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Don’t Fight The Fed (And Win No Matter What) –

Don’t Fight The Fed (And Win No Matter What) –

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Summary of the thesis

I think Bitcoin (BTC-USD) is an ideal investment, regardless of what the Federal Reserve does. In this article I will talk about the different directions the Fed could take, what the consequences would be for the economy and what would happen to the price and value of Bitcoin.

Ultimately, regardless of what the Fed does, I believe Bitcoin will thrive. Loose monetary policy increases wealth, which is good for Bitcoin. On the other hand, further tightening of monetary policy, while bad at first, would eventually lead to a complete economic collapse, causing the dollar to rise and leaving Bitcoin as one of the few values ​​to retain its value.

Current status of the matter

Monetary policy has been used as an economic instrument for 1000 years. The economy was “stimulated” in Roman times by creating more coins of less pure metals. During World War II, the Federal Reserve lent to the Treasury by capping interest rates, and before that there were several attempts to stimulate growth by deliberately devaluing the currency.

Today, economists believe they have perfected the art of monetary policy, and indeed, it seems that the entire market depends on the words of Fed leaders.

While the Federal Reserve has managed to maintain a semblance of normalcy since abandoning the gold standard in 1971, it has built an incredibly fragile and ever-expanding house of cards, by which I mean debt, with only one real way out. ; A sharp contraction of credit, a long recession and a world economy much less dependent on the dollar.

Since the collapse of the dot-com bubble, or perhaps before, the Federal Reserve has paved the way for this outcome. Every crisis, dot-com, housing, and more recently, COVID, is met with the same response, more fiscal and monetary stimulus. In other words, cover the problem with a mountain of debt. The debt has actually become systemic, which is why we can’t possibly “normalize” politics without a major shock.

The Fed’s catch-22

The Federal Reserve is in a Catch-22 situation because it can’t normalize policy without destroying the economy, but failing to normalize eventually destroys the economy as well. There are at least three reasons why the US cannot return to normal monetary policy anytime soon:

  1. Debt markets

  2. National debt

  3. Recession

First, businesses and households in America have become dependent on cheap debt,

Private debt in relation to GDP (Trading Economics)

The graph above shows a debt to GDP ratio that has increased by over 50% since 1995. This is becoming an even bigger problem as growth slows and debt continues to increase due to interest payments.

The same can be said about the federal budget:

Government debt/GDP

Public debt/GDP (trade economics)

We now have almost 140 percent debt to GDP. This graph isn’t just growing, it’s growing exponentially, and it can’t go anywhere else. Every year the population ages and social security costs increase. Increased debt is the only way to maintain the current status quo.

This brings me to my third point, which is that a major policy change, i.e. normalization, would completely disrupt society and likely lead to political chaos, which the Fed would want to avoid at all costs.

Two possible outcomes

There are two possible ways this could happen.

First, the Fed could swallow the pill, raise interest rates and end QE for good. What would happen in this scenario? Interest rates on mortgages would be much higher, which would weaken the housing market. This would have a real impact on consumer spending, which would affect businesses. These companies would have to simultaneously reduce their operations and their indebtedness. Many would not be able to continue operating without the option to refinance their loans, which do not incur much higher interest rates. To cope with these higher interest rates, the deficit would have to be sharply reduced, which would weaken economic activity even more.

Eventually, the economy would suffer a 1930s-style depression caused by a major credit crunch. It is likely that at some point in this cycle the Fed would again try to improve the situation by inflating the bubble again. However, the only thing that would deflate is the value of the currency. The US could and probably would liquidate the Treasury, but the rest of the economy, deep in a full-blown debt cycle, would not respond to stimulus. The private sector would refuse to create more debt, and only when the dust had settled and the system was cleansed of the excesses of previous decades could the US return to business as usual.

We’re getting a taste of this now, but I don’t think the Fed will allow a full-blown collapse. A more likely scenario is that the Fed will at least try to keep the game of musical chairs going. The Fed will tighten for a while, but will eventually have to return to quantitative easing and 0% interest rates as the economy stagnates and debt/GDP threatens to become unsustainable.

Now, the Fed can probably get away with this for a while, and it already has because the rest of the world is in the same trap. Despite unprecedented levels of QE, the US dollar is still considered the world’s reserve currency and is paradoxically stronger than ever, at least relative to other currencies.

As long as we all agree, we can continue to inflate our debt forever, but history shows that eventually something will move the needle enough to cause change. A change that will likely push us into scenario one again.

How is Bitcoin doing?

In the first scenario, Bitcoin would act as a way for the rich to preserve their wealth and hedge against exposure to the dollar, which at this point would likely be collapsing. The USD has managed to maintain its value because it is the world’s reserve currency and is supported by the world’s most prosperous economy.

However, with the US economy in disarray, it is normal to assume that this would cast a shadow of doubt on the US dollar, given the possibility of some sort of default in US Treasuries. It is likely that foreign nations would sell treasuries on a massive scale, causing the dollar to rise and see it replaced by some other standard of value.

As an American, holding Bitcoin would be one of the most convenient ways to maintain global purchasing power. In fact, the collapse of the US dollar could bring sound money alternatives like Bitcoin and gold back to the forefront of the world financial system.

In scenario number 2, where the Fed continues to print money indefinitely, or at least tries to, Bitcoin would also do very well. A constant oversupply of dollars would cause a constant devaluation of the currency. This can go on for decades as the value of assets increases steadily while purchasing power evaporates. Instead of deflating the debt away, we add it away.

But when inflation became a constant thing, people would quickly start turning to alternative assets, making inflation even worse. Eventually, once the systems were in place to replace the dollar, the world would turn its back on the US currency, probably in favor of a commodity-backed currency.

The US government could try to defend the value of the USD, but that would inevitably lead to scenario 1, where the US economy falls into a deflationary credit crunch.

In either case, we would end up in a situation where the US dollar would eventually lose its value and place in world hegemony. Once again, Bitcoin and other limited resources like gold, land and oil would be the best place to invest when this happens.

Bitcoin: A New Beginning

The great thing about Bitcoin is that it can act as a “risk” type of asset while the current debt bubble continues, but once it bursts it becomes even more valuable as it is used as an alternative currency and store of value.

This may seem far-fetched at the moment, but there is clear evidence of Bitcoin’s value all around us. Bitcoin is used in many places where currency and political stability are not guaranteed, such as Africa.

More than that though, if we get a system-wide failure, as many have been talking about for years, Bitcoin will not only become a store of value, but may be the most useful tool for rebuilding our financial system.

Bitcoin already has its own financial system that is largely insulated from outside interference. Implementation is easy, anyone can join the Bitcoin network and the system is self-regulating. This is the magic of distributed systems.

Bitcoin and the DeFi ecosystem built around it and other cryptocurrencies can become the lifeboat the world needs in its darkest hour.

Take with

In conclusion, regardless of what the Fed does, Bitcoin is a must-own. In the best case scenario, we’ll keep the music going for the next 100 years. During this time, however, the dollar would suffer a steep loss in value, while Bitcoin would continue to appreciate due to limited supply and increased use as a store of value.

More likely, sooner or later, however, we may see a major credit crunch and a sharp drop in the value of the USD. At that point, it becomes clear to those who don’t have Bitcoin why owning it is so important.

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