IS BITCOIN A HEDGE AGAINST INFLATION?

A quick comparison between BTC and gold prices shows poor historical correlation between the two assets. In contrast to an inflation hedge, BTC has traded very much like a high-beta leveraged risk asset with a strong correlation to tech and NASDAQ.

This simple fact should seriously start undermining the prevailing narrative of Bitcoin as a lifeboat against inflation. And whether we are witnessing an inflation to begin with.

But didn’t the USA register over 7% inflation?

And isn’t the Fed printing trillions of dollars (quantitative easing), devaluing the US dollar?

No, and no.

CPI is not inflation.

.. and

The Fed have been printing bank reserves.

Bank reserves aren’t real money. What we call QA or money printing is basically the Fed expanding its balance sheet by creating bank reserves out of thin air on its liability side and adding (purchasing) bonds from commercial banks on the asset side. We have no money printing, just mere assets swap.

To understand why bank reserves aren’t money and why the Fed cannot print money even if it wanted to, we need to get back to the 1950s.

Bretton Woods and the new global monetary order. The US dollar became the only currency convertible to gold. In addition a straitjacket was introduced against the free flow of money. (capital controls).

Money was constrained. Trade wasn’t.

On the contrary, in the 50s and 60s, trade flourished. It became global. Trade globalized. The world globalized.

Global trade demands global currency to finance it. Global reserve currency.

And we already have a reserve currency in place - The US dollar. Right?

Not quite.

Yes, the US economy occupied disproportionately large part of the world economy post WWII.

But even that wasn’t enough to satisfy the demand for currency in a globalized trade, because of the so-called Triffin's paradox (named after Robert Triffin).

A currency in high demand lifts its exchange rate, which hurts the currency-issuing country's exports, leading to a trade deficit. Therefore, by "agreeing" to have its currency used as a reserve currency, a country (in this case the USA) pins its hands behind its back.

No national currency can accommodate the currency needs of an international trade, not even the US dollar. Bretton Woods became useless.

A solution was needed. And global banks soon created one.

The euro$.

An offshore network of interbank liabilities powered by dollar deposits outside US, mainly Europe and later, Asia.

The euro$ is a private form of money banks created to finance global trade, directly breaking into the myth that only governments can ‘print’ money.

The euro$ market was created when the offshore currency market soon became a securities market. Banks started playing with these offshore US dollar deposits, creating all sorts of exotic, head-spinning money instruments (M3, M4, M5, M6, etc.).

Even central bankers weren’t able to wrap their minds around what exactly constitutes money and how to measure money.

And if central bankers can no longer define money how can they print money?

The euro$, not the US dollar has been the global reserve currency over the past 50 years. And is controlled by no central bank. Not even by the Fed.

That’s why the Fed doesn’t print money. It cannot. The Fed can only boost bank reserves. Bank reserves aren’t money. Bank reserves are useless. The Fed’s dollar printing is just a puppet show. The Fed only controls the Fed dollar, not the global reserve currency - the euro$.

The bond markets for example accurately recognized this fact once again – bond yields have been refusing to rise despite the seemingly trillions of dollars being printed by the Fed over the past two years.

I am saying ‘once again’ because the bond market (bond yields) have historically been accurate in predicting whether something really is money printing, or not.

The euro$ has been one of the best kept secrets in global finance. Today more people have started studying the phenomena, and that’s a good thing.

The euro$ system was popularized by Paul Einzig in his “The Euro-Dollar System: Practice and Theory of International Interest Rates”. When he first discovered it, bankers in London pleaded him not to write about it.

Over the past few years more people and institutions awoke to the fact that the Fed doesn’t print money but merely runs expectations-based policy, a gigantic PR machine.

This is the reason the primary narrative behind Bitcoin as the boat to climb on when the dollar crashes broke. The US dollar never mattered, the euro$ did.

This may be why Bitcoin is significantly down over its all-time-high over the past six month despite the rising CPIs across America and Europe. The basic narrative was wrong to begin with. We mistook bank reserves for money, thus, inflation.

It is normal for a mainstreet dude to not be introduced to the innards of the shadow money system (the euro$).

What’s scary is that dozens of crypto founders with tens of millions of investors capital ignorantly perpetuated the same narrative – “the dollar is dying, all aboard Bitcoin”. To think that these crackpots are supposed to be the hallmark of knowledge….

Does that mean Bitcoin is a bad hedge against inflation?

Yes.

And No.

We haven’t really experienced a proper inflation (too much money chasing too few goods) to be able to tell. On the contrary, deflation reigns ever since 2009.

Does that mean Bitcoin is useless?

Definitely not.

Bitcoin is an amazing innovation. It is just that people have been piling into it on the basis of the wrong narrative – a lifeboat against (nonexistent) inflation.