The Breakdown - What an Increasingly Booming Economy Means for Bitcoin

Episode Date: April 30, 2021

For the past year, bitcoin’s narrative has been deeply tied to the larger macro narrative of looming inflation. As the economy starts to boom, many continue to point to the spectre of inflation as a bullish force for bitcoin. In today’s episode, NLW explores growing confidence in the markets and what it means for bitcoin. In particular, he looks at what it would mean if consumer inflation didn’t show up. Would bitcoin be cast aside, or are there properties and uses that make it relevant even outside its role as a monetary hedge? -- 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

This gets into the really key question. Does Bitcoin only matter when things are bad or looking like they're going to get worse? Does Bitcoin only matter when inflation is on the menu? With so much of the Bitcoin narrative tied up in the inflation hedge business over the last year, it's worth asking. 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 nexo.io and neared.org and produced and distributed by coin desk.

What's going on, guys? It is Thursday, April 29th, and today we are asking the question of what an increasingly booming economy means for Bitcoin. So the setup for this is that obviously for Bitcoiners, Bitcoin has always been a macro asset in the sense that it is fundamentally about reorganizing the global economy in some way. way. When it comes to the rest of the world, however, it's really only been in the last year that that idea of Bitcoin as a meaningful player on the macro stage has come to the fore. The connection was made first and most profoundly by Paul Tudor Jones with his great monetary inflation thesis. And since then, Bitcoin has been tied up in its digital gold narrative as an inflation hedge, right? There's no way to deny looking at micro-stratogy getting in and Michael Saylor, talking about the melting ice cube of cash as a Treasury Reserve asset, and Stanley Drucken Miller

talking about seeing 5 to 10% inflation over the next few years. There's no way to deny that Bitcoin's narrative has been tied up in the fear of looming inflation. The question then becomes, what if that starts to withdraw? What if the macro narrative shifts? Where does that leave Bitcoin? So today that's what we're going to explore. And I think to start, let's start with this idea. idea of it being a booming economy. One of the Wall Street Journal's lead headlines today is U.S. economy appears to be lifting off. Economists are projecting a, quote, robust consumer-led recovery. GDP grew at 6.4% seasonally adjusted in Q1, which was almost exactly what economists had

predicted. What's more, consumer confidence is approaching pre-pandemic levels. In fact, it's the highest it's been in 14 months, and it's done nothing but increase four months in a row. In particular, a low-income band, people and families earning between $25,000 and $35,000 a year has increased dramatically. In March, 900,000 new jobs were created, and unemployment went down 6%. Consumer spending was up something like 10.7%. And obviously, all of this bodes well for that consumer spending increase continuing into the months to come. Then the question becomes, well, what will the policy response to this new booming economy

be. The risk, of course, that many people are keeping their eye on is this idea of overheating, specifically a sharp rise in consumer prices. There is some evidence of this starting to happen. Here's the anecdote the Wall Street Journal uses. Apparently, a restaurant in San Diego has had a ton of trouble finding cooks because other industries like construction are paying more. It is now considering raising wages by about $4 an hour to attract more people to come in, and because of that, it's going to have to increase prices to match. While anecdotes are absolutely not the same as data, you're starting to see more and more of these stories start to emerge. Which brings us to the analyst class, which has wondered pretty openly

about the Fed's ability to actually keep up their accommodative policy. Every month it seems we discuss this tension between markets and the Fed, where markets are effectively saying that we don't believe you, Jay Powell, when you say that you're going to keep monetary policy so accommodative. We think that the inflation is going to rise too fast and you're going to have to fight it. Well, the Fed just had its latest FOMC meeting and reported back yesterday. It's a continuation of the same policy. They're keeping the benchmark U.S. interest rate near zero. They're going to continue buying assets at a rate of $120 billion per month.

