2022 is off to an exciting start, with assets across the market panicking at the prospect of Federal Reserve “rage hikes” in response to 40-year highs in inflation. Basically, the Fed finally realized they lost the plot, and they’re worried they won’t get it back. And, in response, growth assets – tech, SPAC’s, Tesla – got crushed.
Bitcoin, currently the ultimate growth play in the face of Central Bank buffoonery, tumbled with the whole gang. As of writing, the orange metal is now limping along at $35,000. Of course, a year ago Bitcoin was at $33,000, so I guess you could say Bitcoin had a very quiet year.
I took the past few months off, initially for a dance with Covid, then to set up our move to the Free State of Florida. And, now, as I survey what you guys have done to the world in my absence, a lot is the same: Michael Saylor and Nayib Bukele are still gloriously buying the dip. Peter Schiff and Steve Hanke are still yelling at Bitcoin. And governments worldwide are still pushing totalitarian “Central Bank Digital Coins” to crash the world harder, while they also try to kill Bitcoin so they can feast on plebes in peace. So same-same to 2021.
What has changed these couple months, though, is that inflation absolutely took off. Last numbers peg year-on-year at 7.0%, a 40-year high.
In my day job I write a lot about inflation, so today I want to share some thoughts based on a recent talk I gave to a major bank on trends for 2022.
First off, I think the “rage hike” narrative of a panicked Fed is correct, but I also think the Fed has very little room for maneuver. They’ve painted themselves in a corner, afraid of panicking markets and crashing stratospheric asset prices.
This is why the Fed’s been so coy about ending the $120 billion monthly asset purchases it’s been doing since early Covid, and which are increasingly obviously not needed. If tapering is hard for them, rate hikes will be pulling teeth to a market grown addicted to easy money.
Of course, in a smarter world, the Fed would have ended those purchases long ago. Say, right after the 2020 election, at which point it was clear the economy was bouncing back from government lockdowns and didn’t need $2 trillion of welfare for Wall Street.
Well, in a really smart world, governments would’ve skipped the lockdowns altogether, and the inflation and supply chain crises sparked by lockdowns.
Alas, our central bankers are neither smart nor really smart – well, I’m sure they’re smart about lots of things, but controlling inflation is not one of them. And so we got a full year of utterly useless stimulus piled on top of the previous year’s largely useless stimulus.
In raw numbers, these two years the Fed balance sheet doubled in size, ballooning by $4.6 trillion -- $1.5 trillion since the election alone, when it was crystal clear it wasn’t needed. That’s on an entire economy of $20 trillion. Meanwhile, federal deficits alone summed to nearly $7 trillion over those two years -- $3.7 trillion since the election.
Add in state and local deficits and take out the double-counts and it sums to a $6 trillion wall of money, of which at least half was utterly useless — in fact, it probably worsened the economy by paying people to stay home, while hogging real resources like steel and construction workers for government projects.
For perspective, $6 trillion in new money represents a 40% hike in just 2 years — double the rate of the 1970’s inflationary crisis that sent voters to the ramparts. Unlike the 1970’s, of course, today’s policymakers managed to cripple supply chains with vote-buying or whatever activist project New York Times commands this week.
And so here we are with inflation at 7% and rising, a panicked Fed and now a panicked market, and regular people worried about empty shelves and wages that are dramatically failing to keep up with inflation.
So what’s next, and what’s it mean for Bitcoin?
Inflation and supply chains will probably remain dire or worsen in the coming months as base effects are digested and Biden applies his signature incompetence to the problem. Longer term, it depends whether Washington comes up with new ways to break the economy faster than the rest of us can route around Washington’s damage.
If the economy loses that battle and growth stalls into stagflation, the Fed will have a very hard time raising rates. Suggesting much more inflation on the horizon. If, on the other hand, Washington is so crippled by the socialists’ abysmal polling that they stop screwing things up, economic growth puts wind in the Fed’s rate-hiking sails, tempering inflation. Either way we’ve got months to years of higher inflation.
So what’s that mean for Bitcoin? First, on a meta level, Fed incompetence is very good for Bitcoin’s fundamentals – it validates Bitcoin’s fundamental investment hypothesis as a store of value replacement for the US dollar. Considering store-of-value (“savings”) is nearly all currency demand, including for the dollar, that’s very bullish for Bitcoin long-term.
Having said, short-term storms will hit Bitcoin’s price hard, simply because a lot of Bitcoin demand is speculative demand. So don’t be surprised if Bitcoin’s price goes down the valley to climb the mountain. Indeed, that tumble down the price valley is a super buying opportunity if you’ve got the risk appetite. Otherwise, just sit back and enjoy the ride as the central banks, and the politicians and financiers they serve, implode from their own incompetence.
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I'm glad you are back with the newsletter. Tiffany Hale told me you were moving to Florida, sorry to see you go, of course. This time of year I'm not crazy about New Hampshire, but I will say, I enjoy the solitude and lack of traffic on the freeways. Godspeed, Peter.