Powell’s change of heart from dove to hawk!
We have a number of central banks starting to hike interest rates due to soaring inflation. Indeed, for the first time since 2018, Powell has changed his stance on QE by becoming more hawkish due to spiking rates of inflation.
The CPI hit a 39-year high. As a consequence, we may very well see a market correction in the major averages of 20% or more, if history rhymes. He removed the word ‘transitory‘ as even he can see that inflation is persistently pernicious, even using the government’s manipulated CPI data.
Also recently, the Bank of England hiked rates by 25 basis points for the first time in more than three years. The ECB, meanwhile, stood pat saying they would be the last major central bank to hike rates despite rising inflation due to its own economic issues. Heavyweight Germany also came in with PPI numbers at +19.2% vs +18.4% y/y prior – their highest level in 70 years.
The C19 mutation, despite spreading fast and keeping restrictions in place hampering economies, is far less fatal. The world will likely reach herd immunity sometime in 2022 if all past pandemics going back hundreds of years are any clue. The human immune system learns thus past pandemics, well over a dozen going back hundreds of years, never persisted.
Should the major US stock market averages correct 20% or more, Powell would then likely step in and reverse his stance as he has done a number of times over the last decade, supplying the markets with a continuous and potentially accelerated flow of QE. He certainly left open the possibility that anything is possible going forward depending on the data that reflects growth, inflation, unemployment, and markets.
Debt at current levels has led to the same seemingly inevitable conclusions. But in the meantime, the trend toward tightening around the globe suggests potentially big headwinds ahead.
The three scenarios of ‘What if’…
If Powell were to let free market work by reducing the QE punchbowl to zero over time, we would have a deflationary depression that would be like the Great Depression on steroids. We would see a massive unwinding of all the QE that began in late 2008. Markets would crash, food shortages would prevail, banks would fail, and into that vacuum would rise dictators.
The metaversal portion of the cryptospace would likely thrive in such a situation as DAOs, dApps, and other decentralised platforms would be out of the hands of government (nation-state) control. This would enable even more capital to flow into the metaverse. Mesh networks would be used should nation-states try to shut off the internet.
Off-the-grid forms of electricity would be engaged and spread should the electricity be turned off. There is always a way around control mechanisms – first for the few, then for the masses since the utility of economics wins the day.
Credit would explode in value in such a deflationary system, so a credit crisis would ensue wiping out much credit. People who think they have money in the bank would find otherwise as banks shut down.
The Fed is highly unlikely to break with hundreds of years of history and take this action. As stated, M2 never materially diminishes once debt is at current levels. If a country borrows more than 77% GDP, they pass the event horizon and cannot escape. The servicing of the debt eats away at GDP. Currently, $280 T in global debt exists while global GDP is only at $70 T, thus global debt stands at 80% of GDP with U.S. debt at record levels with Debt:GDP at over 125%.
Fed eases forever a la QEndless. In this case, credit must grow forever to protect an inflationary environment. By doing this, more wealth is transferred from the non-rich to the rich. But if history is any guide, before the middle/lower classes get wiped out, they rise up against the rich as there are many more of them. You have a turning of society of us vs. them, the have-nots vs the haves.
A new leader that supports a populist movement is then elected that is supported by the masses. Hitler rose to power in this manner due to the hyperinflationary environment that was created. This happens because the masses get even more manipulated when things are dire. When you have both corruption and money, corruption permeates most everywhere throughout society. All forms of life are threatened via nuclear war.
The alternative is a cold war where once again, the Metaverse would thrive for the reasons given in Scenario 1. Governments lock-jawed in a cold war stalemate would lose power due to exponential growth in the Metaverse.
Bitcoin and hard assets continue to be escape valves from currency locks or depreciating fiat. Many are leveraging up away from fiat and getting wealthy in this Era of QE, but revolution, nationalisation, or war may come to take the asset back.
People today cannot imagine such a time, though such periods are not uncommon looking back over history. Further, high levels of inflation will often erode base values of hard assets so even though one’s home may have tripled in value in a decade, it’s real value in present-day dollars is less than it was a decade ago. Only Bitcoin – barring an unknown black swan – appreciates in value in present-day dollars, bucking the trend of falling fiat.
We have never had an asset that provides such an escape valve from nationalisation or war. You just need to memorise your Bitcoin wallet’s seed phrase to unlock your wealth anywhere you are in the world. Meanwhile, the Metaverse would continue to thrive as Bitcoin is its base currency. As Bitcoin climbs the steep part of its S-curve, growing in value and utility while volatility slowly bleeds out as it matures, it may eventually become the world’s reserve currency.
One may ask what snowflake causes the avalanche forcing any of the above three scenarios?
The Fed is grasping at anything they can. The system demands more QE which will create more instability which creates more social unrest and populism. The majority of Americans and Brits don’t have $1,000 in savings so are living paycheck-to-paycheck or, in some cases, from helicopter money to helicopter money which is an early form of the wrong form of universal basic income.
The 40% increase of the money supply this year translates into an increase in household wealth but only to the top echelons which keep most of their savings in stocks, real estate, and hard assets – all which are going higher due to debasing fiat.
This is driving populism to all-time highs. In past cycles, this has resulted in revolution and a hot war. In today’s world, such may get circumvented by a currency war between the US dollar, the Chinese digital yuan, and Bitcoin as weaker fiat get Bitcoinised or dollarised. That said, China’s Belt and Road Initiative is a powerful force as they print money to fuel this vast global network since the larger it becomes, the more its digital yuan gets used.
QE Debt vs GDP
On the positive side, we have the tailwind of bleeding edge technologies which are growing exponentially. This can materially change the outcomes of each of the three scenarios above resulting in a hard or even a medium-soft landing. Blockchain together with AI will boost efficiencies while lowering costs by orders of magnitude across a broad spectrum of industries. This greatly boosts productivity thus GDP.
That said, perhaps another non-conventional war will be the race between QE which directly correlates with global M2 vs. the turbo boost in productivity from blockchain and AI which spur GDP.
As for spiking inflation, the other side of the coin for wage inflation is wage deflation. Real income is dropping in terms of buying power against falling fiat. So you may be making more dollars, but these dollars buy less.
The faster money gets printed, the greater the divide, thus the greater the polarisation between China and the US in terms of WW 3 taking the form of a currency war. China has used the Belt and Road Initiative to drive the use of its digital currency while attempting to suppress Bitcoin and crypto in general. The US is hopefully smart enough, given the number of politicians that are being educated by top minds in blockchain about its potential to allow crypto to thrive, thus gaining a sharp edge over China and for the US dollar.
So far, the most recent talks between top level minds in the blockchain space and US lawmakers show they are willing to listen and learn so sensible regulatory laws are enacted that assist blockchain technologies to continue on their path of exponential and evolutionary growth.
(͡:B ͜ʖ ͡:B)
Dr Chris Kacher, bestselling author/top 40 charted musician/PhD nuclear physics UC Berkeley/Record breaking audited accts: stocks+crypto/blockchain fintech specialist. Co-founder of Virtue of Selfish Investing, TriQuantum Technologies, and Hanse Digital Access. Dr Kacher bought his first bitcoin at just over $10 in January-2013 and participated in early Ethereum dev meetings in London hosted by Vitalik Buterin. His metrics have called every major top & bottom in Bitcoin since 2011. He was up in 2018 vs the median performing crypto hedge fund at -46% (PwC) and is up well ahead of Bitcoin as capital is force fed into the top performing alt coins while weaker ones are sold.
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