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2008 to present, the contrast between the United States and the Middle Ages
Faced with another economic collapse of deflation, the United States Great Association defaulted and devalued again. This time, the Federal Reserve did not prohibit private ownership of gold, and then devalued the U.S. dollar relative to gold, but decided to print money and buy government bonds, euphemistically called quantitative easing. In both cases, the amount of dollar-based credit expanded rapidly to “save” the economy.
The proxy war between the major political groups has broken out again. A major turning point was Russia’s invasion of Georgia in 2008, in response to NATO’s intention to let Georgia join the organization. For the Russian elite led by President Putin, stopping NATO with nuclear weapons from advancing and encircling Russia’s homeland has always been a top priority.
Currently, there is a fierce proxy war between the West (the United States and its vassals) and the Eurasian continent (Russia, China, and Iran) in Ukraine and the Levant (Israel, Jordan, Syria, and Lebanon). Any of these conflicts could escalate into a nuclear war between the two sides. To deal with what seems to be an unstoppable war process, countries are turning inward to ensure that all aspects of their national economies are prepared to support the war.
In terms of this analysis, this means that savers will be required to provide funds for the country’s wartime spending. They will be economically suppressed. The banking system will allocate most of the credit according to the country’s instructions to achieve certain political goals.
The United States Great Association defaults on the US dollar again to prevent a deflationary depression similar to the Great Depression of 1930. Subsequently, the United States set up trade protectionism barriers as it did from 1930 to 1940. All nation-states are looking out for themselves, which can only mean experiencing financial repression while also enduring severe currency inflation.
From November 25, 2008, to the present, the S&P 500 Index (white) compared to gold (gold) compared to Bitcoin (green) is 100
This time, as the Fed devalues the US dollar, capital can freely leave the system. The problem is that at the start of the current cycle, Bitcoin provided another form of stateless currency. The main difference between Bitcoin and gold is that, as Lynn Alden put it, Bitcoin’s ledger is maintained through encrypted blockchains, and currency flows at the speed of light. In contrast, gold’s ledger is maintained by nature, and its movement speed is only equivalent to the actual transfer of gold by humans. Compared to fiat currencies, which also move at the speed of light but can be printed infinitely by governments, Bitcoin has the upper hand, while gold lags behind. That’s why from 2009 to the present, Bitcoin has to some extent stolen the show from gold.
Bitcoin’s performance far exceeds gold, to the point where you can’t see the difference in returns between gold and stocks on this chart. Therefore, gold’s performance has lagged behind stocks by nearly 300%.
The end of quantitative easing
Although I find it incredible that my background and description of the past 100 years of financial history cannot dispel people’s concerns about the end of the current bull market. We know we are in a period of inflation, and Bitcoin has done what it should: outperform stocks and fiat currency devaluation. However, timing is everything. If you bought Bitcoin at the recent all-time high, you might feel like a beta version of a cuckold, as you’re projecting past results onto an uncertain future. That being said, if we believe that inflation will continue, and war (whether cold, hot, or proxy) is imminent, what does the past tell us about the future?
Governments have always suppressed domestic savers to fund wars and past winners of the cycle, and maintain system stability. In this modern era of nation-states and large integrated commercial banking systems, the primary way governments provide funding for themselves and key industries is by controlling how banks allocate credit.
The problem with quantitative easing policies is that the market will funnel free money and credit into businesses that do not produce the actual products needed for a wartime economy. The United States Great Association is the best example of this phenomenon. Volcker opened the era of omnipotent central banks. Central bankers create bank reserves by buying bonds, which lowers costs and increases credit limits.
In the private capital market, credit distribution is aimed at maximizing shareholder returns. The simplest way to raise stock prices is to reduce float through buybacks. Companies that can acquire cheap credit borrow money to buy back stock. They don’t borrow money to increase capacity or improve technology. Improving business in hopes of generating more revenue is challenging and does not guarantee a boost in stock prices. But mathematically, reducing float can raise stock prices, and since 2008, large-cap companies that have obtained a large amount of cheap credit have done just that.
Another easily achievable goal is to raise profit margins. Therefore, companies have not used stock prices to build new capacity or invest in better technology, but have lowered labor costs by relocating jobs to China and other low-cost countries. U.S. manufacturing is so fragile that it cannot produce enough ammunition to counter Russia’s fighting in Ukraine. Additionally, China has a significant advantage in manufacturing goods, to the extent that the supply chain of the U.S. Department of Defense is full of critical components produced by Chinese companies. Most of these Chinese companies are state-owned enterprises. Quantitative easing (QE) combined with shareholder-centric capitalism has made the U.S. military “giant” dependent on the country’s “strategic competitor” (their words, not mine), China. This is ironic!
The United States Great Association and the Western collective allocation of credit will be similar to China, Japan, and South Korea. Either the state directly instructs banks to lend to this or that industry/company, or banks are forced to buy government bonds at yields below the market so that the state can issue subsidies and tax breaks to “appropriate” companies. In either case, the return on capital or savings will be below nominal growth and inflation. Assuming capital controls are not implemented, the only way out is to buy cryptocurrencies and other value stores outside the system.
For those who are obsessed with observing changes in the balance sheets of major central banks and believe that the rate of credit growth is not enough to drive the price of cryptocurrencies up again, you must now be obsessed with observing the total amount of credit created by commercial banks. Banks achieve this by lending to non-financial enterprises. Fiscal deficits also generate credit, as deficits must be funded by borrowing in the sovereign debt market, and banks dutifully buy these debts.
In short, in past cycles, we monitored the size of central bank balance sheets. In this cycle, we must monitor fiscal deficits and the total amount of credit created by non-financial banks.
Trading strategy
Why am I confident that Bitcoin will regain its magic? Why am I confident that we are in a new era of localization and nation-state priority inflation?
Look at this
Information
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According to a federal agency’s forecast, the U.S. budget deficit is expected to soar to $19.15 trillion in fiscal year 2024, exceeding last year’s $16.95 trillion and setting a record high, excluding the COVID-19 era. The agency attributed the 27% increase in its earlier forecast to increased spending.
This is the answer for those who are worried that “slow” Biden will not spend more to keep the economy running before the election.
The Atlanta Fed predicts that actual GDP growth in the third quarter of 2024 will be an astonishing +2.7%.
For those worried that the United States will fall into a recession, it is extremely difficult for a recession to occur when the government spends $20 trillion outside of tax revenue. This is equivalent to 7.3% of GDP in 2023. As a reference, U.S. GDP fell by 0.1% in 2008 and by 2.5% during the global financial crisis in 2009. Even if there were another global financial crisis similar to last time, the decline in private economic growth would still not exceed the government’s expenditure. There will be no recession. This does not mean that a large number of ordinary people will not fall into serious financial difficulties, but the United States will continue to move forward.
I point this out because I believe that fiscal and monetary conditions are loose and will continue to be loose, so holding cryptocurrencies is the best way to preserve value. I am convinced that today’s situation is similar to the 1930s to 1970s, which means that, given that I can still freely convert from fiat to cryptocurrency, I should do so, as devaluation due to the expansion and centralized credit allocation of the banking system is imminent.
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This article is authorized to be reprinted from Deep Tide TechFlow.
