Why you should trade paper money for digital gold.
By: Twitter @Bitcoin_Lobby
The US dollar is losing value every single day
The colorful paper in your wallet, so-called governmental “fiat,” is arbitrarily inflated at the whim of governments, central banks, and even your local bank. Money Printers mass-produce money for cheap, while charging us full price.
(United States Treasury Secretary Steven Mnuchin holding up a sheet of uncut $1 Federal Reserve Notes, on November 15, 2017).
Governments are EXPENSIVE!
In 2019, the United States Federal Government spent $5 trillion, while the entire United States economy produced $22 trillion in Gross Domestic Product. Thus, the US Federal Government spends about one-quarter of the entire country’s output every year.
(Historical United States Federal Government spending as of 2019. Notice that spending increases every year.)
Governments spend a lot of money. Studies also show that governments grow faster than the underlying economy, so the rate of government spending increases too.
That means that 22.5¢ of every $1 of value produced within the United States in 2019 was spent, redistributed, or wasted by the US government.
Remember, my calculations exclude state and local governments. We are only focusing on the largest government thus far, the US Federal Government. That means that total government taxing and spending far exceeds the numbers we are discussing.
Every year, the US spends more than it receives in taxes.
Every year, this process repeats.
In 2019, the government received $2 trillion in taxes.
(Historical United States Federal Government tax receipts as of 2019. Notice that taxes decrease during recessions, and increase slower than spending.)
Since the US government spent $5 trillion, and taxed $2 trillion, the difference amounts to $3 trillion in 2019 alone.
This Government “Deficit,” or the amount by which spending exceeds taxes, adds each year into the total “Public Debt.” According to https://www.usdebtclock.org, as of April 2020, the public debt exceeds $24.7 trillion.
Today, the US Federal Government owes more money than total market capitalization of the S&P 500 stock market, which is comprised of the 500 largest US Corporations.
(Historical US Federal Public Debt to 2019, which will continue to increase at an accelerating rate).
The 2020 Depression—like any other recession—reduces tax receipts and increases government spending. Accordingly, expect government debt to continue exploding upwards.
Politicians decrease taxes, increase spending, and print money.
Politicians have limited options for raising government revenue: either (1) increase taxes, (2) decrease spending, (3) print money, or (4) grow the debt.
The first two options—tax bumps and spending cuts—are politically difficult. Politicians want to be re-elected. Due to political practicalities, the opposite usually occurs. Politicians cut taxes and increase spending.
The fourth option, increasing government debt, simply “kicks the can down the road.” As a result, politicians can pass the problem along to their successors. Kicking the can down the road remains a sacred tradition in Washington D.C.
Government debt requires eventual taxes increases, spending cuts, or money printing. Thus, all debt must be eventually financed by one of the other three options.
Printing money has always been the Holy Grail of politics. Politicians can print money and no one cares, because the consequences are indirect, invisible, and delayed.
Printing money will always result in inflation
What is inflation? Inflation acts as an implicit tax, by decreasing the purchasing power of all money. Due to the Cantillon Effect, inflation enriches the money printers and their payees.
Inflation disproportionately hurts poor people. Poor people often earn minimum wage, which adjusts slowly over time because prices are “sticky.” Also, poor people often cannot afford inflation hedges, so they hold inflating dollars while rich people buy real assets like real estate.
The tax policies of politicians always lead to inflation, which is economically bad.
Use this calculator to see how price inflation has evolved over time. Note, that price inflation is generally underestimated by inflation calculators. The actual decrease in purchasing power has declined over time.
The money printers are stealing your purchasing power by printing trillions of dollars without your permission. Even the “independent” central bank for the United States, the “Federal Reserve,” responds to political pressures by printing trillions of dollars out of thin air to buy assets and manipulate markets.
The safest way to acquire bitcoin is through a regulated exchange, such as the Cash App (if you use this link, we will both get $5 of free bitcoin
(Federal Reserve’s Total Assets as of late April 22, 2020: $6,573,136,000,000 or $6.5 Trillion.)
The most famous recent case of hyperinflation comes from Zimbabwe. The Zimbabwean dollar became worth next to nothing, with the government issuing $100 trillion notes. These $100 trillion banknotes can be purchased on Amazon.
But the U.S. Always Pays Its Debts!
Eventually, the markets will punish irresponsible governments by refusing to finance its debts. But no worries! A central bank near you can purchase all of the governments debt. How? By printing money.
(In March 2009, Chairman of the Federal Reserve, Ben Bernanke, admitted that the Fed creates trillions of dollars out by pressing buttons on a computer.)
