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It seems that this guy decided to go heavily into Bitcoin because of a mistaken belief that seems all too common: "At the time, I saw a market dislocation and t

by not2b 6y ago

It seems that this guy decided to go heavily into Bitcoin because of a mistaken belief that seems all too common: "At the time, I saw a market dislocation and the likelihood of significant dollar inflation due to the US Government’s likely response to the unfolding pandemic." He thought that government responses to severe crises that inject lots of money into the economy will cause "significant dollar inflation". In the real world, over the full year of 2020 inflation was 1.4% in the US (food costs went up a bit more, energy costs went down). Failure to inject money into a failing economy results in massive deflation. That's because money was rapidly disappearing from the economy. Money isn't created primarily because governments print it; whenever a bank creates a loan money is created, and when they call in loans money disappears. Central banks control the money supply by regulating banks, and their goal is to keep things stable. Source: https://www.bls.gov/news.release/cpi.nr0.htm https://www.bls.gov/news.release/cpi.nr0.htm

mountainb 6y ago
People often don't understand the implications of an elastic monetary system that is also decentralized because of the way that the Fed and member banks are structured. There are things the Fed or the government could do to frogmarch devaluation (like, for example, encouraging banks to pay people to carry credit card balances through negative interest rate policy or encouraging no-doc/no-credit check loans of all kinds) but that is not their prerogative.
- qeternity 6y ago
  People also don’t realize that moderate inflation is a good thing. You want a gentle inbuilt mechanism to encourage consumption. And we have good tools to combat inflation whereas we don’t really have any tools to combat deflation. There’s a reason nobody spends Bitcoin and it’s mostly not about fees or block size.
  - jasonhoch 6y ago
    Why do you want a gentle inbuilt mechanism to encourage consumption?
    - flyinglizard 6y ago
      To create employment and growth.
    - georgeecollins 6y ago
      Because if you made a better return by hoarding cash then by investing -- holding bonds, buying apartment buildings-- investment would stop and people would stuff cash into mattresses.
      - mlthoughts2018 6y ago
        And in turn pollution might decrease, frivolous consumer waste might decrease, frivolous ad waste might decrease, people might turn to crafting and making their own home goods, and feel more pride and accomplishment, and the standard of return on investment to actually draw cash out of the mattresses would be higher, rather than building in a mechanism that stresses people into giving their cash over for hollow waste, and entrenching false “market demand” narratives around the whole destructive charade.
      - fuzzer37 6y ago
        Is that necessarily a bad thing? Growth at the cost of everything doesn't seem to bode well long term. What would the potential consequences of an economy not based on continuous growth? Genuine question, not trying to be inflammatory.
        whatshisface 6y ago
        The proceeds from whatever growth there is should go to the people involved in growing it, not uninvolved previously-wealthy bystanders. With deflationary currencies, any growth in the total amount of stuff leads to one dollar corresponding to more stuff, which is like a tax on all of the people making stuff paid to the people holding mattress money. That's the most powerful argument against the gold standard, for example. People who spend gold to do actually useful things are punished and people who pile it up are rewarded.
  - dragonwriter 6y ago
    > People also don’t realize that moderate inflation is a good thing. Price stability is a good thing, and moderate deflation (which discourages productive investment) is worse than moderate inflation, so policy targeting moderate inflation is a good thing. This isn’t because moderate inflation is a good thing in and of itself, its because you can’t perfectly target price level outcomes with policy, so you want to bias missing on the less harmful side. > You want a gentle inbuilt mechanism to encourage consumption. The utility of consumption encourages consumption. To the extent that inflation is good its more as gentle inbuilt mechanism to discourage nonproductive saving of cash in favor of productive investment. > There’s a reason nobody spends Bitcoin Right. You definitely don’t want deflation, which encourages hoarding currency that is surplus to immediate consumption desires and thereby sucks money out of productive investment.
