Disclaimer: Opinions expressed in this article do not constitute investment advice from Bitcoin Reserve.
With inflation being actively spurred on, one of the deepest recessions on record in full swing, and unemployment figures still uncomfortably high, the global economy could be facing one of the worst inflationary periods since the 1970s. And that could be extremely favorable for bitcoin.
Last week, the US Federal Reserve reiterated its dovish position on the economy. Instead of actively resisting inflation, the Fed is encouraging it, inserting a new target for average inflation of 2%—though it won't lose any sleep should that figure creep up higher. This means interest rates will remain near zero for the next few years, if not longer, and quantitative easing will continue indefinitely.
For many, this approach is counterintuitive, especially amid one of the most prolific bouts of QE the world has ever witnessed. In the US, QE has accounted for a 75% extension to the Fed's balance sheet, growing from $4 trillion in March to $7 trillion come late August.
According to Morgan Stanley's chief US equity strategist, Mike Wilson, as a result of an onslaught of unconventional fiscal and monetary policy, inflation is already rearing its ugly head—just not necessarily through conventional measures.
"While we are likely to experience big imbalances in the real economy for several more quarters, if not years, the most powerful leading indicator for inflation has already shown its hand — money supply, or M2," Wilson writes.
Indeed, per data from the St Louis Fed, the M2 money stock, an aggregate total of cash checking deposits, savings deposits, money market securities, and mutual funds, has increased by nearly 20% in 2020. Compared to the last recession—in which the M2 increased by 13% in two years between 2007 & 2009—it's easy to spot the concern.
Such a supply shock is likely to have a knock-on effect on the value of the US dollar. In fact, the greenback already sunk to a two-year low at the end of August, after a fourth consecutive month of losses. Analyst's blamed the Fed's dovish reiteration.
Low interest rates often result in a weaker dollar. While higher interest rates attract foreign capital, causing additional demand and thus bolstering value and exchange rates, the opposite is true for dwindling interest rates. Less foreign interest and a lower exchange rate result in diminishing demand and value.
In turn, an enfeebled dollar is leading to inflation in real terms as prices and purchasing power fall out of equilibrium.
As inflation starts to loom, investors are beginning to wise up, turning instead to inflationary hedges such as gold and bitcoin. In early May, Wall Street luminary Paul Tudor Jones entered the bitcoin market—encouraging his investors to do the same:
"At the end of the day, the best profit-maximizing strategy is to own the fastest horse… If I am forced to forecast, my bet is it will be Bitcoin."
For Jones, investing in bitcoin is essential amid the "most unorthodox economic policies in modern history."
Jones' eminent foray caused a domino effect, and soon others entered the fray.
Included in the mass exodus from fiat was MicroStrategy—the largest publicly-traded business intelligence company in the world. The firm placed a $250 million bet on bitcoin, adopting it as a treasury reserve asset, and rationalizing, akin to Jones, that the asset not only provided a "reasonable hedge against inflation," but also the prospect of rendering higher returns than holding traditional assets.
But while the stage may set for inflation and fiat erosion, America remains in clutches of another grave crisis: the deepest recessions on record. In July, the US economy shrank by 33%. To make matters worse, the record slump was compounded by sky-high unemployment figures.
Combined, these factors threaten to conjure a kind of inflation not witnessed in decades—a deathly amalgamation of sluggish growth, inflation, and unemployment, otherwise known as stagflation.
A term first coined by economists in the 1970s, stagflation—a portmanteau of stagnation, i.e., of a nation's economic growth, and inflation—could provide even more rocket fuel for bitcoin. Why? Because, amid rate cuts and QE, bitcoin is performing like digital gold.
Physical gold established itself as a viable hedge against stagflation between 1970 and 1980, going practically vertical, adding 1,800%, trough to peak, within the decade.
For many, bitcoin is on the same trajectory, following in gold's footsteps and morphing into a similar macro hedge. Even Bloomberg's analysts gave credence to bitcoin in April, suggesting that its 2020 performance had transitioned BTC from a risk-on speculative asset to the "crypto market's version of gold."
Arguably, bitcoin has more than shown its worthiness of taking up its predecessor's mantle.
Since the systemic collapse that rippled through the entire financial spectrum in March, bitcoin has recovered 160%, racing to highs not witnessed in almost two years. And, for the most part, it's done so under the impetus of unconventional monetary and fiscal policy.
Now, with the Fed stubbornly committing to its dovish stance, QE, and flat interest rates pervading, fiat devaluation and inflation look inevitable. And both are a boon for bitcoin.