess savings will be depleted. The latter indicates that a recession is indeed approaching. But America hasn’t even started reaching for its credit cards, let alone maxing them out. A $1 trillion infrastructure stimulus measure might also have a significant impact on the economy, and there’s also innovation, the latest example of which is ChatGPT. This might potentially result in good growth and some inflation, which at 4% isn’t really high. In fact, it’s low enough that some may question whether we should even care at this point. The Rise of Bitcoin Since bitcoin is an asset with a fixed limited supply and, unlike gold, is in a growth phase of adoption, such an environment should arguably benefit it. This type of economy is potentially reminiscent of the pre-2008 economic environment. Current interest rates were considered normal at the time while the economy was booming. And the banks were complacent enough to lend to customers with “good credit”. It was the end of an era, the beginning of the 90s, maybe the end of the 80s. But in the end, the Chancellor at the time, Gordon Brown, sold the British gold reserves right at the bottom. No more booms and busts, he said, gold was useless now that everything was fixed. The question is why was gold unattractive during the boom? The answer is complex, but basically you can’t do much with gold. You cannot pay with it either as a merchant or as a customer. Holding actual gold is not easy. It is expensive to ship and the gold is old. It is useful in the fiat system during times of stress, but beyond that it is not useful for much else. Bitcoin, on the other hand, is an alternative to the payment system of commercial banks, among many other things. It is possible to provide collateral so that you can lend and borrow. Easy to keep, cheap to transfer. And it’s new, so it’s still in the adoption phase. Moreover, while gold as a product is already a kind of ready-made thing, cryptos have been and will be a source of significant innovations in the future. So, if the new economy develops like the economy before 2007, it may not bode well for gold. But bitcoin can benefit from it, as the growth of the economy would mean the growth of wages, which is the basis of the economy. Innovation generated by cryptocurrencies might be the engine of the next boom Thanks to crypto-innovation, a booming economy would increase the utility of bitcoin while making gold less useful. Because in unstable times, such as the present, it can only be attractive. The price of gold has risen, as has Bitcoin in recent months. And that’s partly due to the banking collapses in March, the gaining of positions by Russia and China, and inflation. Once the US economy picks up, Russia and China will be irrelevant, the banks will be stable, and keeping up with inflation can be much easier to deal with in any other asset than gold. Bitcoin will be such an inflation-tracking tool, which sometimes correlates with stocks, because there are crypto companies trading on many exchanges, because it has an actual fixed limit, and because it is really useful for commerce and payments. You may not be able to buy coffee with it yet, but sending $1,000 is still very cheap in bitcoin. So whether it’s inflation or non-inflation, growth or recession, the unique offering of cryptocurrencies in terms of its digital nature and as a unit of account, and because it’s still in the adoption phase, can benefit everyone.
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