    - microtherion 6y ago
      > Price stability is a good thing, and moderate deflation (which discourages productive investment) is worse than moderate inflation, so policy targeting moderate inflation is a good thing. That is one of the reasons. But arguably, even if a central bank could be 100% sure of hitting their inflation target exactly, they might still prefer moderate inflation to absolute price stability, because (a) it encourages productive investment and (b) it gives a simple mechanism for downward adjustment of sticky nominal prices/wages.
  - TomSwirly 6y ago
    > You want a gentle inbuilt mechanism to encourage consumption. This kills the planet.
    - drusklo 6y ago
      This kills the environment, planet doesn't care, after we are gone, it starts over
- garmaine 6y ago
  Distributed, not decentralized.
cryptoanonymous 6y ago
Hi, I'm the author. > Money isn't created primarily because governments print it; whenever a bank creates a loan money is created, and when they call in loans money disappears. Yes this is right, and I am in fact aware of this mechanism. As I say in the post: "[...] anticipated high levels of lending and consumer spending post-pandemic, seemed likely to fuel substantial USD inflation in real terms through the end of 2021." Velocity-of-money and the M2 money supply weren't that relevant to the main story I wanted to tell, so I went into no more than superficial detail here.
- blueblisters 6y ago
  Even if inflation were to occur at the levels you anticipated, I would find it hard to justify crypto being a safe hedge against the dollar. Dollar backed productive assets are largely much safer.
- jerrymiller 6y ago
  I recommend that you listen to this: https://www.coindesk.com/podcasts/the-breakdown-with-nlw/breakdown-bitcoin-fud-dan-held https://www.coindesk.com/podcasts/the-breakdown-with-nlw/bre...
- simonebrunozzi 6y ago
  Thanks for a great article. Wondering what would be the best way to follow your writings, given that you're currently anonymous.
saurik 6y ago
To verify, though: in fact, the M2 is skyrocketing in 2020, right?
- findthewords 6y ago
  Yes, but velocity of money is plummeting.
  - dlubarov 6y ago
    Is there reason to think that velocity will remain low in the long term, though? If it's just temporary economic effects caused by COVID (e.g. less physical commerce), then surely we will see higher inflation as those effects go away?
    - dragonwriter 6y ago
      > Is there reason to think that velocity will remain low in the long term, though? There's reason to believe that as velocity rebounds, ceteris paribus, monetary policy will tighten to avoid rapid inflation. Congress may leave fiscal policy on autopilot all too often, but you aren't likely to find the Fed completely asleep at the monetary policy wheel.
- erooijak 6y ago
  Yes. See https://fred.stlouisfed.org/series/M2 https://fred.stlouisfed.org/series/M2. In 2020 the M2 Money Supply increased with 25%.
mlthoughts2018 6y ago
Those inflation figures, much like unemployment figures, are not really representative. If you take a basket of good that includes consumer discretion items like cheap tech gadgets, subscription music, staple foods, then these “balance out” the much worse inflation in housing, college costs and medical care, things which have a much higher quality of life impact. I’n not making any claim on how this dichotomy relates to cryptocurrency speculation, but I do think in general nobody should be using CPI-based figures or traditional BLS figures at all, and anyone seriously talking about US inflation needs to be starting from the given baseline fact that “real” inflation (ie, excluding discretionary consumer toys, subscription services, staple foods) is much higher than 2%, and has been for a long time.
- deleted 6y ago
  [deleted]
Infinitesimus 6y ago
CPI is a very distorted view of actual living costs over time. House prices aren't included and we've seen prices balloon over the last decade. Sure, your apples cost the same but good luck trying to buy property. Yes we have the usual supply constraints, etc.
- SilasX 6y ago
  Yep, the new money has flowed into capital assets rather than consumption goods. But inflated, prices have. It would be like saying there’s no inflation because milk prices are steady, ignoring that cows cost three times as much.
  - dragonwriter 6y ago
    > Yep, the new money has flowed into capital assets rather than consumption goods. Yes, because the wealth has flowed to people who primarily relate to the economy as capitalists, rather than laborer/consumers. > It would be like saying there’s no inflation because milk prices are steady, ignoring that cows cost three times as much. So, it would be true, for the purpose for which we have and measure general inflation. It would not be true for certain other inflation measures which are also used, but which aren’t part of (and aren’t relevant to the purposes of) general inflation measures like the CPI
