The Breakdown - Why a US Senator Just Said the Fed Should Buy Bitcoin

Starting point is 00:00:00 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, Arculus, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Friday, February 18th, and today we are discussing why a U.S. Senator just said the Fed should buy Bitcoin. Before we get into that, however, if you are enjoying the breakdown, please go subscribe, give it a rating, give it a review, or if you want to dig deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod.

Starting point is 00:00:48 And a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX. Now, we've talked a lot about geopolitics lately from both the standpoint of, of these various global situations as well as their impact on markets. But of course, even without a Canada Truckers protest and a Ukraine-Russia situation, there would still be a macro trade setting the context for everything else, and that is inflation. What's more, because it's an election year in the U.S., inflation is taking on a whole different dimension. It's not just about the real impact on people's lives and how much it costs to do the things that they normally do, but also about the narrative jockeying for how to tell the story of inflation in a way that can get your chosen

Starting point is 00:01:40 part of your politician into office. In that sort of heightened circumstance, I find it useful to replace the grain of salt you normally take things with with an entire bag straight from the Morton's factory. In any case, today we're going to check in on inflation, particularly from a political perspective and with an eye to a very provocative proposal from a strategist at Credit Suisse that's been making the rounds. But let's start, as I mentioned, with some choice comments from Cynthia Lummis. Senator Lummis was speaking at a panel hosted by the Orange G. Hatch Foundation, and in response to a question from the moderator said it would be a, quote, great idea, to be honest, for the Federal Reserve to buy Bitcoin. Part of the idea here is that the Fed currently holds over

Starting point is 00:02:24 40 billion in foreign currency reserves on its balance sheet. Lemus said, once there is a statutory and regulatory framework, that will make a lot of sense. The fact that Bitcoin is completely decentralized is going to make it over time more ubiquitous, and I think that's going to be something that the Fed should hold on its balance sheet. On the same panel, Randall Quarles, who's a former vice chairman for supervision at the Fed, wasn't so sure. And keep in mind, this is someone who also strikes me as an ally. When he was on the Fed, he basically argued that everyone shouldn't be.

Starting point is 00:02:54 as scared of stable coins and defy as they seem to be. But in this case, he said for a lot of political and economic reasons, I think that it's best to keep the Fed's balance sheet, which it isn't currently, but it needs to move in that direction entirely in treasuries. Lummis, for her part, first bought Bitcoin back in 2013 and is currently working on a number of legal efforts to bring clarity to the crypto space. She has a bill currently that she's working on that proposes a self-regulatory organization for crypto that would make some initial calls on whether a cryptocurrency is a commodity or a security, and basically the idea would be that the CFTC or the SEC could agree or disagree with that sentiment and have a mechanism to pull it in their direction from a

Starting point is 00:03:33 regulatory framework. That's something to watch for. Speaking of legislative things we're anticipating, President Biden is expected to issue his executive order on crypto next week. The EO is expected to direct agencies to study both crypto and a CBDC and to come up with a government-wide strategy. The agencies involved will include the Department of the Treasury, Department of State, Department of Justice, and Homeland Security. The Director of the Office of Science and Tech Policy will also be expected to do a technical evaluation on supporting a CBDC. Now, an interesting nugget came this week from Bloomberg, who wrote that part of why this

Starting point is 00:04:09 executive order has been delayed was a rift between Treasury and the National Economic Council on the breadth of the order. From Bloomberg, quote, Treasury Secretary Janet Yellen views the plan for an executive order as unnecessary, particularly any mention of a central bank issued digital dollar. The Treasury chief and her team say that the Federal Reserve, which released a report last month, are still working on the topic and should be allowed room to develop its thinking. Her team is also expressed to the White House that Treasury and federal regulators, along with the Securities and Exchange Commission, has been making progress on providing

