Original article by Arthur Hayes, Medium
Original translation: Tao Zhu
Some of you think you are now masters of the universe because you bought Solana for under $10 and sold it for $200. Others did the smart thing and sold fiat for crypto during the 2021-2023 bear market, but lightened up as prices surged in the first quarter of this year. If you traded shit coin for Bitcoin, you get a pass. Bitcoin is the hardest currency ever created.
Bull markets don't come around often; it's a travesty when you make the right decisions but don't maximize your profit potential. Too many of us try to reason about bull markets. They buy, hold, and buy as long as the bull market lasts.
Sometimes I find myself thinking like a loser. When I do, I have to remind myself of the overarching macro theme that the entire retail and institutional investing community has come to believe. Namely, all of the major economic blocs (US, China, EU, and Japan) are devaluing their currencies in order to reduce leverage on government balance sheets. Now that TradFi can profit directly from this narrative with US and soon-to-be-launched UK and Hong Kong spot Bitcoin ETFs, they are urging clients to use these crypto derivatives to preserve the energy purchasing power of their wealth.
I want to quickly explain the fundamental reasons why cryptocurrencies have risen sharply relative to fiat currencies. Of course, this narrative will lose its effectiveness one day, but that time is not now. At this moment, I will resist the urge to take my chips off the table.
As we exit my previous prediction of a window of weakness due to US Tax Day on April 15th and the Bitcoin halving, I want to remind readers why the bull run will continue and prices will move even higher. There are few things in the market that can make you big (Bitcoin from zero in 2009 to $70,000 in 2024) or big (Bitcoin to $1,000,000). However, the macro environment that has led to a surge in fiat liquidity and driven Bitcoin higher will only become more pronounced as the sovereign debt bubble begins to burst.
Nominal Gross Domestic Product (GDP)
What is the purpose of government? Government provides public goods such as roads, education, healthcare, social order, etc. Obviously this is the wish list of many governments, but instead they provide death and despair… I digress. In return for these services, we the citizens pay taxes. A government with a balanced budget provides as many services as possible for a given amount of tax revenue.
Sometimes, however, a government will borrow money to do something it believes will produce long-term positive value without raising taxes.
For example:
A hydroelectric dam is expensive to build. Instead of raising taxes, the government issues bonds to pay for the dam. The hope is that the economic return from the dam will meet or exceed the yield on the bonds. The government entices citizens to invest in the future by paying a return close to the economic growth the dam will create. If, in 10 years, the dam will increase the economy by 10%, then the government bond yield should be at least 10% to attract investors. If the government pays less than 10%, then its profits come at the expense of the public. If the government pays more than 10%, the public's profits are borne by the government.
Let's zoom out a bit and talk about the economy at a macro level. The economic growth rate of a particular nation state is its nominal GDP growth rate, which is made up of inflation and real growth. If the government wants to drive nominal GDP growth by running a budget deficit, it is natural and logical for investors to receive a return equal to the nominal GDP growth rate.
While it’s natural for investors to expect returns equal to nominal GDP growth, politicians would rather pay less than that. If politicians can create a situation where the yield on government debt is less than the growth rate of nominal GDP, then they can spend money faster than Sam Bankman-Fried can in effective altruism philanthropy. The best part is that taxes don’t need to be raised to pay for this spending.
How do politicians create such a utopia? They use the TradFi banking system to economically oppress savers. The simplest way to ensure that government bond yields are lower than nominal GDP growth is to instruct the central bank to print money and buy government bonds, artificially lowering bond yields. Banks are then told that government bonds are the only "appropriate" investment for the public. In this way, the public's savings are secretly invested in low-yielding government debt.
The problem with artificially low government bond yields is that it promotes malinvestment. The first project is usually worthwhile. However, as politicians try to generate growth in order to get re-elected, the quality of the projects deteriorates. At this point, government debt is growing faster than nominal GDP. Politicians now need to make a difficult decision. The malinvestment losses must be realized today through a severe financial crisis or tomorrow through low or even zero growth. Often, politicians choose a long period of economic stagnation because the future happens after they leave office.
A good example of malinvestment is green energy projects that are only possible through government subsidies. After years of generous subsidies, some projects fail to generate a return on invested capital or the actual cost to consumers is too high. Predictably, once government support is withdrawn, demand weakens and projects stall.
In bad economic times, when central banks press the “print money” button harder than Lord Ashdrake presses the “sell” button, bond yields become even more short. Government bond yields stay below nominal GDP growth, allowing the government’s debt burden to be offset by inflation.
rate of return
The key task for investors is to understand when a government bond is a good investment. The simplest way to do this is to compare the year-over-year nominal GDP growth rate with the yield on the 10-year government bond. The 10-year bond yield should be a market signal that gives us an idea of what to expect in terms of future nominal growth.
Real rate of return = 10-year government bond yield - nominal GDP growth rate
Government bonds are a good investment when real yields are positive. Governments are usually the most creditworthy borrowers.
Government bonds are bad investments when real yields are negative. The trick for investors is to find assets outside the banking system that are growing faster than inflation.
All four major economies have policies that have financially repressed savers and led to negative real yields. China, the European Union, and Japan have all ultimately taken their monetary policy cues from the United States. Therefore, I will focus on the past and future monetary and fiscal conditions in the United States. As the United States engineers loosening financial conditions, the rest of the world will follow suit.
The chart shows real yields (.USNOM index) in white and the Federal Reserve (Fed) balance sheet in yellow. I started in 2009 because that was the year Bitcoin's Genesis Block was launched.