    - SilasX 6y ago
      Depends on who the “we” is there. Certain agencies don’t care that new money is flowing into capital assets but probably should care.
      - dragonwriter 6y ago
        > Depends on who the “we” is there. I would argue the statement is true for any significant government or private use of general inflation measures. But, sure, if you’ve got a case where the CPI is actually used for a purpose and you think a different measure of inflation that incorporated asset prices would be a better replacement for the CPI, please feel free to present (1) the existing use in question, (2) your proposed replacement measure, and (3) your argument for why your proposed replacement is better.
ad31mar 6y ago
> In the real world, over the full year of 2020 inflation was 1.4% in the US (food costs went up a bit more, energy costs went down). Are you sure about that? https://chapwoodindex.com https://chapwoodindex.com
- Majromax 6y ago
  On the other hand, the billion prices project (http://www.thebillionpricesproject.com/ http://www.thebillionpricesproject.com/) is generally well-correlated with the CPI.
- wcoenen 6y ago
  The Chapwood index looks a bit weird. It's based on only 500 items (compare to CPI which uses 94,000 according to [1]). And those 500 items[2] include things like "cat grooming", "horseback riding lessons" and "first class airfare" (but not economy class airfare?). Tennis is apparently very important because there's "tennis lessons", "tennis racquet" and "tennis ball" in there separately. Something similar is going on for golf: we find "golf shoe", "round of golf" and "golf lessons". I could not find information on how these items are weighted. [1] https://www.bls.gov/opub/hom/cpi/pdf/cpi.pdf https://www.bls.gov/opub/hom/cpi/pdf/cpi.pdf [2] https://chapwoodindex.com/chapwood-index-items/ https://chapwoodindex.com/chapwood-index-items/
dnp100 6y ago
Deflation is a wonderful thing. It means more people can buy more stuff. It should be one of the primary goals of our civilization.
- mikewarot 6y ago
  >Deflation is a wonderful thing. It means more people can buy more stuff. The problem is if you know your money is going up in value, why would you buy stuff with it? You'd hold on to it even harder... thus increasing the deflation, as people lose their jobs, homes, and society falls apart... but hey... your hoard is going up in value. Deflationary spirals kill people.
  - dnp100 6y ago
    Sure, if we're driving 100mph in one direction and suddenly place the car in reverse, there will be damage. But yes, if we weren't artificially spiking the system with inflation there will be an increase in savings, which is not a bad thing (yes! *gasp*). It's pointless driving the economy in circles wasting fuel, which is akin to the 'spending is automatically good' mantra. We should be using the car efficiently to get to our destination faster. This means allowing the economy to be more geared towards essentials, which we all must spend on, making them immune from deflationary spirals. And essentials are not only toilet paper, they also include things like medicine and other vital technologies. When spending power is more concentrated to these economic categories, the competition will increase to produce better versions. Companies will also be incentivised to get a bigger slice of a currency that increases in value over time. Through society's greater savings rates, the banks will have more capital to lend to producers. Innovation, including the move towards (hopefully human-values-aligned) AI and nanotech, will continue because companies without these technologies will eventually vanish. Finally, if we accept that the environment is dying (or something like that), the real inconvenient truth is because ultimately there are too many consumers. Regardless of how carbon neutral we become, we can never get to zero and no (pre-superintelligent AI) strategy is a match for an exponentially growing population. Therefore, unbridled growth can become a destructive force of its own.
  - faffe 6y ago
mac01021 6y ago
CPI may not have gone up, but it sure seems like the prices of a lot of corporate stocks are pretty inflated... I don't know if that is related to a change in money supply.
tim333 6y ago
>their goal is to keep things stable But they've only got a few levers and there are a lot of things. The priority is to keep the real economy ticking along and retail inflation reasonable but if people are not spending much on things some of the easy money ends up going into financial assets which is one reason we have record stock and crypto prices. It's an unwanted side effect.

