There are three possible outcomes to this crisis: Deflationary depression, little change or hyperinflation.
Let’s look at each of those in turn.
You’d have thought that with all the stimulus that “deflationary depression” would be unlikely but the theory goes something like this: The new money is backed by liabilities so is not printing money like Zimbabwe. You can’t make people or organizations spend money, they may just stash the cash and bring down their debt. The new money will just fill the gap left by the lockdown and the huge supply capacities of the global economy will satisfy and demand pressure before it can create rising prices. It could happen.
That is a fat chance. Let’s all save our time not bothering with this Goldilocks scenario.
Ever since QE was unleashed in the aftermath of the “global financial crisis” grumpy old investors have been predicting “hyperinflation.” It didn’t happen. So why should it happen now? I could agree that it is not going to happen this time either and I can imagine hyperinflation as a possibility but not a certainty. However when you read this from Wikipedia on the subject of hyperinflation it is hard not to get a sinking feeling: “A sharp decrease in real tax revenue coupled with a strong need to maintain government spending, together with an inability or unwillingness to borrow, can lead a country into hyperinflation.”
I don’t think the government borrowing from itself via the Federal Reserve counts are “borrowing” but even if it does the above is an extremely disquieting summary of how hyperinflation could come next.
So what is an investor to do?
The simple answer is to increase weightings towards inflation hedges. In my case I want a really powerful inflation hedge so I don’t have to load up on too many borderline liquid or outright illiquid assets or assets where I need to struggle through layers of greedy middlemen or there is a counterparty risk. There is no good getting the call right if you get robbed along the way. Well that suddenly makes it very difficult to get the trade on.
The classic move is to buy gold. I could buy lots of “paper” gold but in an environment of hyperinflation that paper is likely to turn to ashes. It does not take a trading guru to look at the paper oil market and see what can happen to your money in extreme situations. So, I need physical gold. Okay, where exactly am I going to put that? In a safe deposit box that might go “bye bye.” I could have it delivered to my house and bury it in the basement and have my name and address on a shipping manifest with a treasure chest of gold with X marks the spot scribbled on it. OK so I drop the paranoia, now I have to wire the money, pay a huge premium, get it delivered perhaps in a couple of weeks and have to repeat the process backwards if I ever want to convert it into trillion dollar bills.
It’s doable, but its ugly.
So while I was musing that with a milky coffee, I logged into my bank, sent a cars-worth of fiat to a crypto exchange, bought some bitcoin (BTC) and transferred it out to a wallet. All before I was left looking at an empty mug of beverage.
That, right there, is a fabulous advantage of bitcoin as digital gold.
I then looked at places to buy bullion and it’s mainly sold out.
So the upshot is, when more than the preppers suddenly realize they need to get hedged against inflation, gold will rise a lot and bitcoin will explode.
Bitcoin will explode because there is simply not much of it and it will explode because you can buy it, secure it, take it with you, turn it back into money and actually spend it natively at the click of a mouse. By comparison gold is like some relic from the dark ages. Oh wait… it is…
So while in the short term, the upcoming “halvening” will certainly support prices of bitcoin, any whiff of the new “zillions and trillions” of stimulus setting off inflation will drive the price of crypto and especially bitcoin to the moon.
There was more U.S. QE in a week in March than the total value of all the bitcoin out there..
Meanwhile, here is the chart of bitcoin and it looks bullish:
And now a short message to Gold Bugs. If you haven’t already, you really do need to skill up on crypto. It is a very steep learning curve but it is definitely worth it. It doesn’t cost more than a few bucks and serial headaches to get up to speed and play with some to get comfortable. The reason you love gold is a close match to the utility you can get from crypto and if you are right about what happens next, you will probably need the flexible benefits of a digital proxy. What is good for gold is good for bitcoin.
Author: Clem Chambers