June 12, 2024 | Read Online

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"Everything will be okay in the end. If it's not okay, it's not the end."

- John Lennon

Dollar doomers may have a surprisingly long wait

As a bitcoin holder, it's hard to know what to root for on CPI and FOMC days (let alone dual CPI/FOMC days like today).

We own bitcoin because we fear inflation, but bitcoin typically goes up when (like today) inflation fears go down.

So now we root for inflation to go down, which only makes sense if you think the Fed will respond by debasing the dollar and that a debased dollar, in turn, will make inflation go up.

Such is the logic behind the new-ish idea that bitcoin is a hedge against "monetary debasement": The coming avalanche of dollar printing will lead to higher prices for bitcoin.

So far, however, the correlation has worked in the opposite direction.

The Fed has been unprinting dollars, but the price of bitcoin has mostly gone up (despite the number of dollars going down).

That's probably because we don't believe the Fed will remain vigilant for much longer — it may be unprinting dollars now, but the US government is borrowing so many of them, we think it's inevitable the Fed will soon be printing again, faster than ever.

So, our thesis on bitcoin seems to have changed. Its habit of going up when logic dictates it should go down and going down when logic dictates it should go up suggests to me that we no longer see it as a hedge against inflation or monetary debasement.

Instead, we see it as a hedge against out-of-control deficit spending.

That seems like a useful thing to be seeing as the US is currently adding $1 trillion to its deficit every 100 days — and in a time when the economy is unusually good.

But I'm old enough to remember both that people have worried about deficits forever (to no effect) and that politicians can occasionally get their act together and do something about it (to great effect).

The hole is much bigger this time, of course, but it's worth remembering that the economy is, too.

A New York Times op-ed this week cited a study estimating that the US has a "fiscal gap" of just 2.1%: "If the primary (or noninterest) deficit were, on average, 2.1 percent of GDP lower every year for the next 30 years, the 2054 debt ratio would be the same level it is now."

(See here for why it's the "primary" deficit that really matters.)

Of course, there's no political will at the moment to either raise taxes or cut spending by any amount at all — but, still, 2.1% seems eminently doable if we ever decide we really need to do it.

Is it impossible to imagine, for example, the US government choosing to save hundreds of billions of dollars by switching the cost-of-living adjustment on entitlements from the overly generous CPI to the more realistic Chained CPI?

If legislators could muster the political courage to make some sensible changes like that, the long-term outlook may not be quite as dire as it seems.

The near-term outlook probably isn't as dire as it seems, either.

Scott Grannis notes that US money supply is nearly back to its pre-pandemic trend as "M2 has been absorbed by a bigger economy and suppressed by higher interest rates."

Bitcoiners are certain that trend will eventually reverse. The Fed, they expect, will succumb to political pressure and become the enablers of unlimited spending by monetizing US debt.

But Grannis' chart shows that, for now at least, the Fed remains on the inflation-fighting, dollar-defending job.

This morning's dovish CPI print, paired with this afternoon's hawkish FOMC meeting, serves as a dual reminder of just how on the job they are: Fed Funds is a full two percentage points above inflation.

This means that the purchasing power of the dollars you hold in a money market fund is currently appreciating (which might make you wonder what we need our bitcoin for).

The Fed's job may get easier, too.

Goldman Sachs recently reiterated their forecast that an AI productivity boom could boost global GDP by a whopping 7%.

Rapidly rising GDP would make it far less painful for the US to stabilize its debt-to-GDP ratio.

Note also that Congress and the Fed only have to do their job a little better than the competition — fiat currencies are mostly a relative game and the dollar may be the least bad of a bad bunch.

Yes, the US government has picked an overly generous CPI metric to index entitlements to, but the UK government is even worse: It uses a basket of three inflation metrics and then picks the most overly generous one — every year!

With that kind of competition, the dollar may remain the least bad currency for decades to come — which would allow the US government to continue borrowing cheaply for decades to come.

Still, though, $1 trillion of new debt every 100 days is a staggering number, so being long bitcoin as a hedge against deficit spending may well be a good idea — I'm not as confident as John Lennon that everything will be okay in the end.

But the dollar's end may be a lot further out than we think.

— Byron Gilliam

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