Because central banks are accelerating on their Central Bank Digital Currency (CBDC) creation programs. The analysis by Alessandro Fugnoli, chief strategist of the Kairos funds
There has been a lot of talk this year about the strength of tech stocks, seen by the market as a safe haven in the face of the pandemic earthquake. At one point someone then did the math and noticed that gold stocks, now also in the process of consolidation, were doing even better than technology. Now it turns out that the asset class that has raced the most in 2020 is bitcoin. It finished 2019 at $ 7,300 and is now at $ 18,000. Its rise seems to be gaining momentum with each passing day.
You haven't seen anything yet, says Thomas Fitzpatrick of Citibank, widely reported in the media these days. Bitcoin will close 2021 at 318,000 after climbing much higher during the year. The argument is that bitcoin is simply following in the footsteps of gold in the 1970s, when it rose from $ 35 in 1971 to $ 850 in January 1980. Back then it was the exit from the Gold Exchange Standard and entry into the monetary paradigm of fiat money. Since 2009, the controlled fiat money of the first three decades has transformed with Quantitative easing into something different, which will change further in the next decade with the de facto adoption of Modern Monetary Theory by many central banks. Bitcoin is the successor to gold, Fitzpatrick continues, but it is much more volatile. An upward cycle that involves a hundredfold price increase is absolutely normal, so the estimate of 318 thousand should be considered prudential and moderate.
What to say? Bitcoin, ontologically, is like divinity in certain currents of mysticism. It is both absolute being and absolute nothing. It is absolute to be because, when fully operational, it will always be equal to itself for eternity. There are 18 million bitcoins in circulation today and when the so-called miners have produced another three million we will reach the ceiling of 21 million, which by statute will remain unsurpassed until the end of time. A more perfect Parmenidean currency than gold, which continues to be extracted from the bowels of the earth every day and which Elon Musk and Jeff Bezos will one day extract from asteroids.
But also absolute nothing, since bitcoin has nothing behind or under it. It is a pure abstraction that does not have the materiality of gold and of all the coins that have been created from the Neolithic to today and does not even have, as a foundation, the strength of the nation states which, by imposing on their citizens taxes to be paid in the issued currency by the states themselves, they transform their paper into value.
On the other hand, we know that the notion of a safe-haven asset is historically determined. The Bolshevik bullets that shot the Tsar and his family rebounded, the legend goes, because the diamonds they had stolen from the imperial court before fleeing from Petersburg were sewn into their clothes. In some time, however, it will be virtually impossible to distinguish natural diamonds from low-cost synthetic ones and the rarity value of diamonds will be, at the very least, questioned.
If today the safe haven asset is (or is about to become) bitcoin, all that remains is to acknowledge it. This is what illustrious testimonials such as Druckenmiller and the many converts who until yesterday considered him eccentric and today put it with gusto in their wallets have done.
But refuge from what? From inflation, almost certainly, given that world wars for Taiwan are still spoken only at the academic level. From the inflation that will come, if it does, not from the one that is going in the opposite direction before our eyes, that of deflation. And we will still be talking about deflation until spring if Thanksgiving, Christmas and New Year turn into new expansion opportunities for Covid and lead to other restrictions in January. We will also talk about deflation on January 5 if the Republicans win at least one of the two Senate seats up for grabs in Georgia and will be able, by controlling the upper house for another two years, to limit the expansive fiscal measures of the next administration to the strictly necessary (let's not forget that the money is controlled by Congress, not the White House).
That's why central banks, around seventy up to now, are accelerating on their Central Bank Digital Currency (CBDC) programs. There are certainly security and efficiency considerations in the payment system, but the great goal of CBDCs is monetary policy and policy tout court.
Official digital currencies will potentially be the ultimate nuclear weapon against deflation for two reasons.
The first is that by making the abolition of cash possible, they will also make it possible to introduce deeply negative rates in the event of a new severe recession. If, for example, bond and current account rates were three percent negative, many would line up in front of banks to withdraw their money in the form of banknotes. With banknotes abolished, they could no longer do so and negative rates, at least in theory, could unfold all their expansionary effects.
The second objective of CBDCs is to make it possible to immediately credit funds created out of thin air on accounts that businesses and citizens could open directly with central banks. These, in the fast pace of monetary policy, could create instant-effect money fed directly as a drip into the veins of end consumers. Recall that today the bulk of the money supply is created by the banks, not the central bank. However, banks, in recession phases, are afraid to lend money (i.e. to create the money they credit on the accounts of those who ask them for a loan) and if they are not afraid they still have to comply with capital requirements that limit their freedom of action. . The central bank, in the event, would have neither fear nor limits.
In recent years there has been talk of central bank crises, which have in fact returned to the Treasury as it was originally and as it always was in times of war. What is looming, however, is, at least potentially, a substantial increase in their power. If we combine the CBDCs with the fight against climate change, which is now a priority for the ECB , and that against inequality, which is now a priority for the Fed, we clearly see the expansion of their competences from monetary to fiscal and regulatory. And this even before political power formalizes these transformations and introduces them into the statute of central banks.
Of course, on CBDCs, central banks promise graduality and prudence and reassure ordinary banks that they will not be bypassed and marginalized. At the beginning it will certainly be like this, but certainly very different horizons open up for the future than we were used to.
Bitcoin and CBDC therefore tell us the same thing, but with different nuances. The rising bitcoin speaks to us of inflation on the horizon. CBDCs tell us about the fear of deflation that central banks have today more than ever and their willingness to reflate at all costs, including the risk of actually having an effective return on inflation.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/bitcoin-inflazione-banche-centrali/ on Mon, 23 Nov 2020 07:09:17 +0000.