And here are a few things they added for color in terms of their subjective interpretation of the market. First, they do acknowledge improvement in the labor market. That said they think it's still not perfect. quote, the sectors most adversely affected by the pandemic remain weak but have shown improvement. What's more, they see this remaining slack in the labor market as the counterweight against inflation. They think that until we're at full employment, overall inflation is going to have a hard time taking hold. They do acknowledge that inflation has risen, but they say it, quote, largely reflects transitory factors. This is kind of the word of this quarter right now,

transitory, we keep hearing this over and over. They're also absolutely dismissive of the sort of labor market shortage talk we heard in the anecdote above. Powell was very clear on this yesterday, saying that if there were really labor market tightness, we'd see faster wage growth. Now, when it comes to how FinTwitt, for example, is interpreting this, effectively they're seeing that by saying the same thing over and over and over again, the Fed is slowly but surely convincing the market that they will have a ton of advance warning about any sort of taper in the policy. Connor Sen tweeted, the Fed is very clear about what they're doing right now, and some people just absolutely will not listen. To sum up, we have an increasingly booming economy, but a Fed

which says it's not enough, and we're not about to change the policy yet. So let's talk about the potential implications, and specifically with regard to Bitcoin. Let's be a little bit reductive for the sake of the show and reduce it to two possible outcomes. The first is that the inflation callers are right. And I think that the key thing here to discuss is the velocity of money. When people point to why inflation didn't happen, for example, last year as so much new money was injected into the system, they point to a counterbalancing decrease in the velocity of money. Velocity of money refers to how many times money exchanges hands. It's a measure of how much economic activity there is. Inflation is, of course, not just a vector of supply of money, but also velocity of money.

You need not only an increase in supply, but a corresponding increase in the velocity. If the money supply goes way up, but the velocity of money goes way down, you're in the same spot. What people are watching for this summer then is now that consumer confidence is on the rise again. You're seeing, like I said, 10.7% increase in consumer spending. The velocity of money is picking up commensurately with the increase in the supply of money. Will that create inflation? If it does, in that case, let's assume that the Bitcoin macro thesis started by people like Paul Tudor Jones and Sand Druckenmiller, and that the Bitcoin party continues because people are still looking for an inflation hedge. That's sort of easy to see how that plays out.

But what if, on the other hand, we have another recovery like the Great Financial Crisis, where top-line consumer inflation doesn't increase? Or at least the broad popular perception of inflation, doesn't increase. And what I mean by that is that I want to hold aside for the sake of this discussion exclusively asset price inflation or alternative measures of inflation like the Chapwood Index. And that's not because I don't think that those things are important to discuss. It's because I want to talk about the narrative of inflation in popular media. Of course, this gets into the really key question. Does Bitcoin only matter when things are bad or looking like they're going to get worse? Does Bitcoin only matter when inflation is on the menu?

With so much of the Bitcoin narrative tied up in the inflation hedge business over the last year, it's worth asking. But I think really this is actually a different question. It becomes a question of what role is Bitcoin actually playing? What does it actually offer? Looking for the best way to unlock your crypto's liquidity? nexo.io is exactly what you need. Borrow against your digital assets at just 5.9% APR,

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Learn why NIR is the infrastructure for innovation. at neer.org. That's n-e-a-r.org to learn more today. Certainly, Bitcoin is by the very definition of its money supply, the fixedness of its money supply, the unchangeability of its monetary policy, an anti-inflationary force. That is and will continue to be a core appeal of Bitcoin versus any type of fiat money. However, there are other benefits as well that are worth noting when it comes to assessing how people are likely to interact with Bitcoin in the context of a booming economy that isn't seeing big inflation. One of those is that Bitcoin is still in an early adoption phase. As long as you've

