These two events may not seem related at first glance – BTC at $100,000 – and the Plaza Accord.
Ok – to be fair – BTC at $100,000 isn’t an event – yet!
Cryptos are under serious selling pressure, along with numerous other assets. As we pointed out earlier this year, cryptos are being hit by disastrous macro liquidity. A little unsolicited advice – avoid fundamental investing on a medium or short term time frame – it will only lead to tears.
The fundamental case for cryptos is as strong as ever. So what gives?
Well, we are at the tail end of a massive credit creation event. We can’t use the word cycle, as that would imply it would return to its previous state. No, this event only has one possible end. But the road to total fiat currency collapse is complex – and isn’t just an exercise in math.
There is a human component to all this…
Central Banks Are Calling The Shots
Crypto prices are at the mercy of global liquidity flows. We are at a unique point in the history of central banking. While the 1980s isn’t a perfect analog to today’s economic environment, there are some important parallels.
If you are still nursing losses from the recent crypto crunch – pay attention.
Central banks are over a barrel. The task they have at the moment is impossible. Let’s use the US as an example – where government debt is ticking up by around $1 trillion every 100 days. That is over $3 trillion in new debt yearly, $1 trillion of which goes to interest payments on existing debt.
If you aren’t good at seeing hopeless situations, the example given above is a good way to practice.
Government spending is driving debt to record levels. Two large components to government spending in the USA are “defense” and social entitlements (welfare and social security are examples) – so there are no big spending cuts coming.
Oh yeah – did we mention that the US government employs around 1/4 of the US population either directly or indirectly – so there are more outlays that aren’t being cut anytime soon.
All that being said, its pretty easy to see that knocking down to cost of servicing government debt could be done by cutting rates, buying debt at below-market rates, and sacrificing the exchange value of the USD. Japan is already on that road, and is a great (tragic) example of what lies ahead for the US and EU!
Bro When is Bitcoin Going Up Again?
In the 1980s Japan was in the position that the US now occupies (sort of). The economy was screaming higher (tech stock and property bubble) while the government was spending huge cash. Japanese government debt overtook GDP in around 1996 – and never looked back.
In the USA, government debt overtook GDP in 2019. Which means that this credit creation event is likely going to kick into high gear in the next few years.
Again, the fundamental picture for cryptos has never looked better – stay with us bro!
Here is why the future for cryptos looks sooooooo good. Japan’s government debt was able to overtake GDP because the Japanese central bank was on a mission to fight deflation after the collapse of the Japan bubble in the late 1980s.
The Japanese central bank bought government bonds to keep interest rates low, and knocked down the value of the yen to boost exports. Today, the FED wants to expand the use of these tools, but it can’t do it on its own. The FED needs a global crisis.
Cryptos Go Lower From Here
The FED needs global coordinated intervention in markets to make the system work for another 5 years. Yes, the situation is that bad. So don’t look for an explosive crypto rally until you see something big happen at the FED – and all the major central banks. A 50bp cut isn’t going to do it this time.
Remember – cryptos need liquidity to run higher. When central banks revalue the USD lower against the global currency market – liquidity will rip like a tidal wave. We are not there at the moment. This is the crisis phase of the money party – when things get kinda dark.
You may have noticed the social unrest around the world.
Like any centrally planned economy, the Western world is falling apart. It has been nearly 40 years since Greenspan et al. started on the path of cheap money based economic planning, and the system is at the breaking point.
Cryptos were just a glimmer in the eye of those unknown devs when Greenspan took office, but today, they rely on cheap FED money to maintain their value. At least that is how many see value in the crypto market. The mental fiat money trap is strong.
The Big Move
Back to the Plaza Accord. Money in the 1980s was almost as broken as it is today. Before Greenspan ran the FED there was Paul Volcker, who dealt with the horrific monetary legacy of Richard Nixon and Jimmy (Peanut man) Carter.
Much like the modern FED, Volcker jacked up rates to deal with inflation. This led to a situation where the USD was way too strong, and had to be knocked down big time. That is exactly what the Plaza Accord did in 1985.
By 1987 the easy money that entered the market drove global equities wild – which is one of the reasons why the price of equities made a moonshot in 1987 (and then crashed).
Today, the FED needs the same kind of coordinated global agreement to reliquefy markets, and knock down the USD vs. all the other global reserve currencies. This time around it may not take the form of a fancy-pants meeting at the Plaza Hotel with career bureaucrats gladhanding.
The opportunity for the FED to devalue the USD may resemble the Suez Crisis – and an ultimatum being delivered to the US government about its wild military adventurism (there are a lot of US military assets near Iran at the moment BTW).
One thing is certain, the global financial system is on the brink of collapse – and central banks need political cover to introduce a new way forward for fiat currency. Look for China to take a bigger role going forward, and CBDCs to launch in the coming years.
China is the proof-of-concept – and soon that model will be used in the West. You can have all the gold you want, just don’t ask for human rights of any kind (so you don’t really “own” the gold).
The Party Just Started
Much in the same way you can tell that the drunk who sleeps rough near the liquor store has a problem, we can see that central bankers are facing an existential crisis. You have to put the bottle down mate, or it is going to put you down (the bottle is debt based money).
We have arrived at the inflection point in a budding crypto bull market.
With prices heading lower, and stunningly good fundamentals – the current headwinds present an incredible buying opportunity. We will be buying for the long term as crypto investors everywhere panic and cough up their tokens at amazing prices!
The real theme in play is deeper. We live in a social structure that relies on very old ideas. People want central authority, but they don’t understand the extreme risks that centralized power creates on a global scale.
Humanity is changing. Decentralization is a part of that change. Bitcoin is an emergent phenomena – it shows what is possible with decentralized systems. We don’t think that Bitcoin is going to be the technology that empowers a new age in human growth, but it is a good proof-of-concept.
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