Expansion of the banking system and centralized credit allocation is leading to an impending devaluation.
Some people say like this:
The bull market for cryptocurrencies has ended.
I need to launch my token now because we are in the downward phase of the bull market.
Why isn’t Bitcoin rising along with the large US tech companies in the Nasdaq 100 index?
This chart of the Nasdaq 100 (white) and Bitcoin (gold) shows that the trends are consistent, but Bitcoin has stagnated after hitting an all-time high earlier this year.
But the same people will also say the following points:
The world is transitioning from a unipolar world order dominated by the US to a multipolar world order with leaders like Brazil and Russia.
To fund government deficits, savers must be subjected to financial repression, and central banks must print more money.
The third world war has already started, and war leads to inflation.
Some opinions on the current Bitcoin bull market stage and their views on geopolitical and global currency situation confirm my point that we are at a turning point – we are transitioning from one geopolitical and monetary global arrangement to another. While I don’t know which country will ultimately dominate and what the trade and financial architecture will look like, I know what it will roughly look like.
I want to move beyond the ups and downs of the current cryptocurrency capital market and focus on the broader cyclical trend we are in. I want to analyze the three major cycles from the Great Depression of the 1930s to the present. This will focus on the American world, as the entire global economy is a derivative of imperial financial policy. The American world has not undergone a political revolution due to the two world wars. Most importantly, for the purposes of this analysis, the American world is relatively the most suitable place to hold capital. It has the deepest stock and bond markets, and the largest consumer market. Whatever the United States does, other countries in the world will follow and react, which leads to good and bad results relative to the flag on your passport. Therefore, understanding and predicting the next major cycle is very important.
There are two types of periods in history: local periods and global periods. In local periods, the government imposes financial repression on savers to fund past and present wars. In global periods, financial regulations are relaxed and global trade is promoted. Local periods are inflationary periods, while global periods are deflationary periods. Any macro theorist you care about will have a similar classification to describe the main cycles of the 20th century and beyond.
The purpose of taking this history lesson is to make wise investments throughout the cycle. In a typical 80-year life expectancy, I should have more time because of the stem cells I injected; you can expect to experience two major cycles on average. I categorize our investment choices into three categories:
If you believe in the system but not in the people who manage the system, you invest in rocks.
If you believe in the system and the people who manage the system, you invest in government bonds.
If you believe in neither the system nor the people who manage the system, you invest in gold or other assets that do not require any residual existence of a country, such as Bitcoin. Stocks are a legal fiction, maintained by courts that can send armed men to enforce it. Therefore, stocks need a strong country to exist and maintain value in the long run.
In a local inflationary period, I should hold gold and give up stocks and bonds.
In a global deflationary period, I should hold stocks and give up gold and bonds.
Government bonds generally do not hold value in the long term unless I can use them at low or no cost indefinitely, or regulatory agencies force me to hold them. This is mainly because it is so tempting for politicians to fund their political goals by printing money rather than resorting to unpopular direct taxation.
Before describing the cycles of the last century, I would like to describe a few key dates.
– April 5, 1933, on this day, US President Franklin D. Roosevelt signed an executive order prohibiting private ownership of gold. He then devalued the dollar against gold from $20 to $35, breaking the US commitment under the gold standard.
– December 31, 1974, on this day, US President Gerald Ford restored the right of Americans to privately own gold.
– In October 1979, Fed Chairman Paul Volcker changed US monetary policy, targeting the quantity of credit rather than the level of interest rates. He then controlled inflation by limiting credit. In the third quarter of 1981, the 10-year US Treasury yield reached 15%, hitting a historical high, while bond prices reached a historical low.
– January 20, 1980, Ronald Reagan was sworn in as President of the United States. He then actively relaxed financial regulations. Other significant subsequent financial regulatory changes included making the capital gains tax treatment of stock options more favorable and abolishing the Glass-Steagall Act.
– November 25, 2008, the Fed started printing money under its quantitative easing (QE) program to address the global financial crisis triggered by subprime mortgage losses on financial institutions’ balance sheets.
– January 3, 2009, the Bitcoin blockchain created the Genesis block. I believe our Lord and Savior is here, rescuing humanity from the control of nations by creating a digital cryptocurrency that can compete with digital fiat currency.
1933-1980 American peace and rise period
Compared to other countries in the world, the US emerged unscathed from the war. Considering the US casualties and property losses, the lethality and material destruction of World War II were lower than those of the 19th-century Civil War. As Europe and Asia became ruins, US industry rebuilt the world and reaped great rewards.
