Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
2020 has shown us how the stock market’s health is directly linked to the Federal Reserve interventions. Massive money-printing in March became a worldwide meme. With the culling of small businesses underway, are we heading for a situation which Modern Monetary Theory (MMT) can’t handle?
The Fed’s Money Printing Comes at a Cost
When we think about something, we tend to automatically frame it from the reference of familiarity. For example, Bitcoin is viewed as volatile because we cherish the stability of our fiat currency – USD. However, such thinking can lead us to miss insight.
If we slightly shift our frame of reference, we can view the USD as a currency that is losing value to Bitcoin precisely because of Bitcoin’s volatility, which is currently on a bull run surpassing multi-year $20k price resistance. Bitcoin now represents a safeguard against the money-printing machine that the Federal Reserve has become.
The massive balance sheet spikes you see this year, especially in March, means that in the last year, since September 9, 2019, the Fed has injected at least $9 trillion into the economy.
What’s the Value of USD vs. Bitcoin?
However, this is not at all surprising. Since the United States abandoned the gold standard in 1971, the USD has already lost much of its value. It is not really 90%, as it is often claimed, because one has to account for at least a basic interest rate. In reality, this interest rate adds to the dollar’s purchasing power, which isn’t theoretically reflected in its value, depending on the lens.
Still, untethering from gold spurred massive spending sprees and debt accumulation, which is currently unfathomable at over $27 trillion. As a result, we are now firmly moving toward 70% USD devaluation compared to Bitcoin, which represents digital gold.
Historically, across nations, currency devaluation occurs when the money supply exceeds 20% of the total fiat money printed in a given year. Although we surpassed this dollar inflation threshold this year, at roughly 22%, the price index inflation still remains at a manageable 2% rate. The Fed Chairman, Jerome Powell, actively enforces this policy:
“The Committee seeks to achieve inflation that averages 2% over time and therefore judges that, following periods when inflation has been running persistently below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time.”
The problem with this balancing act is that it has never been attempted at such a massive scale in the entire monetary history. The question then becomes, can the Fed resist the basic economic law of supply and demand? As you should know, if the supply of something is significantly increased, its demand lessens, and so does its value.
Unknown Monetary Territory
The money supply is just one of the factors that determine the value of USD, but it could become the critical one for hyperinflation to commence in earnest. This week alone, up to $1 trillion cash infusion is likely to be released as covid emergency relief. For how long can this continue until something gives?
The truth is, nobody knows for sure, which is one of the reasons we are seeing a wave of institutional investors focusing on Bitcoin like never before. They are betting on Bitcoin as a digital, deflationary gold, a trend already noticed by JPMorgan Chase. What does that betting look like? If we just take MicroStrategy as an example, courtesy of Ellie Frost:
If Bitcoin hits $22K…
MicroStrategy could pay the entire 5-year interest on the $650M notes
They’d *still* have profit of +$75M
With such a perspective, it is easy to see why Bitcoin is becoming a highly-sought store of value. Its fungibility, lack of physicality, and immutability lend themselves as fortification features resisting the cascading fallout of devastating covid lockdowns.
Are you fine with giant corporations absorbing small business services, as they are brought down by often-arbitrary lockdown rules? Let us know in the comments below.
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.