Future economists may well look back at the end of 2020 as the moment when the most powerful central bank in the world flinched and decentralized finance came of age. In retrospect, that was when the Fed publicly lost control of inflation and its own credibility in the process.
After all, the time to soften the flow of free dollars into the U.S. economy was when consumer prices started accelerating faster than the Fed’s 2 percent target … and not months into the inflationary cycle. At this point, it could take another two to four years to get prices back under control.
Don’t blame the pandemic. While the Fed’s initial impulse was to protect the economy by flooding the system with cash, a secondary agenda crept into the policy statements early on. Central bankers were using the lockdowns to resolve their own confusion over the persistent absence of inflation after the 2008 credit crisis.
Month after month, they told us inflation would need to run above 2 percent for an extended period in order to satisfy their long-term expectations. And now that’s what we’re going to get, misery and all.
The latest Fed projections suggest that they’re resigned to devaluing the dollar’s purchasing power by about 12 percent between now and 2024. All their best effort points at that goal. While they could tighten interest rates more aggressively, that’s not what they want.
But they have a credibility problem now because they’ve told us they want to keep inflation humming at no more and no less than 8 percent in any given four-year period. Which is the real target? Should we follow the Fed’s rhetoric or its actions?
And if there’s a gap between rhetoric and action, there’s no reason to trust what we see on the statement after every meeting. After all, the Fed has the most powerful financial arsenal on the planet at its disposal. The price crunch we’re all feeling is exactly what Fed Chair Jay Powell wants.
If he and his fellow board members really wanted to stop printing money, they could have at least slowed down when their 2 percent target broke down. Just a tap on the brake.
The only alternative scenario I can come up with is going to be controversial. Maybe the most powerful central bank on the planet hasn’t been able to hit the inflation brake because something is holding them back.
If so, we’ve just witnessed the limit of central bank power. They can’t defend their fiat currency, so they’re committing to managing an inevitable decline. Even if the Fed ultimately gets inflation back down to 2 percent a year, that’s going to cut the value of the dollar in half every 14–15 years.
As long as the economy grows fast enough to keep up, there’s no intrinsic problem in that math. But at this point, there’s no guarantee that the Fed won’t simply go on printing dollars in order to boost GDP.
Is it any wonder that the dollar has dropped 5 percent against a basket of global currencies since the Fed first cut interest rates to zero in March 2020? What’s shocking is that gold, the traditional hedge against a deteriorating fiat currency, has barely stirred.
“Paper” bullion instruments like the SPDR Gold Trust (GLD) are up only 7 percent in the zero-rate world. The miners will always find a way to pour more gold, so it’s a depreciating asset too.
It’s just that the depreciation is a lot slower than what the Fed has wrought. But then you turn to crypto currencies as an alternative to fiat as a reservoir of real value, and the math gets very interesting.
Like gold, bitcoin isn’t under the Fed’s control. All central banks can do is make rules for who can own each unit … again, much like gold in periods when private holdings were tightly regulated.
But while bitcoin are still being mined today, it’s getting harder and harder to “print” each unit. Out of a hard theoretical limit of 21 million coins, 18 million are already in circulation today.
The miners will only be able to “dilute” the value of each bitcoin by 15 percent before hitting the limit. The Fed has committed to diluting the value of fiat dollars by 12 percent by 2024. Beyond that point, the inflationary impact of bitcoin mining drops fast to zero.
Demand for that kind of anti-inflationary hedge has pushed the market price of bitcoin up a breathtaking 795 percent since the Fed started printing dollars. Month by month and week by week, the exact number fluctuates, but the trend clearly favors the crypto bulls.
And in my view, the Fed’s credibility erodes from here. Everyone can see prices climbing and sooner or later more people will ask why the central bankers aren’t doing more about it.
A little bitcoin can play the role gold once did. Coinbase (COIN) has one of the most robust pure crypto trading platforms, but I’ve always been fond of the way Silvergate Capital (SI) opened up conventional banking services to crypto-oriented customers.
We bought SI at $12 a few years ago in my IPO Edge portfolio. Look at it now. With platforms like PayPal (PYPL) and Jack Dorsey’s Square (SQ) … now “Block” … embracing the new currency, this is the place.
