Inflation hedge or not, Bitcoin’s true value is the separation of money and state


For the first week in a long time, the non-crypto world was louder than the crypto world.

Everyone is talking about:

Meanwhile, no one is debating whether or not bitcoin (BTC) is an inflation hedge. Fortunately (unfortunately?), every single thing everyone is talking about is (at least loosely) linked to inflation in some way. So I will. I will write whether or not bitcoin is an inflation hedge.

Because it’s all about inflation and it’s all about bitcoin (even the non-bitcoin stuff). Stochastic means “random”, by the way.

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Is student debt cancellation inflationary?

First of all, the US government does not repay everyone’s student loans. What the Biden administration has announced is that people who hold both federal government student loans and earn less than $125,000 a year will have $10,000 or $20,000 of their loan balance forgiven. student. There are concrete details (which you can get by listening to this NASFAA podcast), but the main question we want to answer is whether or not this is inflationary.

Here’s an argument that it will be: Canceling student loan debt will put money in Americans’ pockets, and those Americans will use that money to buy more immediately. The immediate increase in consumption will contribute significantly to further inflation.

Here’s an argument that won’t be: Canceling student debt will leave money in Americans’ pockets, and those Americans will use that money to consume more gradually over their lifetimes. The gradual increase in consumption will not contribute significantly to more inflation.

I really like the argument that canceling student debt won’t be immediately inflationary. Yes, the coronavirus pandemic stimulus checks were, but there’s a significant psychological difference between handing someone a check for $3,200 and handing them an official letter saying they owe $10,000 of less on an outstanding loan.

Does canceling student debt ease the pressure on Jerome Powell?

No, probably not. Probably the opposite. While the White House has introduced a program that is not overtly inflationary on the surface, the Federal Reserve Chairman continues to dig deep for his Volcker moment (without going full Volcker). When Powell faced central bankers, economists and the American people on Friday morning with his prepared remarks in Jackson, Wyoming, he said that “history warns against premature relaxation of politics,” which essentially means “We’re going to stay the course because if we change course again, you really won’t believe us.

Powell (and the Fed) is also digging deep for his credibility. Adam B. Levine of CoinDesk, host of the “Markets Daily” podcast, made one of the best points for this in last week’s episode where he said:

“… [H]History suggests that the [Fed’s] decision [on interest rates] will remain well below [necessary] interest rate needed to keep up with inflation. For much of the 1970s and 1980s, the last time we saw comparable price inflation, the rate set by the Fed was between 8% [and] 20%, several times more than the Fed is now suggesting. So while central banks and markets will be playing games with each other, it may all be for show to seriously look at the problem when the proposed solution really has no chance of solving anything.

What Adam Levine uses to make this claim is Taylor’s rule, a rule of thumb used by central banks to set interest rates at a level that will effectively fight inflation. According to his estimate, Taylor’s rule suggests that rates need to be above 9% to begin to cope with the changes in behavior that rising inflation in the long run brings. I tend to agree with Levine and I don’t think the markets believe the decision makers anymore.

Powell is stuck between a rock and a hard place (at least he’s stuck between some really nice rocks in Jackson Hole).

Is war inflationary?

Pozsar makes it clear in the aforementioned research note that he thinks so. I think the note is worth reading in full, but here’s a summary in case you haven’t read it:

Supply exceeds demand because we have moved from a world where a) cheap immigrant labor in the United States, b) cheap goods from China, and c) cheap Russian gas supported low inflation to a world where a) nativist immigration policies have led to wage pressures in the United States, b) China’s zero COVID-19 policy has hurt the flow of cheap goods, and c) war Russia in Ukraine led to a spike in gas prices in Europe, fueling high inflation.

Here is the punctuation quote:

“Welcome to the war economy…

… where heads of state matter more than heads of central banks.

Can bitcoin save us?

OK – we didn’t solve inflation last week, so now let’s move on to crypto’s main inflation hedge: bitcoin. With inflationary forces still present, investors are considering how best to protect themselves. Is bitcoin a way to do this?

I am not sure. From a market perspective, no, not at all. In recent memory, bitcoin has been correlated with stocks. Stocks are not meant to be inflation hedges; less risky things like gold and commodities are. So the price of bitcoin following (or leading) the stock makes bitcoin not really appear as an inflation hedge.

There are two threads worth following here.

First, perhaps inflation is not related to the increase in the price of goods, but to the depreciation of the currency. Some variations of this chart are quite popular in bitcoin circles:M2 and bitcoin global price (@mrblonde_macro)

As Global M2 – the amount of money in circulation – changes from year to year, it seems that the market value of bitcoin follows. In short, as economies introduce money into circulation, the price of bitcoin increases because the extra money in circulation dilutes the rest of the existing money in circulation. This therefore supports the idea that bitcoin is a hedge against currency depreciation (a fancy way of describing the dilution of money in circulation).

I’m not sure the data strongly supports this idea. Of course, there is a visual relationship in the previous chart, but the rolling 30-month correlation coefficient between US M2 and the value of bitcoin goes from negative to slightly positive (see the next two charts). Statistically, that really doesn’t tell you anything. Perhaps the move is because bitcoin is maturing over time as it nears its final resting place as an inflation hedge? I know that the United States does not represent the entire global economy, but still.Year-over-year change in US M2 and bitcoin market cap (FRED, TradingView)Rolling 30-month correlation between M2 and Bitcoin (FRED, TradingView)

Second, and more concretely, if you agree that we are in a war economy “where heads of state matter more than heads of central banks”, bitcoin is probably investable simply because it is separated from “heads of state”. ‘State”. I’m not saying the price of bitcoin is immune to the actions of heads of state, but I’m saying bitcoin isn’t issued by any country and the wider network a) doesn’t need any particular country and b) is resilient enough to prevent China from banning it.

So in the event bitcoin doesn’t behave as an inflation hedge, there might be something to be said for it to act as a bet on the separation of money and state. .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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