been here, as long as we've been talking about this, there are far, far more people out there and far, far more capital that hasn't come into the space yet. That creates another very clear benefit over cash for, for example, institutions, which is, of course, NGU technology, number go up. If you assume that Bitcoin has a big role to play across a large number of different types of institutions, many of whom have enormously deep pockets, it's hard not to see how the price of Bitcoin goes up over time. Certainly there will be volatility in the short term, but that's about a time frame assessment. Certainly, if you look back at the 12-year history of Bitcoin, this is borne out. So now, instead of just the long-term anti-inflation benefit, you also have another benefit,

which is a short-to-medium-term yield generation benefit. This is obviously incredibly important in a world where it's very difficult to get yield in any sort of traditional way. But let's add another benefit that isn't just about that anti-inflation narrative. Let's call it depth of liquidity. See Tesla over the course of this week. We had a really interesting journey where Tesla announced that they had sold 10% of their Bitcoin holdings,

but that they had done it in part to demonstrate to themselves and to their shareholders the depth of liquidity in the Bitcoin market. They proved that, one, they were able to sell Bitcoin extremely quickly when they needed the cash for other purposes, i.e. semiconductors and port access. Two, they also showed that they could make hundreds of millions of dollars of Bitcoin sales without cratering the rest of their holdings, without actually diminishing the value of Bitcoin in some significant way. Indeed, let's be clear, Tesla's Bitcoin holdings are now at $2.5 billion up from the $1.5 billion they bought in February. So now, coming back to this question of Bitcoin, and of course, as you can tell, I'm

kind of more focused on this set of new institutional buyers, who I think are the big X-factor, the big question mark when it comes to what would happen in the context of a booming economy. We have the long-term anti-inflation benefit, the short-to-medium-term yield generation benefit, and we also have the liquidity value proposition as well. So let's come back to this question of what happens in the context of a booming economy. Well, one, anti-inflation isn't off the table. As we've talked about before, if velocity triggers a lot more inflation, boom, that's confirmed. But two, this is where the liquidity matters. Let's assume that things are booming and there's not a lot of inflation. Well, if you need to deploy those cash-like reserves that you were previously holding in Bitcoin to other productive purposes because of how that economy was booming, Tesla just showed that that's trivially easy to do. Basically, Tesla showed that Bitcoin is just cash with more upside than downside. So so far, perhaps we don't have to worry about Bitcoin simply being for when things are bad. However, up till now, we've basically been discussing Bitcoin,

exclusively in terms of its relationship to the market cycle. Of course, part of what gives Bitcoin its strength is acyclical factors. First and foremost among that is all of you guys, its base of hoddlers. A huge percentage of Bitcoin hasn't moved in years. This is a base of hodlers that contribute with their actions to the scarcity of Bitcoin. They artificially decrease the supply of Bitcoin through their unwillingness to sell Bitcoin, which of course makes it a more valuable asset. They also, as we've seen over and over again, gobble every dip that comes their way, which in turn provides a price floor. It provides a risk-minimizing factor to big institutional holders of this asset. That is largely independent of a booming economy or a bad

economy. This base exists regardless, and it's done nothing but gets stronger over the years. Another acyclical benefit around Bitcoin is the entire dimension of censorship resistance and permissionless access. It provides an opt-out option to local currency regimes, local monetary regimes that aren't serving the citizens. I think an easy place to look at this right now is in Turkey. Google searches for Bitcoin and Turkey are at their all-time high as people try to move their money out of a currency that's seen something like 16% inflation. The Turkish Central Bank is right now scrambling. to figure out how they wrap their hands around Bitcoin and crypto in general, while sort of acknowledging that they can't just ban it outright, that it's unlikely to be successful. This entire dimension

of censorship resistance, of permissionless access, of an alternative to local monetary regimes around the world, is another thing that's going to give Bitcoin value completely outside of cyclical forces, like whether we anticipate more inflation or not, from a U.S. perspective. Another potentially a cyclical benefit of Bitcoin, even for big U.S. institutions and big global institutions, is the idea of Bitcoin as a global settlement currency. Bitcoin has huge benefits as a cross-border settlement currency. First, it has speed. None of this T-plus-2.