by not2b 6y ago

mountainb 6y ago

People often don't understand the implications of an elastic monetary system that is also decentralized because of the way that the Fed and member banks are structured. There are things the Fed or the government could do to frogmarch devaluation (like, for example, encouraging banks to pay people to carry credit card balances through negative interest rate policy or encouraging no-doc/no-credit check loans of all kinds) but that is not their prerogative.

qeternity 6y ago
People also don’t realize that moderate inflation is a good thing. You want a gentle inbuilt mechanism to encourage consumption. And we have good tools to combat inflation whereas we don’t really have any tools to combat deflation. There’s a reason nobody spends Bitcoin and it’s mostly not about fees or block size.
- jasonhoch 6y ago
  Why do you want a gentle inbuilt mechanism to encourage consumption?
  - flyinglizard 6y ago
    To create employment and growth.
  - georgeecollins 6y ago
    Because if you made a better return by hoarding cash then by investing -- holding bonds, buying apartment buildings-- investment would stop and people would stuff cash into mattresses.
    - mlthoughts2018 6y ago
      And in turn pollution might decrease, frivolous consumer waste might decrease, frivolous ad waste might decrease, people might turn to crafting and making their own home goods, and feel more pride and accomplishment, and the standard of return on investment to actually draw cash out of the mattresses would be higher, rather than building in a mechanism that stresses people into giving their cash over for hollow waste, and entrenching false “market demand” narratives around the whole destructive charade.
    - fuzzer37 6y ago
      Is that necessarily a bad thing? Growth at the cost of everything doesn't seem to bode well long term. What would the potential consequences of an economy not based on continuous growth? Genuine question, not trying to be inflammatory.
      - whatshisface 6y ago
        The proceeds from whatever growth there is should go to the people involved in growing it, not uninvolved previously-wealthy bystanders. With deflationary currencies, any growth in the total amount of stuff leads to one dollar corresponding to more stuff, which is like a tax on all of the people making stuff paid to the people holding mattress money. That's the most powerful argument against the gold standard, for example. People who spend gold to do actually useful things are punished and people who pile it up are rewarded.
- dragonwriter 6y ago
  > People also don’t realize that moderate inflation is a good thing. Price stability is a good thing, and moderate deflation (which discourages productive investment) is worse than moderate inflation, so policy targeting moderate inflation is a good thing. This isn’t because moderate inflation is a good thing in and of itself, its because you can’t perfectly target price level outcomes with policy, so you want to bias missing on the less harmful side. > You want a gentle inbuilt mechanism to encourage consumption. The utility of consumption encourages consumption. To the extent that inflation is good its more as gentle inbuilt mechanism to discourage nonproductive saving of cash in favor of productive investment. > There’s a reason nobody spends Bitcoin Right. You definitely don’t want deflation, which encourages hoarding currency that is surplus to immediate consumption desires and thereby sucks money out of productive investment.
  - microtherion 6y ago
    > Price stability is a good thing, and moderate deflation (which discourages productive investment) is worse than moderate inflation, so policy targeting moderate inflation is a good thing. That is one of the reasons. But arguably, even if a central bank could be 100% sure of hitting their inflation target exactly, they might still prefer moderate inflation to absolute price stability, because (a) it encourages productive investment and (b) it gives a simple mechanism for downward adjustment of sticky nominal prices/wages.
- TomSwirly 6y ago
  > You want a gentle inbuilt mechanism to encourage consumption. This kills the planet.
  - drusklo 6y ago
    This kills the environment, planet doesn't care, after we are gone, it starts over
garmaine 6y ago
Distributed, not decentralized.

cryptoanonymous 6y ago

Hi, I'm the author. > Money isn't created primarily because governments print it; whenever a bank creates a loan money is created, and when they call in loans money disappears. Yes this is right, and I am in fact aware of this mechanism. As I say in the post: "[...] anticipated high levels of lending and consumer spending post-pandemic, seemed likely to fuel substantial USD inflation in real terms through the end of 2021." Velocity-of-money and the M2 money supply weren't that relevant to the main story I wanted to tell, so I went into no more than superficial detail here.

blueblisters 6y ago
Even if inflation were to occur at the levels you anticipated, I would find it hard to justify crypto being a safe hedge against the dollar. Dollar backed productive assets are largely much safer.
jerrymiller 6y ago
I recommend that you listen to this: https://www.coindesk.com/podcasts/the-breakdown-with-nlw/breakdown-bitcoin-fud-dan-held https://www.coindesk.com/podcasts/the-breakdown-with-nlw/bre...
simonebrunozzi 6y ago
Thanks for a great article. Wondering what would be the best way to follow your writings, given that you're currently anonymous.

saurik 6y ago

To verify, though: in fact, the M2 is skyrocketing in 2020, right?

findthewords 6y ago
Yes, but velocity of money is plummeting.
- dlubarov 6y ago
  Is there reason to think that velocity will remain low in the long term, though? If it's just temporary economic effects caused by COVID (e.g. less physical commerce), then surely we will see higher inflation as those effects go away?
  - dragonwriter 6y ago
    > Is there reason to think that velocity will remain low in the long term, though? There's reason to believe that as velocity rebounds, ceteris paribus, monetary policy will tighten to avoid rapid inflation. Congress may leave fiscal policy on autopilot all too often, but you aren't likely to find the Fed completely asleep at the monetary policy wheel.
erooijak 6y ago
Yes. See https://fred.stlouisfed.org/series/M2 https://fred.stlouisfed.org/series/M2. In 2020 the M2 Money Supply increased with 25%.

mlthoughts2018 6y ago

Those inflation figures, much like unemployment figures, are not really representative. If you take a basket of good that includes consumer discretion items like cheap tech gadgets, subscription music, staple foods, then these “balance out” the much worse inflation in housing, college costs and medical care, things which have a much higher quality of life impact. I’n not making any claim on how this dichotomy relates to cryptocurrency speculation, but I do think in general nobody should be using CPI-based figures or traditional BLS figures at all, and anyone seriously talking about US inflation needs to be starting from the given baseline fact that “real” inflation (ie, excluding discretionary consumer toys, subscription services, staple foods) is much higher than 2%, and has been for a long time.

deleted 6y ago
[deleted]

Infinitesimus 6y ago

CPI is a very distorted view of actual living costs over time. House prices aren't included and we've seen prices balloon over the last decade. Sure, your apples cost the same but good luck trying to buy property. Yes we have the usual supply constraints, etc.