The inevitable reaction to irresponsible government finances will be a discounting of the government debt by the market. When that happens, the interest rate that the government must pay on its debt will increase.
(A 60-year chart of the constant maturity 10 year treasury interest rate, or the interest rate that the US Government can borrow money for 10-years, which are sitting all-time-lows.)
Interest rates currently sit at all-time-lows. Expect interest rates to increase over time as the markets begin demanding higher interest rates to compensate for inflation risk.
When interest payments (“debt service”) increases, the government will issue more debt to pay the higher interest. Issuing more debt will increase the interest rate in a vicious cycle.
When the amount of interest expenses exceeds tax receipts, then the debt will grow with compound interest. In this scenario, the dollar will lose its reserve currency status.
No Inflation? Hahaha!
All else equal, printing money decreases the value of all remaining money. This is necessarily true. Increasing the supply of any good will decrease its market value. When the market value of money decreases, it’s called inflation.
Mainstream commentators think that there is “no inflation” because the CPI (Consumer Price Index) says so. The CPI constitutes a highly artificial measure of inflation, published by the US Government’s Bureau of Labor Statistics.
Uninformed critics love to cite a version of the Consumer Price Index which excludes food and energy expenses. They say: “we don’t have an inflation problem, we have a deflation problem! The inflation rate is only 2%.”
(A 60 year chart of CPI [excluding food and energy expenses] yearly rate of change.)
However, the real rate of inflation is much much worse. Ludwig Von Mises defined inflation as the rate of increase of the money supply.
Another way of visualizing inflation is by seeing its effect on the price of goods that we consider important. The goods and services that rich people consume have increased in price much faster than the price changes for junk, such as televisions.
In my opinion, the markets are drastically underestimating modern inflation risk. When the market realizes that we are on the cusp of inter-generational inflation, the markets will react suddenly and violently.
Markets are completely unprepared for inflation.
When inflation appears, the markets will overreact in the opposite direction.
Government money and government debt will lose value at a precipitous rate. Meanwhile, real assets which are priced in government money will appear to increase in value, because the money will be worth less.
For the foregoing reasons, I have entitled this article the “Dollar Doubling.” The quantity of money will continue to double, so the value of a dollar will continue to decline over time.
Note: although the foregoing focused on the United States Dollar, note that similar trends are developing all around the world, including but not limited to the Euro and Yen.
Only you can protect your portfolio against inflation! To prepare for future inflation:
- Don’t own bonds, especially government bonds
- Don’t store your long-term savings in fiat
- Buy real assets, such as gold
- Hodl Bitcoin
What is the Bitcoin halving
Soft money is easy to produce. Hard money is hard to produce.
Simply put, Bitcoin is the hardest money to ever exist. No one can print bitcoin!
In 2009, the supply of Bitcoin was set in code. There will only ever be 21 million bitcoin. As of 2020, over 85% of all bitcoin that will ever exist, already exists.
There is no central authority that can increase the amount of bitcoin. All bitcoin must be “mined,” and genuine bitcoins are never “printed.”
Every 4 years, the production of new bitcoins decreases by half.
In May 2020, the amount of new bitcoins created with every block will decrease from 12.5 BTC to 6.25 BTC.
In 2024, the new supply of bitcoin will decrease from 6.25 BTC to 3.125 BTC per block. This process will repeat every four years, until about 2140. After 2140, there shall be no more new bitcoins.
The Halving is the Anti-Scam
This event, the so-called “Halving” (sometimes “Halvening” or HalFinning”) occurs every 210,000 blocks. In 2009, every bitcoin block was mined with 50 new bitcoins. In November of 2012, the block “subsidy” declined to 25 BTC per block. In July 2016, the block subsidy decreased to 12.5 BTC.
On average, one block gets mined every 10 minutes. As of this writing, in May 2020, the price of a bitcoin is about $7,500. Thus, almost $100k (12.5 BTC * $7500 = $93,750) of new money must flow into buying bitcoin every ten minutes, all else equal, to keep the price at $7,500.
On average, 144 blocks are produced per day. Thus, $13.5 Million of new money must be used for buying bitcoin every day just to maintain the current price. To calculate this number, calculate 144 blocks * 12.5 BTC/block * $7500 = $13,500,000.
Assuming the same amount of new money is still buying bitcoin after the Halving, the price of bitcoin must double to $15,000 simply to balance supply and demand.
Data shows that past Bitcoin halvings greatly affect the price
A pseudonymous institutional money manager in the Netherlands, PlanB, compiled data from previous Halvings to conclude that the bitcoin price is driven by the Halving.
