Bitcoin in a hyperbolic bubble

[WolfeTone]

Agree with the first point. Not sure I understand the second point.

Bond yields are being driven to zero by ECB to facilitate cheaper (free) borrowing.
Without it interest rates rise, inflation etc.

But if this was a panacea against long-term economic instability then it would be permanent policy, would it not?
But the CBs are clear, these are not permanent measures... why? Well, because it is not sustainable. And if it is not sustainable, then there has to be consequence.
How, when, or in what form, those consequences emerge nobody knows.

 

[RedOnion]

Bond yields are being driven to zero by ECB to facilitate cheaper (free) borrowing.
Without it interest rates rise, inflation etc

How do higher interest rates lead to higher inflation? I'd love to see the theory behind that if you get a chat to explain it.

You do realise that the reason CBs are printing money is to create inflation? A small amount of inflation is a good thing for economic growth.

 

[WolfeTone]

How do higher interest rates lead to higher inflation?

I never said it leads to higher inflation.
I suggested that without ECB intervention inflation would good higher.

You do realise that the reason CBs are printing money is to create inflation?

Yeh, how has that been working out so far?

 

[RedOnion]

I suggested that without ECB intervention inflation would good higher.

And that suggestion makes absolutely no sense, and flies in the face of all economic theory.
You're suggesting that if there was less money, prices would be higher?

It's impossible to have a discussion if you're not going to at least try to base it in reality.

Yeh, how has that been working out so far?

It's not working as well as they want, but based on your comments above I'm guessing you haven't factored in that we'd be in a massive deflationary period without the intervention?

 

[WolfeTone]

You're suggesting that if there was less money, prices would be higher

No, I'm suggesting if there no ECB interference the cost of borrowing will rise... a not insignificant factor in setting prices.

 

[RedOnion]

No, I'm suggesting if there no ECB interference the cost of borrowing will rise... a not insignificant factor in setting prices.

That still contradicts all accepted economic theory.

 

[tecate]

You mean a tweet that shows the prices of a select number of commodities, some of which have recovered back to the levels they were a few years ago, before falling sharply?

That's fair enough on the source - it was posted on the understanding that its indicative. Authoritative data outside of official sources is hard to come by.

On the whole, my understanding is that technology is driving a deflationary world and that the battle overall has been against deflation. However, on the flip side we have money printing like we've never seen before. Some items may very well continue to be deflationary but that doesn't account for all items. Who's to say that CBs and governments have proper control in what they're tinkering with?
On statistical analysis of data re. CPI, I don't share the Duke's same level of unquestioning confidence. Government agencies responsible for such analysis have been roundly criticised on the misrepresentation of data going back donkeys years.

Can you clarify for us what level of CB balance sheet expansion is too much? If we're ok with magically creating more Euro's, can I tell Revenue that I've asked the ECB to print off my tax bill and that they should contact them for payment on my behalf? Where do we draw the line? Is there a line and if there is, does anyone have any earthly idea where it is?

 

[tecate]

It is clear now that the fear of hyperinflation is partly behind the btc surge, although the Muskie effect has also been enormous. If the gnomes are right or even if Mme Lagarde has her wicked way and gets inflation up to 2% I can't see the hyperinflation insurance aspect of btc lasting till 2028.

Duke, going back a few months, you said that the btc price performance was unimpressive given the extent of the rampant money printing. I think bitcoin was around $15k at the time. You also said that you were concerned at the level of money printing. Are you now saying you were mistaken?

 

[WolfeTone]

That still contradicts all accepted economic theory

Not really, its just chicken and egg stuff along the business cycle.

 

[RedOnion]

On statistical analysis of data re. CPI, I don't share the Duke's same level of unquestioning confidence. Government agencies responsible for such analysis have been roundly criticised on the misrepresentation of data going back donkeys years.

There are lots of different measures for inflation. As you've mentioned the one that economists like is 'core inflation' which excludes certain items which can fluctuate a lot over short cycles, as it's a better reflection of the drivers of the economy.
However, the one we normally hear about is CPI, which includes food & fuel, etc. but might exclude items like tobacco or alcohol. It's also the one that most inflation linked bonds are linked to. Why is that important? Well, because there are trillions or euro linked to it. If Central Banks were messing around with the numbers to keep CPI lower, then the holders of the bonds would keep them in check as it impacts on their returns. I would say that the increase of the volumes of inflation linked bonds is adding to the confidence level of CPI figures.

 

[RedOnion]

Not really, its just chicken and egg stuff along the business cycle.

With all due respect, you're just making stuff up now.
You are at the very least confusing correlation with causation. In this case, the chicken & egg cycle is very clearly understood.

