A Case for Deflation As the Cause of Our Malaise
(AP Photo/Marta Lavandier)
A Case for Deflation As the Cause of Our Malaise
(AP Photo/Marta Lavandier)
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A popular catchphrase from the once-popular Game Of Thrones was “winter is coming.” Set in the fantasy world of the HBO drama, winters weren’t seasonal in the way we experience them on our Earth. Cold, yes, but prolonged in every respect. Once the temperature began to plummet, the fictional characters were meant to prepare themselves mentally for the long, harsh freezing.

Winter is coming.

The phrase has a similar meaning in the often-fantasy world of cryptocurrencies, too. Sparked by a confluence of confounding events, digital currency prices – the temperature of this universe – have indeed plummeted.

Not just the usual run-of-the-mill volatility this time, either. Crypto enthusiasts would often bark that King of the North Bitcoin had suffered no fewer than six declines reaching 30% or more during 2017’s miraculous (scandalous, some would say) 1000% rise.

What followed that rise, though? Deep, dark winter lasting years.

Since early last November, Bitcoin is down more than 60%. Ethereum 80%. The billionaire twin stars Cameron and Tyler Winklevoss have made their own declaration in response. The crypto exchange they control, Gemini, is cutting 10% of its workforce, the company’s first layoffs in its eight-year history (practically ancient by digital standards).

The Winklevosses, too, invoked “crypto winter.”

Gemini is not unique. Coinbase, after going public only a little over a year ago, this crypto exchange announced in May that its quarterly revenue was down more than 27% compared to the same quarter last year, producing a $430 million loss.

No improvement by June, only more “volatility” across the entire space, Coinbase is laying off a whopping 18% of its workforce. CEO Brian Armstrong blamed, you guessed it, “crypto winter.”

“In past crypto winters, trading revenue (our largest revenue source) has declined significantly.”

Where once youthful (some would say naïve) enthusiasts had arrogantly retorted “have fun being poor” whenever anyone expressed any doubts about crypto, winters bring on something different in them, a change in tone.

The funny thing is right now is exactly when these things were supposed to shine brightest. To have lit a fire under more than the younger generations, radiating such heat outward to disrupt and remake the entire financial and economic landscape.

Here is the very thing these cocksure crypto cowboys had been railing against the whole time, ever since the first genesis block of the original Bitcoin blockchain had been set down in bits of ones and zeroes. You need, not want, absolutely need, they said, a hardcore store of value because governments were going to destroy money, currency, the whole thing.

So much so that it came to be believed it wouldn’t matter what form such protection might take. Last year amidst the summer’s overheated boom, all kinds of outlandish digital formats were made up and sold, the most ridiculous meme coins, the ever-obvious scams whose prices reflected confusion rather than the certainty professed.

What drove first niche interest before now widespread public acclaim was the association of these digitals with an independent financial asset which wouldn’t be perverted by the wild, overeager money printers at the Fed or in the Treasury Department. You had to shelter assets from the dying dollar, or find a way to have fun living poverty.

Yet, here we are. Consumer price increases of just the kind every Winklevoss fan has been warning, finally the moment of great need, proof positive of concept and…crypto is crashing? Facing another winter when it was supposed to be permanent summer.

There’s something else going on here.

The common answer is the typical pabulum mish-mash blaming regulations, phases of the moon, electricity availability, what have you. The twins said price pressures have been, “further compounded by the current macroeconomic and geopolitical turmoil.”

Wait a minute; isn’t that exactly what digital stores of value were supposed to do, protect their owners from turmoil? Geopolitics and consumer price escalation, the very outcomes which had first stirred original rebellion within these legions of convinced fanatics.  

That’s what these poor souls thought, nor what they bought. The average speculator and investor has been sold a fairy tale repeatedly rejected by reality.

Like 2017, the 2021 crypto bubble was blown by the gravest monetary misconception. Each time the dollar seems set to tumble, the rush goes on in whichever rationalized crypto form most easily within reach. Like any and every bubble in human history, the particulars never matter once they blow past some emotional threshold.

Dogecoin? Laughable outside these critical conditions. At one point last May, its price was 0.64 to the dollar. Today? About 0.05.

The Fed and its accounting fictions of bank reserves had sold this other fairy tale only too well.

That is the tragic irony here. All these struggling, mostly honest investors who sought protection from crypto because they literally bought the money printing story ended up being the Fed’s money printer. The more they piled into whichever, Bitcoin, Ethereum, this or that, the more they did the FOMC’s inflation-seeking bidding.

They became the very thing they despised, buying “protection” against themselves!

There is and never was money at the Federal Reserve, ECB, any of them. The empty “monetary” policies each espouses amounts to nothing more than psychological manipulation, a purposeful design to influence behavior. The goal of such designs is to get people to act on the implanted belief these policies are going to create inflation.

If you believe in the “debasement” and then take that belief into heavy buying of Bitcoin, you’ve done the Fed a huge favor. You’ve become the very essence of what little power and influence this nominally-titled central bank actually possesses. The higher you drove Bitcoin, the more it looked like dependable, rational markets agreed with the inflation premise.

