Authored by Peter St.Onge via CryptoEconomy substack,
In the 1970’s, Saturday Night Live had a mock commercial for Shimmer Floor Wax, tagline: “It’s a floor wax AND a dessert topping!”
Between supply chains, rising prices, and falling growth, we’re living in hazy times, economically. Investors don’t know whether we’re due for a stretch of serious inflation or if, instead, we’ll get socked by a deflationary stagnation either as prelude or as crash. They don’t know if they need the wax or the snack.
As people struggle to protect against both, there is one hedge that actually covers them all: runaway inflation, runaway stagnation, even the “Goldilocks” scenario that historically burns gold investors. And that one hedge is Bitcoin.
Crystal balls cracking
One Hedge for All Seasons
Universal hedge is counterintuitive, since inflation and deflation are opposites, while Goldilocks is the opposite of the opposites. But the universality hinges on two mechanisms that are only present in Bitcoin: central banks addicted to printing, combined with Bitcoin’s dot-com levels of secular growth that approach historical levels of bona fide money replacement.
First, let’s sketch the economy at the moment.
Fed chair Powell is still predicting medium-term disinflation, but a substantial minority of macroeconomists are predicting “significantly higher” inflation. Meanwhile, growth figures are trending down worldwide, partly as a result of chaotic supply chains causing shortages from groceries to Christmas trees to aluminum chassis – I wrote about this last week. This drama is reaching into GDP statistics, with Atlanta Fed’s “GDPNow” estimate now limping along at 0.5% – flat per capita.
Into this chaotic world strides Bitcoin to heal all worries, to hedge all fears.
Atlanta Fed watching it melt
Hedging both inflation and deflation may seem odd – make up your mind. But the key here is that, like an incontinent dog that pees when startled, today’s central banks print money in response to any sudden movement. They print when they’re happy – the economy can soak it up. And they print when they’re scared – the economy needs it.
One might think central banking has become an elaborate hoax to print as much money as possible no matter what, which is basically true. Of course, they print not because it’s the correct thing to do, but because legal counterfeiting is their business — barbers are paid to cut hair, central bankers are paid to print money.
To be sure, happy-printing and scared-printing lead to different collateral damage for the economy. Printing in good times sparks a “tissue fire” boom that creates malinvestments — investments that only happened because money was so cheap. While printing in bad times slows the liquidation of those malinvestments until some become “zombies” like Japan has endured for decades. If you’re interested, there was a whole “liquidationism” debate in the 1930’s which, obviously, the good guys lost.
Still, what both stages of printing do have in common is they dilute your money. This automatically benefits anything priced in dollars, like Bitcoin or, say, donuts. And it can reinforce since dollars, having no intrinsic value, float on expectations about how much the central bank will magic up in future. So it’s possible that even a small printing can lead to a large drop in purchasing power if people expect the printing to go nuts. While the more usual is that a large printing, like the 40% jump in dollars in 2020, leads to a small change in value since people don’t expect it to last or don’t expect all those dollars to circulate “in the wild” for long.
What about deflation, shouldn’t that do the opposite? After all if Bitcoin is priced in dollars, then a stronger dollar should reduce Bitcoin’s price. And here the key is where the deflation is coming from. It it’s healthy deflation driven by technology or productivity improvements then it would be inherently neutral to the Bitcoin price in dollars. So before the deflation, Bitcoin might be worth $60,000, which buys 3 months at a luxury resort. And after the deflation Bitcoin might still be worth $60,000, which now buys 4 months at that luxury resort. Good for Bitcoiners, just as it’s good for dollar owners.
Alas, this “healthy” deflation is rare nowadays, because central bankers stop it — no sense leaving money-printing opportunities on the table.
So, instead, deflation today is more likely to come from the kind central bankers actually create: debt deflation. This is where a lot of credit evaporates overnight — it won’t be repaid. We saw this in the 1930’s, and again in the 2008 crisis. Of course, in 2008 it didn’t turn to full-blown deflation, because the Fed stepped in – well, it flopped in – with $1.6 trillion of fresh money, of which $1.2 trillion went directly into the banking system.
The Fed has never regretted that 13-figure bail-out, nobody went to jail for it, and they repeated that script in Covid. So we can be fairly certain they’ll do it again next time.
The Dreaded Goldilocks
Now the final possibility, the one that keeps goldbugs up at night: Goldilocks. A scenario where governments and central bankers steer the ship of economy through the shoals and hurricanes until we end up with pretty good growth and pretty good inflation. Say, 2% on both.
The reason for focusing here is because Goldilocks scenarios have been terrible for gold these past 50 years. Indeed, gold’s three big losing streaks since the 70’s have been the early 80’s, the late 90’s, and the early 2010’s. All periods of economic calm where people relaxed, stopped worrying about the future, were happy enough to leave it to government, and sold their boring gold for exciting plastics, dot-coms, or electric car stonks.
Gold vs Bitcoin: Goldilocks has a favorite
Setting aside how unlikely Goldilocks is given the gang in charge, even in that doldrums scenario Bitcoin is likely to do just fine. Because, unlike gold, Bitcoin has enormous underlying user growth – currently running 40% year-on-year in the number of wallets in existence.
Indeed, remember that up until Covid we’d been in roughly a decade of Goldilocks, during which gold dropped from $1,900 to under $1,200, while Bitcoin went from one five-thousandth of a Papa John’s pizza to $8,000 on the eve of Covid.
I’ve written about some reasons why this secular growth might actually accelerate in the years to come, including El Salvador’s legal tender law that raises Bitcoin’s odds of replacing fiat, and rapid growth in Bitcoin’s Lightning Network that make it a superior daily-use money. One could imagine other reasons – demographics, regulation, company and investor learning curves. And the punchline is even in the classic macro doldrums scenario, Bitcoin’s got a lot else going on besides macro.
Boiling it down, inflation is always good for money hedges, and in this crisis Bitcoin has so far replaced gold as the hedge of choice. If we instead get deflation, it’s good-to-neutral for Bitcoin but, given today’s Fed, will probably be converted to inflation anyway. And in that last “Goldilocks” scenario, Bitcoin’s underlying growth is likely to carry any slack, sparing it gold’s humiliating plunge into periodic obscurity.
Finally, which macro outcome is most likely? You’d make a lot of money guessing that correctly, and there are excellent arguments for both inflation, stagnation, and even their demon offspring, stagflation. For now, unless you actually enjoy existential speculation, I think the prudent hedge is simply buy and hodl Bitcoin.
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