 

[Duke of Marmalade]

Duke, going back a few months, you said that the btc price performance was unimpressive given the extent of the rampant money printing. I think bitcoin was around $15k at the time. You also said that you were concerned at the level of money printing. Are you now saying you were mistaken?

Not at all. In fact I should have backed my intuition. $15k was too low for the spectre of hyperinflation that the official reaction to Covid had definitely spooked. Though I am not sure how much of the rise since then is due to hyperinflationary fears or the Muskie effect.
These are definitely uncharted waters. When I was studying financial mathematics a typical text book would show examples of the risk free interest rate being 5%. And it was taken as beyond logical dispute that zero was the lower bound for interest rates (despite instances of negative rates on the Ch Fr). Today € interest rates are negative up to 10 years and the 30 year yield is 0.5%. I can hardly get my head around that.
Monetary policy in the modern world is very complex indeed. It might go wrong. I would like insurance against that but I don't see any realistic way to get that insurance, certainly not bitcoin. Unlike some in this parish, I trust the motivations and expertise of the monetary authorities in their efforts to steer us through this (this is not Zimbabwe) but as I say it might go wrong.
If the gnomes are right and we get to 2028 with very subdued inflation I think bitcoin will have its BOHA moment. The surge to $60k, driven by hyperinflation fear and Muskie syndrome, is a threat to bitcoin's long term sustainability IMHO.

 

[WolfeTone]

With all due respect, you're just making stuff up now.

I'm not really, honest.
The asset purchasing programs by Central Banks over the last 6/7yrs have no resulted in the desired effect - target of 2% inflation rate. There is nothing theoretical about it, it is a fact. It hasn't worked. It has increased asset prices, go figure!

On the other hand, the US Gov proposal for a 1.8trn infrastructure stimulus will, in my opinion, invoke the core inflationary spirits that they have sought for so long. Labour shortages will lead to wage increases, increased borrowing, increasing borrowing costs - if CBs stop interfering, then increasing prices.

 

[RedOnion]

I'm not really, honest.
The asset purchasing programs by Central Banks over the last 6/7yrs have no resulted in the desired effect - target of 2% inflation rate. There is nothing theoretical about it, it is a fact. It hasn't worked. It has increased asset prices, go figure!

No, you are way out of your depth on very basic economic theory.

You are suggesting that if central banks hadn't intervened, then interest rates would be higher (fully agreed), but that that increased interest rate would in turn have led to inflation????

That makes absolutely no sense at all.

 

[WolfeTone]

I'm guessing you haven't factored in that we'd be in a massive deflationary period without the intervention?

Indeed, but it very much dependent on other factors. The interest rate is not the sole factor in determining inflation rate. If it were then inducing a 2% inflation rate would be easy.
Debt ratios is also a major factor, sovereign debt, corporate debt, personal debt.

You are suggesting that if central banks hadn't intervened, then interest rates would be higher (fully agreed), but that that increased interest rate would in turn have led to inflation????

I'm saying that if CBs stopped (or reduced) interferance now cost of borrowing will rise and this in turn will lead to higher prices.
The opposite of course is to believe that the CB intervention will lead to higher prices... how is that working out?
It has led to higher asset prices, so if you are trying to purchase a house arguably inflation is already way beyond 2%.
However the cost of borrowing that money to buy the house has fallen so arguably the CB interference has led to that massive deflationary period you mentioned earlier?

Which is it? One persons inflation is another person's deflation.
I accept this may be a bit nuanced and beyond the basic economic standard theory.
But as fact, going by the ECBs stated aim to target a 2% inflation rate through asset purchasing program the results have been derisory.

 

[tecate]

There are lots of different measures for inflation. As you've mentioned the one that economists like is 'core inflation' which excludes certain items which can fluctuate a lot over short cycles, as it's a better reflection of the drivers of the economy.

Wasn't the 'Core CPI' measurement utilised for many years for general reporting purposes?

I would say that the increase of the volumes of inflation linked bonds is adding to the confidence level of CPI figures.

That's interesting. Question, though. A bond offering that's inflation-linked is likely to be entered into by those that have an intimate knowledge of the applicable CPI measurement. That measurement may be consistent but it may still exclude items that are inflationary. Once again, my understanding is that technology is driving a deflationary environment but that doesn't mean that every category/item is immune from inflation eg. there may well be considerable asset price inflation.

 

[tecate]

It might go wrong. I would like insurance against that but I don't see any realistic way to get that insurance, certainly not bitcoin. Unlike some in this parish, I trust the motivations and expertise of the monetary authorities in their efforts to steer us through this (this is not Zimbabwe) but as I say it might go wrong.
If the gnomes are right and we get to 2028 with very subdued inflation I think bitcoin will have its BOHA moment. The surge to $60k, driven by hyperinflation fear and Muskie syndrome, is a threat to bitcoin's long term sustainability IMHO.