Starting point is 00:04:40 industry with more clarity on U.S. rules around virtual currencies. A Treasury spokesperson says that that's just not true, but in a very polite political way. Treasury spokesman John Rizzo said that the account is, quote, inaccurate, but didn't directly address Yellen's involvement. Of course, when it comes to this executive order, the thing that's really caught people's notice is the notion that part of the motivation is a national security dimension, and this has been heightened since we heard Russia's updated plans to legalize and regulate crypto as a type of currency. But for now, all of this still remains in the realm of speculation, so let's go to something a little more here and now. We've been living with,

Starting point is 00:05:19 with higher inflation for a while. But the blame game is really heating up. And it's a particular problem for Democrats. As the party in power, they're the ones taking the lion's share of the focus. And as Jason Furman, a senior economic advisor to former President Barack Obama said, it puts a politician in a bad spot when the truth is the main solutions to inflation are a combination of patience and the Federal Reserve, and there's not a lot they can do. Nexto is a trusted and easy-to-use crypto platform where you can buy cryptocurrencies at the touch of a button and start earning up to 18% annual interest that is paid out daily. They support all of the major assets on the market and even allow you to swap one asset for another or borrow cash against your crypto without selling it. Nearly 3 million people in over 200 countries trust Nexo with their digital assets.

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Starting point is 00:07:58 alternative explanations. The big one this week is all about price gouging and corporations using inflation as a pretense to raise prices. There was recently a hearing on pandemic profiteers, their words, and AOC recently said that many price hikes are, quote, just straight price gouging by corporations. Interestingly, there seems to be some debate about how hard to go on this narrative. Jeff Stein, the White House economics reporter at the Washington Post, said, White House aides divided over how much to blame corporate power for inflation, with one senior official's prepared remarks recently altered to omit the argument, CEA seen as most wary of blaming corporate power.

Starting point is 00:08:37 Democrat pollsters say doing so is hugely popular. So on top of this shifting narrative, Democrats are also making a number of short-term proposals as well, such as a proposal to suspend the federal 18 cents a gallon gasoline tax until next year. They're also trying to hammer Republicans for not confirming appointed Federal Reserve directors. Tristan Snell said, whining about inflation but then refusing to confirm more federal reserve directors is like whining about fires, but then refusing to hire more firefighters. John Cooper, the former national finance chair for Biden's campaign in 2016, says Senate Republicans

Starting point is 00:09:11 are blocking the confirmation of a new director of the Federal Reserve, the official responsible for managing inflation, so they can blame President Biden for inflation. But the biggest thing that people, at least in the econ and business world have been discussing this week, is an argument from Credit Suisse strategist Zoltan Posar that a Fed-induced recession is maybe the only cure for inflation, and that if the Fed is trying to balance their two different mandates, stable prices and employment, it may be that bringing down asset prices is the way to go. Let's read this argument because there is a lot of chatter about it. And these are Zoltan's words. Just as your correspondent is,

Starting point is 00:09:50 is not an expert on inflation, neither is he an expert on labor matters. But growing up in Hungary, his common sense whispers that if the post-communist government response of generous transfer payments and early retirement sapped labor force participation and hurt the real growth prospects of Hungary and other economies, the capitalist market response to low interest rates and QE through sky-high equity valuations, house prices, and the rise of Bitcoin probably does the same. If the young feeling Bitcoin rich or less inclined to work and the old feeling mass affluent are eager to retire early, labor force participation drops to the detriment of real growth prospects. If early retirement wasn't good for Hungary, it won't be good for the U.S. either. Maybe the path to slower services inflation is through

Starting point is 00:10:30 lower asset prices. We recognize that what we are saying is extreme, but we think the Fed will soon incorporate some version of this thought process. It wasn't tried before, but what was tried before the Fed cannot do anymore due to the political imperatives of inclusive unemployment and redistribution, hence the need for a Volker moment. Volatility is the best policeman of risk appetite and risk assets. To improve labor supply, the Fed might try to put volatility in its service to engineer a correction in house prices and risk assets. Equities, credit in Bitcoin, too. Legendary central bankers like Paul Volker or Mario Draghi either sparked or tamed volatility. Draghi tamed volatility with his bumblebee-themed speech and Volker sparked volatility