It takes just the time that it takes for the block to be confirmed for that value to move. Second, it has finality. Once the money has been moved, there's no way to peel it back. there's no politics to that system, which is the third benefit. It's not tied to a political monetary regime. Now, there are many businesses for whom the U.S.-led Swift and ACH system work fine, because that's the broader political monetary regime they're a part of. But there are plenty of companies, even within that sphere of influence, who would rather have something that is completely and ultimately neutral, and not subject to the whims of global governments.

These benefits are not cyclical. They're not dependent on the market cycle for relevance. and I believe that you're going to see more and more of this cross-border settlement capacity as an advantage that is articulated by corporations who are interacting with Bitcoin. So, to sum up in short, I think my thesis is that while Bitcoin is pretty uniquely positioned to take advantage of inflation questions, of inflation hedge narratives, it also has a number of factors that make it radically more resilient in the face of those narratives shifting. But to wrap up, let's come back to the question of what happens next. As I said, there is this Powell camp which is saying that continued slack in employment holds off

inflation. On the other side, are anecdotes like those about the restaurant that I discussed. Let's add one more story to the anecdotal pile, but with a little bit more heft from today's New York Times. They're running a feature piece titled Diapers, Serial, and Yes, toilet paper, are going to get more expensive. With the subheader, retailers used to absorb much of the cost of goods when suppliers raised prices. Now the difference is being passed on to shoppers. The article points to numerous examples of actual clear price increases, pamper's, tampacks, both going up in September, Scott toilet paper, huggies and pull-ups going up in June.

And the reason? Quote, this is necessary to help offset significant commodity cost inflation. So here you have big, big mainstream companies announcing in advance that they're going to have to increase prices to offset commodity cost inflation. commodity cost inflation. Now, there's two more things that this piece explores. The first is who is hit most by this. Quote, price increases for necessities like toilet paper and diapers will affect low-income Americans most profoundly, placing an additional burden on those already hard hit by the pandemic. But the second really important piece is, again, this question of transitoryness.

How transitory will these price increases be? Quote, whether the increased prices will stick or eventually come down is a topic of debate among economists. predict that prices will normalize within one to two years as the economy continues to gain steam, the job market improves, and those who lost jobs during the pandemic increasingly returned to work. I'd like to balance that perspective, though, with that of Rory Murray Murray, whose tweet about this is actually where I saw this New York Times article first. He tweeted, it's going to be a hot, hot summer. Corporations increasing prices will be absorbed by fiscally supported consumers. People going to spend like crazy coming out of lockdowns and consumer credit balances will increase. Post-Labor Day,

it's tricky. Benefits roll off. People will be starting to be forced to go back to office. Market will start pricing margin impacts and higher taxes in 2022. I could see a big shift in the national mood to a bit of a hangover. Biden is too early in the presidency, and you can feel it. He's having his moment. There's always a chance we choose deflation, but I think that probability rounds to zero. We'll need another monetary and fiscal package by September or October to keep it going and we'll get it. This ain't the beginning anymore, and it's not the end of the beginning neither. This is the long, fat, middle, and it's trickier. In the end, it will be as we know it to be. Rates will stay low forever, base money will increase, and the price of everything will go up.

But the relative differences will be harder to capture. Start preparing. The time to sit and enjoy is over. This is obviously going to be one of the most hotly debated macro questions of the months to come and you know I'll be here to cover it every single day. With that, guys, I appreciate you listening. I hope you enjoyed this episode. Until tomorrow, be safe and take care of each other. Peace. We're witnessing the greatest paradigm shift in finance in modern history. Join thousands of newsmakers and influencers talking the future of money at Consensus by CoinDesk. A live virtual experience of leaders, change makers, virtual reality meetups, keynotes from Ray Dalio, Gary Vaynerchuk, and much more. Get an up close look at the boom in crypto, the

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