Bitcoin and the Global Stagflation Crisis of 2022/2023
Written 21-March-2021
TL;DR Bitcoin/Cryptocurrency is the only major fixed supply commodity, and there is a global stagflation crisis(which has never happened before) coming within the next year or two. Bitcoin will keep its exponential growth in value.
Background:
Inflation and low interest rates incentivize two things: borrowing and spending.
Low interest rates incentivize borrowing and spending because it makes it cost less to borrow and makes it more viable to leverage for profits by acquiring assets.
Inflation incentivizes borrowing because money borrowed now is worth more than the debt paid later since the debt loses value over time, and incentivizes acquiring assets that won’t devalue overtime unlike the underlying asset
Scenario:
The recent stimulus package just passed by the Biden administration is a nearly $2 Trillion package in total doubling the stimulus package passed by the Trump administration. The first stimulus package focused more and corporations and small businesses, leading to a package that infused a lot of money into the economy while not really affecting the consumer price index used to measure inflation. This most recent stimulus package is more focused on giving the people money to boost the economy and will affect the consumer price index significantly. Inflation numbers are hidden in the CPI due to equities and real estate not being included which have both been pumped into a massive bubble for the past couple of years. Even though the CPI shows there is no inherent rise in inflation, a common indicator of inflation is a shortage in supply caused by more buying pressure in the form of newly created money. The list for commodities and products currently in a supply shortage is massive. The list is as follows:
semiconductors/autos, headphones/game consoles, plastics, steel/aluminum, coolers/drinkware, sofas, boats, seafood, meat/dairy, roller skates, fitness equipment, garden furniture, hot tubs/baths
This report by Goldman Sachs global investment research shows a large disruption in the supply chain, most likely caused by inflation.
This leads to the everything bubble(specifically real estate and equities), which is the finding that nearly every asset under the sun has gained a tremendous amount of value within the last several years. The bond market is starting to notice this trend and is in a massive sell off causing a spike in long term treasury bond yields. The fed is working to artificially lower the the long term treasury yield by continuing to buy debt. Jerome Powell has recently stated that the federal reserve is in the process of buying $80 billion in treasuries and $40 billion in mortgage backed securities. Which will keep the stock market to continue rising as well as the housing market. Many in the bond market are afraid of these recent actions and continue to try and liquidate their positions to flee to assets that will not devalue like the dollar. This has caused a lot of volatility in the last several weeks in the market. Jerome Powell has gone on the news to try and calm the market down. In summary, he has stated that the economy is not doing well in many sectors as unemployment is still in high numbers especially in the African American and Hispanic demographics and this is his number one priority. He says that the fed does not plan to raise rates any time soon until this problem can be fixed. So everyone knows inflation is coming, but his response? He stated that this inflation is transitory and will only affect the United States for a short amount of time. He expressed that inflation levels moderately above 2% for some time is an appropriate action. Another question is how much does "moderately above" mean, and how much is "for some time"? I believe that he believes that he can fix this economy through monetary policy. I trust that he will continue to print money until the cows come home, because there are multiple incentives for inflation right now. One obvious incentive as stated before is stimulating the economy, but another hidden incentive is lowering the national debt. Rising inflation devalues the tremendous debt that the United States holds and I think this is a major underlying factor to keep inflation at high levels for a long time. So where does all this end?
Tinfoil hat theory:
The end is coming for this massive bull run, but it has two outcomes. A continued rise of fear in the bond market raises bond yields to a point that the United States cannot reasonably control the interest rate without absolutely destroying the dollar. Another end scenario is the end of the global pandemic itself, when most of the population is vaccinated and the economy is starting to look healthy again causing the stimulus to end . In the pandemic many companies have struggled and lead to a massive amount of corporate debt being created. The size of the corporate bond market in the U.S. has ballooned to $10.5 trillion dollars and a significant portion of this debt is linked to zombie companies(look up the definition of zombie company if unfamiliar). If rates rise it will create a domino effect of killing the current zombie companies while also adding more to the list. A raise in rates will also kill the housing market bubble. As borrowing becomes more expensive, less buying pressure will cause real estate prices to fall leaving many new homeowners left holding the bag. This will also cause these new home owners to possibly sell their homes to buy a more valuable home for the same price as their current home further lowering the real estate market. Also as rates rise, the cash flows of many companies start to look very unappealing leading to a massive sell off in the stock market.
With these two outcomes, they are heavily leading to a stagflation crisis for the United States, but this is still looking at the small picture. The actual big picture of this is that all of these events are not localized to the United States and almost every country in the world is doing this in some form. What we are looking at is a global stagflation crisis which has never happened before. For future outlook, there are two countries of focus on specifically Japan and China. Japan is probably the most famous example of stagflation and how it affected their economy. In the 1980’s we saw a massive rise in the Nikkei 225(Japanese market index). In the late 1980’s is when the stagflation crisis hit Japan and they did not recover from their equity values until as of recently. Which has taken 40 years to recover. One thing to consider is if they actually recovered or not? I believe that they just reset the clock on stagflation as they, like all other countries in the world, tried printing their way out of the coronavirus problem, causing a possible stagflation round 2 for japan.
Picture of Nikkei 225 below:
I believe China can be a good indicator of the future of America’s economic market, because they arguably got hit just as hard, they are also in the same bubble scenario that most countries are in, have similar economic size, and are ahead in the coronavirus recovery cycle. Recently Beijing is set to “tighten credit policy, particularly in the property sector, as evidence that economic growth has reached its peak and is set to decline”, and “Chinese economic analyst think that United States will maintain its loose monetary policy until at least the end of 2023 to support its economic recovery and labour market have reinforced concerns in Beijing as it tries to reduce the risk of domestic asset bubbles by gradually tapering off stimulus policies enacted last year”
Source for quotes: China Macro Economy/Chinese economists debate potential for domestic stagflation, with most dismissing the risk by Cissy Zhou
This is the beginning of a financial crisis the world has never seen before and I think marks the beginning for bitcoin becoming a currency for the world.
Bitcoin is a limited asset. Before bitcoin there was no fixed supply asset. The closest thing to compare bitcoin to is gold as a store of value. Gold is inherently a terrible store of value due to the constant dilution of value caused by a yearly increase in global available supply. A common argument for Bitcoin is that it has no intrinsic value, which is objectively false. Robert Metcalfe who is an early pioneer to starting the internet and co-inventing the ethernet, is a prominent figure who received the 2003 Marconi award for promulgating what is known as Metcalfe's Law. Metcalfe’s law states that the value/utility of a telecommunications network is proportional to the square of the number of connected nodes/users of the system. Before this year I would have argued that Bitcoin was a risky investment, but the network now has a lot of support and is quickly growing in functionality. Investing in Bitcoin is becoming more mainstream as people like Kevin O’Leary publicly stating that he allocates 3% of his portfolio to bitcoin, many companies like Tesla are starting to acquire Bitcoin, Many fintechs like Paypal are starting to utilize bitcoin, Bitcoin is starting to look more attractive to big banks as they acquire cryptocurrency assets and exchanges like the Bank of New York Mellon, and last but not least exchange traded funds centered around bitcoin are being created and coming to the stock market. The more people that invest in bitcoin, the more the value grows exponentially and the safer it becomes. It is argued that bitcoin looks like a bubble and is part of the everything bubble, but I only think that is partially true. As every nation's currency lowers in value, bitcoin starts looking more and more attractive as a hedge, and the more people investing in bitcoin, the more the value and safety of bitcoin as an investment increases. I think it is safe to say that bitcoin will easily double in value before the end of the year.
This is not financial advice do whatever with your money.
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