A paradoxical, peculiar and precarious relationship between crypto and fiat currencies has emerged, but it’s not tenable for long.
April 12, 2021
By: Bobby Casey, Managing Director GWP
The purchasing power of the USD has diminished to such a degree that, while one dollar in 1913 would’ve procured 30 Hershey chocolate bars, today it will afford you maybe a small coffee at McDonald’s.
Money supply (M2) in the U.S. has skyrocketed over the last two decades, up from $4.6 trillion in 2000 to $19.5 trillion in 2021.
The effects of the rise in money supply were amplified by the financial crisis of 2008 and more recently by the COVID-19 pandemic. In fact, around 20% of all U.S. dollars in the money supply, $3.4 trillion, were created in 2020 alone.
When people refer to the times we live in as “late-stage capitalism”, they aren’t entirely wrong in their assessment. What is perceived as “capitalism” is more like state corporatism, but because there are clear private sector winners, people fail to make the distinction.
Capitalism isn’t just the existence of profit. It’s the existence of free markets, i.e. markets free of government interference.
They got the capitalism part wrong, but the world is no doubt in the late stages of something terrible. The money printing coupled with a global economy predicated on what is mostly debt, is untenable.
The last major financial crisis was in 2008. That was debt based, and rooted in bad lending practices in residential property speculation and debt securitization.
The next major crisis is expected to come from bonds, currency, and stocks:
The next one is likely to be a bond, stock and currency crisis triggered by rising bond yields undermining the debt pile and weakening the dollar.
These aren’t unrelated. Their common denominator is debt. Global debt is estimated to have grown from $175 trillion in 2008 to $284 trillion, while the global GDP tragically lingers at $80 trillion.
This global debt is breaks down into four different categories: government, financial, non-financial corporate and consumer.
Debt is just a delay of the inevitable, so at some point the bill comes due. Governments around the world are struggling to keep the illusion going, but 86% of developing nation government debt is either at moderate or high risk of distress, 54% being on the high end.
Consumer debt is also at risk with an estimated $54 trillion globally in defaults hanging in the balance.
We all know the death knell of the USD was when her debt exceeded her gold stores, and she finally abandoned the gold standard entirely.
In response to that was a currency experiment: cryptocurrency. It started as just a fluke, but has since become a $2 trillion counterweight to the inflationary tactics of fiat currencies around the world.
Investing in cryptocurrencies gives a feeling of distancing oneself from fiat currencies. As if some economic freedom can be found in divestment away from fiat. That’s one of it’s key selling points from the beginning: that it couldn’t be printed on a political whim.
But cryptocurrencies inadvertently did something else: it enabled more printing! Crazy right? You’d think by investing in crypto, you are signaling your disapproval or a withdrawn endorsement of fiat. Not exactly how it plays out, at least right now.
People took their funds and invested in what has become a $2 trillion store of wealth. They did so instead of putting it into a real estate, commodities, or stocks. In so doing, they mitigated the inflationary effects of all the money printing at the Federal Reserve… at least for a while.
Said otherwise, cryptos now represent some $2 trillion in excess liquidity that would otherwise be invested in housing or stocks, making both of these respective asset bubbles that much more prone to bursting, and bringing the entire asset-bubble dependent socioeconomic and financial system closer to collapse. However, thanks to bitcoin, there is a substantial buffer allowing Powell to keep printing indefinitely.
It’s a weird unintended paradox. But here we are.
That’s not great, but there’s something a little worse than that. I don’t think the average politician understands any of this on any level. Why would they? The politicians themselves are archcane and so too are their understandings of anything remotely relevant to the current decade.
Ask each member of the House and Senate what they understand about Bitcoin, and they’ll at once say something about money laundering. It’s pathetic.
While your average politician has the economic understanding of a bowl of oatmeal, the folks at the Federal Reserve know what’s happening.
They can’t crack down on crypto, or they’d risk a catastrophic deleveraging event. They want to regulate it, but need to proceed with great care, lest they tip the scales too much. It’s not just $2 Trillion dollars in wealth stores, a lot of it is also backed by debt!
That’s right. One of the biggest, albeit not the only, contributors to this debt-backed crypto is MicroStrategy. They can’t destabilize the debt based economy, so they talk about regulations but hesitate when it comes to executing.
If the US reaches hyper-inflation levels, that’s when the US will drop the hammer. It obliterates $2 trillion + in assets, which means:
…once we hit hyperinflation and bitcoin goes offerless, regulation will come for one simple reason: it will be tantamount to deleveraging the system by trillions in a heartbeat…
The Fed and other central banks around the world are wind sprinting toward hyperinflation with their Zero and Negative Interest Rate Policies. And they are playing a dangerous game relying on crypto to be both their enabler and benefactor.
Be careful out there!
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