I agree - this is not Zimbabwe. However, as you rightly state, this could still go wrong. I assume that this is the reason that absolutely nobody seems to be able to answer how much money printing is acceptable and how much is too much.
On your long pursuit of this 'boha moment', I don't think its that straight forward, Duke. Monetary expansion was just icing on the cake as regards the utility of bitcoin. It has other facets to it. Additionally, whilst you may live in a country/block that is comparatively better run from a currency standpoint, many don't. There are many Zimbabwe's - every year there are new examples.

Clearly, there's no measure by which you'll accept bitcoin as having reached escape velocity. I'm going to have to contact next of kin over the weekend to hand over posting 'privileges' here. Bitcoin could have reached a dollar a satoshi and be accepted for payment everywhere by then and you'll still be stuck in that trench pursuing the 'win' (as you described it)

 

[RedOnion]

I'm saying that if CBs stopped (or reduced) interferance now cost of borrowing will rise and this in turn will lead to higher prices.

Really really basic economic theory - increased cost of borrowing will reduce demand, and therefore prices. Increasing interest rates is the most commonly employed policy to slow down inflation. The claims you are making are absolute nonsense in the truest sense of the word.

But as fact, going by the ECBs stated aim to target a 2% inflation rate through asset purchasing program the results have been derisory.

But, what would the level of deflation be if they hadn't intervened?

 

[WolfeTone]

Really really basic economic theory - increased cost of borrowing will reduce demand, and therefore prices

I know, but what I'm trying to impart on you is that you need to go beyond really, really basic economic theory.
If inflation could be stoked using really, really basic economic theory, it would not be a problem to achieve it, would it?

So what you also have to factor in is where the stimulus is directed. CBs have pumped the balance sheets of sovereign states and financial institutions. As you admit, it has not worked as well as they hoped - even though, seemingly, it is really, really basic economic theory.

I refer to the economic cycle. I reference US 1.8trn infrastructure proposal, and I reference also increased levels of savings acquired during this pandemic.
These three factors, assuming a normal return to economic activity (or close to) will drive demand in US and EU. There will be labour shortages, there will be wage demands and the cost of borrowing will begin to increase.
Alongside it, for a period, the inflation rate. Interests rates will continue to rise, as will the inflation rate. At some point along the business cycle, the interest rate will become cost prohibitive, reducing demand. But it does not stand that increasing interest rates reduces demand and inflation, it can and does increase the cost of borrowing, inducing higher prices also.

But, what would the level of

I don't know, what would the level of deflation be if they had not intervened? And for how long would it have lasted?

 

[Duke of Marmalade]

I assume that this is the reason that absolutely nobody seems to be able to answer how much money printing is acceptable and how much is too much.

I think you may be getting a bit too caught up with your metaphor. Physical printing presses are not the actual tool being used. The ECB will make monetary conditions as easy or tight as it thinks is required to achieve its targets, and thankfully I agree with its targets and I have a reasonable amount of confidence that they will achieve them, there or thereabouts. They have the tools to withdraw that so called "printed" money if they need to. As I say, this is not Zimbabwe. By contrast, Mugabe having literally printed zillions of Z$ could not withdraw them from circulation. You are trying to simplify beyond the bounds of simplification. Satoshi might have thought 21m was a nice round number to hard code for all time. The real world is not like that, and so you are destined to be frustrated in the search for the answer you are looking for.

I don't think its that straight forward, Duke. Monetary expansion was just icing on the cake as regards the utility of bitcoin. It has other facets to it.

I just checked. Bitcoin has increased in price 10 fold over the last 12 months. Gold is exactly at the same price as it was a year ago. So you are right. The fear of hyperinflation cannot be a factor at all. Muskie is good for some of the increase but please enlighten me as to the "other facets".

there may well be considerable asset price inflation.

Yes indeed, a very controversial area. By definition assets are not consumables so they do not enter the CPI. CPI is used for such things as pension planning and adjusting social welfare payments and informing collective wage bargaining. Arguably it is the cost of living that is relevant here and not the cost of assets. But there is no doubt that QE has led to inflation in asset prices and a consequent increase in wealth inequality. Is this deliberate CB policy or an unfortunate by product of the monetary easing? I do not accept Big Short theory that it is a deliberate ruse to line the pockets of the elites. But the increased wealth effect may be a not unwanted side effect. I think in March last year the Fed were as concerned with the stock market crash as they were with the loss in employment induced by the pandemic.