The Breakdown - What a New Era of Big Government Could Mean for Bitcoin

Episode Date: June 6, 2021

A reading of David Z. Morris’ piece for CoinDesk “Has COVID-19 Made Biden’s Big Spending the New Normal?”.   -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.io and produced and distributed by CoinDess. What's going on, guys? It is Sunday, June 6th, and that means it's time for Long Reads Sunday. Yesterday, I was asking the question about whether this Bitcoin bull market is at its end. and part of what I said felt very important to understand, before we really know whether that's the case, is if and how the macro environment has shifted. The macro landscape, the inflation narrative, has been such a huge part of driving this Bitcoin bull cycle, that the unwinding of that,

the changing of that would, you would imagine, naturally have some consequences for where Bitcoin and crypto fit in the larger world. We've been in a period of waiting, of wait to see, of wondering if there was going to be a transition. It has felt to many like the economy was heating up in such a way that inflation was naturally going to follow, and interest rates were going to have to rise because of that. In consequence, the riskiest tech stocks that had the highest valuations have been in retreat for a couple months, roughly the same period that Bitcoin has been idling or going down. There is, however, a narrative counterweight that whatever the case in the short term of monetary policy, fiscal spending has entered a fundamentally new era, a fundamentally new era in which

Bitcoin could be more relevant than ever. The potential for that new era is exactly what David Morris explored in a recent op-ed on CoinDust called Has COVID-19 made Biden's big spending the new normal. This came out just after Biden's budget was released and explores some of these questions. President Joe Biden today unveiled a budget proposal that would increase U.S. federal spending to levels not seen since World War II. As usual, the new president's proposed budget has already triggered a fierce debate. But while we can expect the usual scrum over spending details, the Biden budget is an attempt to push forward and leverage a much broader ideological shift.

The coronavirus pandemic has made government spending and programs significantly more appealing to Americans. It's something of a perfect storm. The budget arrives after coronavirus pandemic relief proved hugely popular and seemingly effective. Longer term, rising inequality and other serious social problems have created more space for pro-government voices, like U.S. Senator Bernie Sanders. Meanwhile, conservative deficit hawks have been marginalized by the rise of Donald Trump. That creates a scenario friendly to the return

of big government. But of course, all that comes with the cost. An increasing embrace of government spending could not only lead to long-term debt hangover, but could also fuel rising inflation. That could further increase interest in one of the major arguments for Bitcoin, that it can act as an inflation hedge against currencies like the dollar. Rising inflation was a key factor in investor Ray Dalio's recent endorsement of Bitcoin at CoinDesk's Consensus 2021 event this week. The idea is still relatively untested, especially in the U.S., but Americans' shifting attitudes in Biden's legislative agenda could create a real-world showcase of how Bitcoin responds to rising government spending, debt, and inflation.

The Biden budget would increase discretionary spending for 2022 by 8.4%, according to the Wall Street Journal. An overall non-defense spending would rise 16%. The proposed budget for 2022 would total $6 trillion. Biden also lays out proposed spending for the next decade, which, according to the Congressional Budget Office, would push U.S. federal debt to 117% of GDP by 2031, a level widely considered risky to an economy. Notably, the Trump administration's pre-pandemic tax cuts and spending had already had a similar effect, setting a course for the same level of debt by 2035.

Instead of tanks and bombers for fighting Nazis, Biden's big spending push would be focused on improving Americans' lives. The military budget would barely grow. Proposals include subsidized child care, tuition-free community college, paid leave for workers, and big spending on transportation and utility system upgrades. The budget would also increase government revenue by increasing the capital gains tax, and restoring corporate tax rates and some personal income tax rates to pre-Trump levels. None of this is law yet, and realistically, much of it never will be. The White House budget proposal is largely a symbolic document, a way for an administration to signal what it wants, whether or not it can actually get it. Though Democrats technically have control of

Congress, their ability to get legislation through depends on the support of centrist Democrat senators like Kristen Sinema of Arizona and Joe Manchin of West Virginia. That's just one reason there will likely be a lot of compromises as proposals become reality. Looking for the best way to unlock your crypto's liquidity, nexo.io is exactly what you need. Barrow against your digital assets at just 6.9% APR, earn passive income with yields of up to 12%, and swap between more than 100 market pairs with the instant nexo exchange. Try the NXO wallet app to get the whole 360 degrees of crypto banking. Get started at NXO.io.

That's N-XO.io to get started today. What's really significant about the Biden proposal may be less its individual positions than how it reflects major shifts in thinking about government spending. The Biden administration is framing its proposal as a strategic investment in the future of America, arguing that high spending now on things like infrastructure and education will create growth down the line. That's been a tough argument. to make in America during the past half century of ideological dominance by the conservative stance that lower taxes and less spending are the best way to grow the economy.

But Biden's case for public investment comes at a moment when Americans suddenly appear much more receptive to it. Most obviously, the coronavirus pandemic shrank the U.S. economy by 3.5% last year, creating an opportunity for accelerated government spending to pick up economic slack. This Keynesian approach to recessions was already put into action under President Trump, whose Treasury Secretary Stephen Mnuchin championed a nearly $1 trillion emergency relief program. American support for that and subsequent relief programs has been high, even among Republicans who have long opposed such spending. That reflects another shift that seems likely to make deficit-fueled spending more popular.