Starting point is 00:11:08 by starting to target quantities instead of rates. And he didn't talk too much about what he was doing. He kept the market guessing. Maybe the Fed should hike 50 basis points in March, put an end to press conferences, and sell 50 billion of 10-year notes the next day. Maybe FOMC members talk too much. They don't keep the market guessing. They suppress volatility. A new Volker moment should also mean a radical change in the Fed's strategy and involve going from targeting rates to targeting quantities once again. Not the quantities of reserves in the banking system, but the quantity of duration in the market-based shadow banking system to jolt all sorts of risk premium higher. No, lower risk assets won't kill growth. This is not a balance sheet recovery. And no higher mortgage rates won't kill growth either.

Starting point is 00:11:48 Wage growth at 5% can absorb higher monthly payments. The decisions of central bankers are always redistributive. For decades, redistribution went from labor to capital. Maybe it's time to go the other way. What to curb? Wage growth or stock prices? What would Paul Volker do? Now, there has been some interest in this. Brian Chappata, who's at Bloomberg Wealth, said Zoltan Possar's new note is provocative. Effectively the Fed. needs to engineer a decline in stocks, Bitcoin, and other risk assets to both lower inflation from current levels and promote broad-based inclusive job growth. However, there is also a lot of skepticism. J.W. Mason, an associate professor of economics at the City University of New York,

Starting point is 00:12:28 says Zoltan Poser knows an enormous amount about financial markets, but there's a danger of knowing a lot about finance and not much about anything else. The idea that the wage the typical worker will accept depends on the value of Bitcoin is imaginative. It's a danger of. It's a danger of It's also worth lingering over the fact that Pozar says that the government should, as a matter of policy, try to reduce the value of people's retirement savings to induce them to work more. MacroAlpha writer at MacroCompass wrote, Zoltan's idea to raise long-term yields to spark a crash and tame inflation reminds me of Jim Bianco's joke. The patient says, doctor, my finger hurts. The doctor punches the patient hard in his face. The doctor then says, problem solved.

Starting point is 00:13:07 Now your finger doesn't hurt anymore, does it? Bitcoiners, of course, weren't sure about the argument that the main economic problems we're facing are because people now feel Bitcoin rich so they don't want to work anymore. Nick Carter sum this up, back to work, lazy coiners. And then there was this issue of whether there is actually an ability to cleanly separate different parts of the economy, to have an equity's price correction without that's spilling over into people's jobs. Alessio Urban writes, the problem with the crash is that corporate debt will blow up and people

Starting point is 00:13:36 will lose their jobs. inflation won't decrease immediately and you'll have to face high living costs with no job. That leads to private debt to start to blow up, $1 trillion of debt in credit cards in the U.S. last year, and potentially to a situation like 2008. So I wanted to share this argument for three reasons. One, it's getting a lot of attention in this sort of macro class, and I think because of that is worth exploring and understanding what's going on here. Two, there's obviously a Bitcoin dimension.

Starting point is 00:14:02 He calls out Bitcoin specifically as exemplary of cheap money policies. and is looking explicitly to target a correction in the price of Bitcoin as a way to induce broad-based economic growth. Three, however, I think is the most important reason that I share it is that this is a moment where people are a lot more receptive to many types of ideas that they normally wouldn't be. That's what happens when you have this combination of a challenging market situation plus the larger political dimensions that surround it.

Starting point is 00:14:31 What do you think, guys? Are you listening, not contributing to the productive economy because you feel Bitcoin rich? If so, I envy you, and congratulations. For now, I'm going to say thank you again to my sponsors, nexo.io, Arculus and FTX, and thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Why a US Senator Just Said the Fed Should Buy Bitcoin

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