SilasX 6y ago
Yep, the new money has flowed into capital assets rather than consumption goods. But inflated, prices have. It would be like saying there’s no inflation because milk prices are steady, ignoring that cows cost three times as much.
- dragonwriter 6y ago
  > Yep, the new money has flowed into capital assets rather than consumption goods. Yes, because the wealth has flowed to people who primarily relate to the economy as capitalists, rather than laborer/consumers. > It would be like saying there’s no inflation because milk prices are steady, ignoring that cows cost three times as much. So, it would be true, for the purpose for which we have and measure general inflation. It would not be true for certain other inflation measures which are also used, but which aren’t part of (and aren’t relevant to the purposes of) general inflation measures like the CPI
  - SilasX 6y ago
    Depends on who the “we” is there. Certain agencies don’t care that new money is flowing into capital assets but probably should care.
    - dragonwriter 6y ago
      > Depends on who the “we” is there. I would argue the statement is true for any significant government or private use of general inflation measures. But, sure, if you’ve got a case where the CPI is actually used for a purpose and you think a different measure of inflation that incorporated asset prices would be a better replacement for the CPI, please feel free to present (1) the existing use in question, (2) your proposed replacement measure, and (3) your argument for why your proposed replacement is better.

ad31mar 6y ago

> In the real world, over the full year of 2020 inflation was 1.4% in the US (food costs went up a bit more, energy costs went down). Are you sure about that? https://chapwoodindex.com https://chapwoodindex.com

Majromax 6y ago
On the other hand, the billion prices project (http://www.thebillionpricesproject.com/ http://www.thebillionpricesproject.com/) is generally well-correlated with the CPI.
wcoenen 6y ago
The Chapwood index looks a bit weird. It's based on only 500 items (compare to CPI which uses 94,000 according to [1]). And those 500 items[2] include things like "cat grooming", "horseback riding lessons" and "first class airfare" (but not economy class airfare?). Tennis is apparently very important because there's "tennis lessons", "tennis racquet" and "tennis ball" in there separately. Something similar is going on for golf: we find "golf shoe", "round of golf" and "golf lessons". I could not find information on how these items are weighted. [1] https://www.bls.gov/opub/hom/cpi/pdf/cpi.pdf https://www.bls.gov/opub/hom/cpi/pdf/cpi.pdf [2] https://chapwoodindex.com/chapwood-index-items/ https://chapwoodindex.com/chapwood-index-items/

dnp100 6y ago

Deflation is a wonderful thing. It means more people can buy more stuff. It should be one of the primary goals of our civilization.

mikewarot 6y ago
>Deflation is a wonderful thing. It means more people can buy more stuff. The problem is if you know your money is going up in value, why would you buy stuff with it? You'd hold on to it even harder... thus increasing the deflation, as people lose their jobs, homes, and society falls apart... but hey... your hoard is going up in value. Deflationary spirals kill people.
- dnp100 6y ago
  Sure, if we're driving 100mph in one direction and suddenly place the car in reverse, there will be damage. But yes, if we weren't artificially spiking the system with inflation there will be an increase in savings, which is not a bad thing (yes! *gasp*). It's pointless driving the economy in circles wasting fuel, which is akin to the 'spending is automatically good' mantra. We should be using the car efficiently to get to our destination faster. This means allowing the economy to be more geared towards essentials, which we all must spend on, making them immune from deflationary spirals. And essentials are not only toilet paper, they also include things like medicine and other vital technologies. When spending power is more concentrated to these economic categories, the competition will increase to produce better versions. Companies will also be incentivised to get a bigger slice of a currency that increases in value over time. Through society's greater savings rates, the banks will have more capital to lend to producers. Innovation, including the move towards (hopefully human-values-aligned) AI and nanotech, will continue because companies without these technologies will eventually vanish. Finally, if we accept that the environment is dying (or something like that), the real inconvenient truth is because ultimately there are too many consumers. Regardless of how carbon neutral we become, we can never get to zero and no (pre-superintelligent AI) strategy is a match for an exponentially growing population. Therefore, unbridled growth can become a destructive force of its own.
- faffe 6y ago

mac01021 6y ago

CPI may not have gone up, but it sure seems like the prices of a lot of corporate stocks are pretty inflated... I don't know if that is related to a change in money supply.

tim333 6y ago

>their goal is to keep things stable But they've only got a few levers and there are a lot of things. The priority is to keep the real economy ticking along and retail inflation reasonable but if people are not spending much on things some of the easy money ends up going into financial assets which is one reason we have record stock and crypto prices. It's an unwanted side effect.