A “stock-to-flow” ratio measures the new supply (flow) relative to the existing supply (stock). The stock to flow ratio simply measures the inverse of the inflation rate of an asset.
This econometric model, called the “Stock to Flow Model” or S2F, predicts much higher prices after the Halving. According to the Stock-to-Flow Model, Bitcoin should be valued at about $100,000 after the 2020 Halving, and $1 million after the 2024 Halving.
Main Criticism of the Stock to Flow Model
“Already Priced In”
The “Efficent Market Hypothesis” (EMH) posits that prices reflect all relevant public information. Since the bitcoin supply schedule was always public information, the EMH implies that no one can make a profit by trading the news event.
Indeed, Bitcoin’s future monetary policy is known with nearly perfect precision. On the day of the Halving, the price will not jump. The Halving is not news to informed investors.
For this criticism to be correct, there must be a way of valuing a bitcoin before and after the Halving. For the EMH to be true, there must be firms which are willing to buy and sell bitcoin to bring BTC to its underlying fundamental value.
These assumptions are flawed. First of all, there is no agreement as to the fair value of a bitcoin. Second, the nascent bitcoin markets do not have the same quality of investment firms, in terms of sophistication or capitalization, for us to assume that the Halving is retroactively reflected in the bitcoin price.
In economic terms:
- The Halving reduces the supply of bitcoin.
- The Halving increases the costs of producing a bitcoin.
- The Halving might increase marginal demand of a bitcoin, due to psychological scarcity and attention.
Not to say that the Bitcoin markets are inefficient. Rather, we start with the basic intuition that the price of bitcoin will increase following the Halving, as long as demand is held constant.
The EMH assumes that traders will buy bitcoin pre-Halving, and sell bitcoin post-Halving, thereby denying everyone else from an opportunity to profit off of the Halving. Furthermore, hypothesized firms must have more capital than the rest of the market, to mute the effect of the Halving. These assumptions are insubstantial.
Stock-to-Flow Model Measures Supply Only
The Stock-to-Flow model attempts to project the future price of bitcoin by measuring its demand only. PlanB, the model’s author, has applied the model to gold, silver, and platinum, showing that the prices of these precious metals may also be explained by the model.
Strikingly, the Model ignores demand completely. It is my belief, however, that marginal production is the main driver of price, whereas the other factors explain why the price fluctuates around the S2F price.
These other factors explain why the price may fluctuate anywhere from $7.5k now to $300k after the Halving.
Although the S2F Model price remains the same for four years, we all know that Bitcoin is very volatile.
Bitcoin’s volatility inheres in a highly profitable investment. Bitcoin’s price is headed to the millions, and the only way to get there is on a powerful, yet turbulent, rocket ship.
Stock-to-Flow Model Eventually Projects Infinite Prices
In the far-out future, the S2F Model calls for unreal prices. PlanB expects that the model will explain price action for the next 1-3 Halvings, at which point the dollar will hyperinflate against Bitcoin.
Proponents of the S2F Model believe that the Model will be invalidated to the upside. Preston Pysh, for example, believes that it is possible the S2F Model will turn out to be too pessimistic once Bitcoin breaches about $300k and accelerates to the upside.
Is Bitcoin Too Good to be True?
The most common argument against high BTC price predictions amount to essentially: it’s too good to be true.
The primary flaw with these critics is that they are using analogy rather than employing critical reasoning. They have a hard time imagining bitcoin as a world reserve currency, so they think it cannot happen.
Make no mistake, the Dollar is Doubling while Bitcoin is Halving. Fiat money will continue to be printed at an accelerating rate, whereas bitcoin will become increasingly scarce.
Monkey Brain: "oooo pretty pattern will repeat"
Seasoned Trader: "patterns don't repeat after being publicly pointed out"
Contrarian HODLer: "money printer go brrrrrrr" pic.twitter.com/ytrhPMl13N
— Jameson Lopp (@lopp) March 24, 2020
Fiat is infinite. Bitcoin is finite.
The 2020 Halving is happening at a critical time in the greater economic landscape. On one hand, the Bitcoin Protocol forces less production over time. On the other hand, the political environment forces more production over time.
I fear we are witnessing a slow-motion collapse of fiat money. The markets will not consume unlimited amounts of money without punishing the economically irresponsible governments.
Bitcoin Hodlers know that there will never be more than 21 million bitcoins. As a result, bitcoin’s price will violently adjust upwards to reflect decreasing demand for inflating fiat currency, and increasing demand for a truly scarce asset.
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That $5 of bitcoin will be worth $50, $500, and even $5,000 one day. But who knows how much that fiat currency will be worth much by then.
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