Despite the smooth progress of the war for the United States, it still needed to pay for the war through financial oppression. Starting in 1933, the US banned gold ownership. By the late 1940s, the Fed merged with the US Treasury, allowing the government to control the yield curve and borrow at rates lower than the market, as the Fed printed money to buy bonds. To ensure that savers could not escape, bank deposit rates were capped. The government used saved marginal dollars to pay for World War II and the Cold War with the Soviet Union.
If gold and fixed income securities that pay at least inflation-adjusted interest were banned, what else could savers do to beat inflation? The stock market was the only way out.
From April 1, 1933, to December 30, 1974, the S&P 500 index (white) compared to the gold index (100) (gold)
Even after President Nixon abolished the gold standard in 1971, gold rose, but its return still did not exceed that of stocks.
But when capital was again able to freely bet against institutions and governments, what happened?
From December 31, 1974, to October 1, 1979, the S&P 500 index (white) compared to the gold index (100) (gold)
During this time, gold outperformed stocks. I stopped comparing in October 1979 because Volcker announced that the Fed would significantly tighten credit, thereby restoring confidence in the US dollar.
1980-2008, the peak global period of American rule
As confidence increased that the US could and would defeat the Soviet Union, the political winds changed. It was time to transition from a wartime economy, lift financial and other regulations, and let the market be active.
Under the new petrodollar currency system, the dollar was supported by surpluses from the sale of oil from Middle Eastern oil-producing countries such as Saudi Arabia. To maintain the purchasing power of the dollar, it was necessary to raise interest rates to suppress economic activity and thereby suppress inflation. This is exactly what Volcker did; he let interest rates soar and the economy falter.
The early 1980s marked the beginning of the next cycle, during which the US, as the only superpower, spread its wings to trade with the world, and the dollar strengthened due to currency conservatism. As expected, gold underperformed compared to stocks.
From October 1, 1979, to November 25, 2008, the S&P 500 index (white) compared to the gold index (100) (gold)
Except for bombing some Middle Eastern countries back to the Stone Age, the US has not faced any wars with a peer or near-peer military force. Even after the US wasted over $10 trillion, facing and being defeated in war with cavemen in Afghanistan, Syria, and Iraq, there was no loss of confidence in the system and government. After Jesus seized glory with a sword a thousand years ago, this time, the Lord would cause serious damage to the US.
2008 to the present, the comparison of the American rule and the medieval domestic cycle
Facing another economic collapse of deflation,The United States’ Great Association defaults and devalues once again. This time, the Federal Reserve did not prohibit private ownership of gold and then devalue the dollar relative to gold, but decided to print money and purchase government bonds, calling it quantitative easing. In both cases, the credit quantity based on the US dollar expanded rapidly in order to “save” the economy.
A full-scale proxy war between major political groups has erupted once again. A significant turning point was the 2008 Russian invasion of Georgia, which was a response to NATO’s intention to allow Georgia to join the organization. For the Russian elite led by President Putin, preventing the advance and encirclement of NATO, which possesses nuclear weapons, has always been a top priority.
Currently, there is intense proxy warfare between the West (led by the United States and its satellites) and the Eurasian continent (Russia, Iran) in Ukraine and the Levant (Israel, Jordan, Syria, and Lebanon). Either conflict could escalate into a nuclear war between the two sides. In response to the seemingly unstoppable war process, countries are turning inward to ensure that all aspects of the national economy are ready to support the war.
From this analysis, it means that savers will be required to provide funds for the country’s wartime spending and will be financially suppressed. The banking system will allocate most of the credit according to the country’s directives in order to achieve certain political goals.
The United States’ Great Association has defaulted on the dollar once again to prevent a deflationary depression similar to that of the 1930s. Subsequently, the US has set up trade protectionist barriers as it did from 1930 to 1940. All nation-states are looking out for themselves, which can only mean that along with financial repression, they are also likely to endure severe inflation.
From November 25, 2008 to the present, the Standard & Poor’s 500 Index (white) compared to gold (gold) compared to Bitcoin (green) has an index of 100.
This time, as the Federal Reserve devalues the US dollar, capital can freely leave the system. The issue is that with the start of the current local cycle, Bitcoin provides an alternative non-national currency. The main difference between Bitcoin and gold is that, as Lyn Alden puts it, Bitcoin’s ledger is maintained through encrypted blockchain, and the currency moves at the speed of light. In comparison, gold’s ledger is maintained by nature and its movement speed is only comparable to the actual transfer of gold by humans. Compared to digital fiat currency that moves at the speed of light and can be printed indefinitely by governments, Bitcoin is superior, while gold is inferior. This is why from 2009 to the present, Bitcoin has to some extent stolen the limelight from gold.