As you can see, real yields turned from positive to negative following the deflationary shock of the 2008 global financial crisis. They briefly turned positive again due to the deflationary shock of the pandemic.
A deflationary shock is when real yields surge in response to a sharp drop in economic activity.
With the exception of 2009 and 2020, government bonds have been a terrible investment compared to stocks, real estate, crypto, etc. Bond investors can only perform well by using insane amounts of leverage to trade. For Hedge Fund Puppet readers, this is the essence of risk parity.
This unnatural state occurs because the Fed expands its balance sheet by printing money to buy government bonds, a process called quantitative easing (QE).
The safety valve for negative real returns during this period was and is Bitcoin (yellow). Bitcoin has risen in a non-linear fashion on a logarithmic chart. Bitcoin’s rise is purely a function of a finite number of assets priced in devalued fiat dollars.
This explains the past, but markets are forward-looking. Why should you continue with your cryptocurrency investments and have confidence that this bull run has only just begun?
Free shit
Everyone wants something for nothing. Obviously, the universe will never provide something so cheap, but that doesn’t stop politicians from promising benefits without raising taxes. Support for any politician, both at the ballot box in a democracy and implicitly in more authoritarian systems, stems from the politician’s ability to create economic growth. When simple and obvious growth-supporting policies are enacted, politicians use the printing press to funnel money to their favored constituencies at the expense of the population as a whole.
As long as governments borrow at negative real rates of return, politicians can offer free stuff to their supporters. Thus, the more partisan and polarized a nation-state becomes, the more incentive the ruling party has to improve its reelection odds by spending money they don’t have.
2024 is a critical year for the world, with many major countries holding presidential elections. The US election is of global importance, as the ruling Democratic Party will do everything in their power to keep their office (as evidenced by the fact that they have done some questionable things to the Republican Party since Orange Man Trump "lost" the last election). A large portion of Americans believe that the Democrats have somehow cheated Trump out of winning. Whether you believe this to be true or not, the fact that a large portion of the population holds this view ensures that the stakes of this election are very high. As I have said before, the fiscal and monetary policies of the Pax Americana will be emulated by China, the EU, and Japan, which is why it is important to watch the election.
Above is a chart from BCA Research showing political polarization in the United States over time. As you can see, the electorate has not been this polarized since the late 1800s. From an electoral perspective, this makes it a winner-take-all race. The Democrats know that if they lose, the Republicans will reverse many of their policies. The next question is, what is the easiest way to ensure reelection?
It's stupid economics. Voters who haven't yet decided on the winner of the election decide based on their views on the economy. As the chart above shows, if the public believes the economy is in recession during an election year, the incumbent president's chances of reelection drop from 67% to 33%. How does a ruling party that controls monetary and fiscal policy ensure there is no recession?
Nominal GDP growth is directly affected by government spending. As you can see from this Bianco Research chart, the US government’s spending is 23% of nominal GDP. This means that the party in power can print as much GDP as they want, as long as they are willing to borrow enough money to meet the desired level of spending.
Every year, the Chinese government sets a target GDP growth rate. The banking system then creates enough credit to drive economic activity to the desired level. For many Western-trained economists, the “strength” of the U.S. economy is puzzling, as many of the major economic variables they monitor suggest a recession is imminent. But as long as the ruling party can borrow at negative interest rates, it can create the economic growth it needs to stay in power.
That’s why the Democratic Party, led by President Biden, will do everything in its power to increase government spending. Then, Treasury Secretary Janet Yellen and her Fed Chairman Jerome Powell will need to ensure that Treasury yields are significantly below nominal GDP growth. I don’t know what kind of money-printing euphemisms they will invent to ensure that negative real yields persist, but I’m sure they will do what’s necessary to get their boss and his party re-elected.
However, Trump could win. In this case, what would happen to government spending?
The chart above estimates the deficit under either a Biden or Trump presidency from 2024. As you can see, Trump is projected to spend even more than Biden. Trump is seeking another round of tax cuts, which will further increase the deficit. Whichever aging clown is chosen, rest assured that government spending will not go down.
The Congressional Budget Office (CBO) projects government deficits based on current and hypothetical future political environments, and predicts massive deficits. Basically, if politicians can create 6% growth by borrowing 4%, why would they stop spending?
As mentioned above, the political situation in the US gives me confidence that the printing presses can be fired up. If you think what the US monetary and political elites did to “solve” the 2008 global financial crisis and the pandemic was ridiculous, you haven’t seen anything yet.
Wars on the periphery of Pax Americana continue to be fought primarily on the Ukrainian/Russian and Israeli/Iranian theaters. As expected, warmongers in both political parties are content to continue funding their proxies with borrowed billions in cash. As the conflict escalates and more countries are drawn into the melee, the costs will only increase.
Summarize
As we head into the northern hemisphere summer and policymakers get a break from reality, cryptocurrency volatility will drop. This is the perfect time to take advantage of the recent cryptocurrency dip to slowly add to your position. I have a list of shit coin that got hammered last week. I will discuss them in the next article. There will also be many token launches, but they will not be as popular as the first quarter launches. This provides a great entry point for those who were not pre-sale investors. Whatever the taste of crypto risk excites you, the next few months will provide a golden opportunity to add to your position.
Your hunch that money printing will accelerate as politicians spend it on handouts and wars is correct. Do not underestimate the desire of the current elite to remain in office. If real interest rates turn positive, reassess your crypto convictions.