Reality has a way of intruding onto this sick symbiotic fantasy. The dollar might fall temporarily, yet always seems to find a way to surge higher, defying the certitude offered up surrounding its “inevitable” collapse which never comes. It’s a hard one to square with the death spiral narrative and the derived need for store of value protection above everything else.

Unlike last winter, this one comes with consumer prices. CPIs did accelerate but only ever modestly in 2018, hardly convincing while the dollar was moving upward. This time, though, consumer prices are at odds with the exchange value.

Or are they?

There was always this very real possibility consumer prices weren’t ever inflation, though such doubt was easily cast aside in the flood of mainstream commentary talking endlessly about inflation set alight by a flood of Federal Reserve if not federal government monetary excessiveness. It “felt” like the real thing, precisely Jay Powell’s intent up until recently, the digital price bubble doing (some of) the work his institution can’t.

While crypto prices were skyrocketing, lingering doubts in the back of anyone’s rational mind were quickly overcome by all the unearned riches and fun everyone was having; I mean, dog-themed meme coins! It wasn’t just easy to join the party, it was, so many thought, the responsible thing to do.

“Have fun being poor” was simply the current generation’s way of paraphrasing the old Smith Barney tagline: “we make money the old-fashioned way.” Rather than earning it by day-trading the hottest dot-com, nowadays flipping crypto on Robinhood and Coinbase.

Perverted prudence if only until the world woke up to the lie; forced to confront sobering deflationary truth. Like yanking the rug out from under the entire space, dollar up not dead, consumer prices not inflation. Deflationary money running wild across every market spot, including stocks.

In other words, the rug has been yanked. Winter is here. Therefore…

Jay Powell is spinning his inflation fantasy, to stick with what he says the Fed knows. The FOMC even went so far as to up their dosage of fairy tale, uncorking a triple-sized 75 bps rate hike this week. The headlines blared, as was the point, most aggressive action in 28 years.

What about the yield curve? Eurodollar futures? Swaps. And, yes, the dollar’s exchange value. Unlike 1994, these are surefire signs that inflation is not now, nor has it been, the system’s biggest threat. Since last October, even the crypto markets have had to agree with this verdict.

Rather than siding with Powell on CPIs, they’ve been shown the cold light of truth on the various unswerving curves. Recession and disinflation if not deflation (again) draws near; eurodollar futures, as of this writing, all but certain it happens and hits this year.

It’s not Bitcoin winter rather monetary midwinter for the entire global system, bringing digital currencies along for the harrowing sleighride.

This isn’t the end of the crypto story, however; far from it. What’s really underlying digital evolution was never really about store of value and money-printer-go-brrr.

We see every day more and severe deflationary money indications – T-bill rates again after this latest rate hike are insane, meaning they’re insanely low – leading toward higher, nastier recession possibilities.

This repeated and severe reserve inelasticity is where digital formats can thrive, have thrived, competing efforts to create a workable alternative which might realistically solve this Eurodollar Famine. While speculators pile into them for the wrong reasons of store of value, massive resources have been invested instead inventing, testing, and perfecting (hopefully) usable mediums of exchange.

When the last winter hit in December 2017, I wrote the following:

“From China to Europe there are official and unofficial voices expressing grave doubts and discomfort over Bitcoin without really considering blockchain. It may end up where Bitcoin sinks the blockchain given that its greatest risks are all political (an outright ban).

“The only way to thwart those intentions is for enough people to take a determined interest in cryptos as a class rather that solely as speculation in the one; to see the great potential in the real stuff of its evolution, and not get hung up on something like price. We have to step ourselves outside of currency and appreciate the currency system, and do it with enough of a broad basis of appreciation that it overcomes and survives what will surely be an effort to kill it.”

This effort to kill it isn’t merely regulatory, or the frequent criticisms lobbed by whichever Nobel Laureate Economist (Stiglitz, in December 2017). Crypto bubbles being exposed as bubbles have as much if not more potential for rendering harm to the space than any other factor.

Burn enough people selling the wrong-headed idea of Dollar-Is-Dead, and they’ll take away something very different from when winter inevitably falls.

That crypto is all a scam.  

Much may be, though not all of it is rip-offs. There’s still much to be optimistic about even now once the digital snows pile deeper and deeper atop the disheartened and angry former coin-chaser, as the global eurodollar system and economy grow colder and more dangerous.

The last burst of that last bubble in 2018 had not deterred medium of exchange exploration one single bit (pun intended), and it won’t stop the most serious in 2022. While the general investing community lost interest in store of value, digital formats proliferated anyway because the innovators never lost focus on the real aim.

Elasticity and dependability.

This year’s “surprising” turn toward deflationary money should, if anything, only add more passion and resolve to this decentralized enterprise. It just won’t be reflected in any crypto prices, at least not for the foreseeable future. The public will again turn off and turn away.

And that is a good thing for the long run. Better to be ready for primetime first, to have prices based on real money potential and fundamentals than on being a key prong in Jay Powell’s inflation psychology. The latter, like crapcoins everywhere, exposed for what they always were.


Jeffrey Snider is the Head of Global Research at Alhambra Partners. 

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