The performance of Bitcoin far surpasses that of gold, to the point where you cannot see the difference in returns between gold and stocks on this chart. Therefore, the performance of gold is nearly 300% worse than stocks.
The end of quantitative easing
Although I believe my description and background of financial history over the past 100 years to be incredible, this does not erase people’s concerns about the end of the current bull market. We know that we are in a period of inflation, and Bitcoin has done what it should: outperformed stocks and fiat currency devaluation. However, timing is everything. If you bought Bitcoin at recent historical highs, you might feel like a beta version of a cuckold, as you are extrapolating past results to an uncertain future. That being said, if we believe that inflation will continue, and war (whether it be a cold war, hot war, or proxy war) is imminent, what can the past tell us about the future?
Governments have always suppressed domestic savers to fund wars and the winners of past cycles, and to maintain system stability. In this modern era of nation-states and large integrated commercial banking systems, the primary way that governments provide funding to themselves and key industries is by controlling how banks allocate credit.
The problem with quantitative easing is that the market will inject free money and credit into businesses that do not produce the actual products needed for the wartime economy. The United States’ Great Association is the best example of this phenomenon. Volcker ushered in the era of untouchable central banks. Central bankers create bank reserves by purchasing bonds, thus lowering costs and increasing credit limits.
In the private capital market, credit allocation is aimed at maximizing shareholder returns. The simplest way to increase stock prices is to reduce floating losses through buybacks. Companies that can access cheap credit will borrow money to buy back stocks. They will not borrow money to increase production capacity or improve technology. Improving business to bring in more revenue is challenging and does not guarantee a boost in stock prices. However, mathematically speaking, by reducing floating losses, stock prices can be increased, and since 2008, large-cap companies that have obtained substantial cheap credit have done so.
Another easily achievable goal is to increase profit margins. Therefore, companies do not use stock prices to establish new production capacity or invest in better technology, but rather, reduce labor costs by moving jobs to other low-cost countries. The US manufacturing industry has become so weak that it cannot produce enough ammunition to combat Russia in Ukraine. Quantitative easing (QE) combined with shareholder-centric capitalism has led to US military “giants” relying on their “strategic competitors” (in their words, not mine). It’s ironic! The United States’ Great Association and the Western collective distribution of credit will be similar to Japan and South Korea. Either the government directly instructs banks to lend to this or that industry/company, or banks are forced to buy government bonds at yields below the market rate, so that the government can provide subsidies and tax breaks to “appropriate” companies. In either case, the return on capital or savings will be lower than nominal growth and inflation. Assuming capital controls are not implemented, the only way out is to purchase Bitcoin and other value stores outside the system.
For those who are obsessed with observing major central bank changes on the balance sheet and believe that credit growth is insufficient to drive the price of cryptocurrencies higher, you must now be obsessed with observing the total credit created by non-financial banks. Banks achieve this through lending to non-financial companies. Fiscal deficits will also generate credit, since deficits must be funded by borrowing in the sovereign debt market, and banks will dutifully purchase this debt.
In short, in past cycles, we monitored the size of the central bank’s balance sheet. In this cycle, we must monitor fiscal deficits and the total credit of non-financial banks.
Trading strategy
Why am I confident that Bitcoin will regain its magic? Why am I confident that we are in a new era of localization and national prioritization of inflation?
Look at this information:
According to a federal agency’s forecast, the US budget deficit is expected to soar to $1.915 trillion in the fiscal year 2024, surpassing last year’s $1.695 trillion and reaching the highest level since the non-COVID-19 era. The agency attributes a 27% increase in its forecast to increased spending.
This is the answer for those who are worried that “Slow” Biden will not keep the economy running with more spending before the elections.
The Atlanta Fed predicts that real GDP growth in the third quarter of 2024 will be a staggering +2.7%.
For those worried about an impending recession in the United States, experiencing a recession is mathematically very difficult when the government spends $2 trillion beyond tax revenues, which equates to 7.3% of GDP in 2023. As a point of reference, US GDP fell by 0.1% in 2008 and 2.5% during the global financial crisis in 2009. Even if there were another global financial crisis similar to the last one, the decline in private economic growth would not exceed the amount of government spending. There will be no recession. This does not mean that a large number of ordinary people will not suffer severe financial difficulties, but the United States will continue to move forward.
I point this out because I believe that fiscal and monetary conditions are loose and will continue to be loose, therefore, holding cryptocurrencies is the best way to preserve value. I am certain that our current situation is similar to the 1930s to the 1970s, which means that, since I can still freely convert from fiat to cryptocurrencies, I should do so, as currency devaluation resulting from bank system expansion and centralized credit allocation is imminent.
