Oh, bitcoin isn’t a hedge against inflation?
As inflation spiraled out of control throughout last year, the financial class celebrated the steep decline in bitcoin’s price. The crazy libertarians who had replaced their dreams of abolishing the Federal Reserve with creating a viable alternative currency to circumvent the inflationary tendencies of the federal government were lumped in with the celebrities sued for promoting the scam of FTX and the dummies who lost their life savings on stablecoins like terraUSD.
But contrary to the hopes of the financial establishment, crypto is not a monolith. And while other digital currencies have died for good, bitcoin is bouncing back, not as a hedge against inflation itself, but rather against the credit of the US government.
THE INFLATION BILL IS COMING
Consider that when the inflationary situation worsened, but the Federal Reserve seemed able to pull off a soft landing without the rest of Wall Street or Washington going apoplectic, bitcoin sank and the dollar rose. But since the beginning of this year, the New York Stock Exchange has virtually flatlined, and the Nasdaq Composite is up 20% while bitcoin is down 80%. For the first time since June, the cryptocurrency reached $30,000. Meanwhile, the dollar continues to strengthen even as inflation stagnates and the collapse of Silicon Valley Bank remains a recent memory.
So, what gives? Is this just another bubble inflating, or does bitcoin’s growth reflect real value?
The answer to this question can be found in what distinguishes last year and this year. First, the Fed’s (debilitating) war on inflation has brought the central bank into a loss for the first time in almost two decades, and by stopping SVB depositors, it sent the massive signal to the markets that not only was a bank like SVB systemically important, but also that taxpayers will be put back on the hook for non-FDIC insured deposits. More important is investor fear for our fiscal situation. President Joe Biden has no interest in negotiating either to avoid a government shutdown later this year or the 20% across-the-board Social Security cut that would be triggered when the program becomes insolvent within a decade.
Then we see that it is not that bitcoin is a hedge against price level increases in itself, but rather when the only thing that supports the US dollar, the full faith and credit of our cretinous government, comes into question.
Last year, the Fed seemed unusually poised to kill inflation without changing Washington’s spending projections, but now we know that necessary rate hikes have increased our interest payments on the national debt by 40%. At this rate, the incentives of the Fed and the rest of the federal government (at least under Democratic control) are diametrically opposed, as the Fed pursues disinflation, while the government, as a debtor, directly benefits from its liabilities losing real value.
Around the world we see the practical use of bitcoin, from legal tender status in El Salvador to global donations to Ukraine’s defense. But in America, bitcoin joining the ranks of gold is reason enough to bet on longevity.
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