The rise of Donald Trump, as the effective leader of the Republican Party, has reduced the traction of traditional conservative ideas, including balanced budgets. That big spending approach to economic relief has already shown success. Despite shrinking dramatically for the year, the U.S. economy actually grew at more than a 4% annualized rate in the last quarter of 2020, and 6.4% in the first quarter of 2021. US GDP is now expected to exceed pre-pandemic levels by the end of June. A usual point of comparison here is with the 2008 financial crisis,

when some argue a more limited federal relief effort led to sluggish growth that dragged on for nearly half a decade. It's not an entirely apples-to-apples comparison because of the deep structural roots of the financial crisis, but many Americans appear to have taken the contrast as a vindication of Keynesian deficit spending. The success of relief program so far, of course, is also the argument against continued high government spending. Maybe we've already done enough, and the economy is well on its way to being fine. In addition to recovering GDP, for instance, the standard measure of unemployment stands at now just 6.5%, down from a terrifying 17% in April of 2020. Continued high government

deficit spending into a relatively healthy economy, critics say, risks causing higher inflation. Inflation has already risen to a 13-year high, although there's some reason to believe that it's a temporary effect of pandemic-driven shortages and reopening demand. But the Biden budget is ultimately looking well beyond COVID-19 to try to address deeper economic problems that the administration argues are holding the U.S. back. Here again, circumstances give Biden a major advantage when it comes to selling its proposal to the public. Though the U.S. response to the pandemic got off to a rocky start, the ultimate success of relief and vaccination programs seem to have actually increased Americans' faith in government and their belief that the government can play a positive role in their lives.

According to a Johns Hopkins survey from October of last year, the share of U.S. adults who support an active government role in society rose from 24% to 34%. The Biden proposal is an attempt to leverage that higher faith in government towards longer-term goals than pandemic relief. In many cases, the measures are responses to problems that have been allowed to fester for decades under the tax cuts and austerity that Ronald Reagan made the lodestar of U.S. policy. Disinvestment in public utilities, roads, bridges, and dams have left them increasingly at risk of catastrophic failure, with massive economic costs. The failure of the Texas power grid in February, for example, could incur costs as high as $195 billion, as well as causing

a number of deaths. That's far more than it would have cost to prevent the failure, which was caused by inadequate winterizing of power plants before a major predicted drop in temperature in the region. The best example may be education, where declining funding for public universities has played a major role in increasing student debt loads. Biden's proposal to spend more to support community colleges would help address that in the long term, and his budget may include more direct student debt relief. But what might be most significant is that 90% of Democrats and 68% of Republicans support government action to ease student debt burdens. Student debt relief is popular because it would make life easy for many individuals right now. But the deeper argument

for spending more on education is, again, that it would increase long-term growth. The focus on community colleges is a great illustration of how this might work, since those schools often teach trades like welding and machining that have seen major worker shortages. Though shortages not only increase expenses for businesses by driving wages up, but also hamper innovation and have other broad, harmful effects. Lack of skilled machinists in the U.S., for instance, was a major hurdle to scaling up domestic PVE manufacturing in response to the pandemic. Longer term, America's skills gap is also making it more difficult to bring manufacturing operations back to American shores, another major Biden policy priority. So that's the theory, spending more now to improve the economy down the line.

Even something like Biden's child care subsidy, which might be tempting to view as a mere handout, could be supported on economic grounds. The pandemic pushed millions of women, including many high earners and innovators crucial to the success of the broader economy, to stay home. Child care could help them get back to work. But what about that huge bill? The least outlandish defense is simply that with wise investment now, real economic growth will make it easier to pay off debts down the road. But the Biden proposal's enshrinement of permanent deficits as a normal and uncontroversial part of the U.S. budget is much harder to rationalize, even from the most progressive perspective. The pandemic has convinced many Americans for the first time that the government

has a legitimate and positive role to play in their lives. But the bill for all that help does eventually come due. So, first of all, great summary, David. Kudos. But I think that instead of trying to get into any of the actual specific politics or specific policies, because that's not really the focus that I want to hone in on, what I'm interested in is how much this. represents almost something that we were talking about yesterday, this very liminal moment, this in-between moment between what was a very strong, clear narrative last year, and what is very unknown heading from here out. There is still a lot of competition right now to shape the way that people see the world and what comes next. That narrative ambiguity is not the type

of environment that's going to drive people aggressively into an asset like Bitcoin. Bitcoin thrives, as we saw last year, from narrative clarity, and the narrative was clear. Money, printer, go bur, the engines are revved up. The whole world is going to a whole new level of central bank support. Now, what David is getting at in this piece is that it is entirely possible that we are shifting again into a different permanentization, which isn't a word, but should be, of that type of policy, of that type of thinking, an MMT world by default, to crib what Paul Tudor Jones said in his great monetary inflation thesis. In that context, if that is a narrative that the business world, that markets start to accept, regardless of what the populace at large thinks, that could be extremely good for Bitcoin.

But who knows? It's still early. It's still in between. So to the extent that the macro narrative does impact the Bitcoin price, I think that you just have to expect a little bit more wait and see, a little bit longer. And to some extent, it's going to take shape and place around the debates around things like the Biden budget. So if you're not paying it, attention to Macro yet, this is a good time to start. For now, guys, though, I appreciate you listening. Until tomorrow, be safe and take care of each other. Peace.