‘I think if we get to a point, either through Bitcoin or just because you know it’s the long run, here we go. I think that you can reduce and eliminate the need for central banks. They no longer make sense in that type of environment.’
Inflation is running rampant and has been the story of 2022. With many people feeling the sting at the pp and in the supermarket, it seems a bit out of touch to suggest that deflation might be a bigger concern yet. This is what Cathie Wood has been suggesting for quite some time, with many pundits and analysts stating that she’s wrong about her prediction. Cathie’s ARC fund has taken a beating year to date, but she has been adamant about a long time horizon and setting herself up to be positioned to succeed during the deflation environment that is coming.
Not many analysts, investors, or thought leaders have shared this view with Cathie, but on the What Bitcoin did podcast, Lynne Alden suggests that Cathie might be correct. Lynn seconded Cathie’s deflationary comments, suggesting that the rest of this decade will be unpredictable, but all history and the data suggest that we are heading for deflation.
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‘So i think in the long ARC of time deflation is kind of the outcome, because so even in our current environment. Let’s say you have 3% inflation over a long period of time. If you look at the actual money supply, that might be 6% average money supply growth. The question is, “Where is that other 3%?” So, your 3% inflation and money creation is actually 6%. It’s really because there’s a lot of innovation going into making prices cheaper on a regular basis. We can think of it in terms of TVs, computers, and smartphones. So the underlying long-term ARC is towards technological deflation, and things get cheaper over time, most things, especially when compared to whatever the hardest money is. Things priced in gold tend to get cheaper over time because we find better and better ways to produce more of them, but they tend to go up in price in fiat currencies because we’re making fiat currencies at a faster rate than that technological disinflation, deflation.
And so if you had a hard currency environment, whether it’s gold, which has like a 2% inflation rate, or Bitcoin, which tends towards a 0% inflation rate, you would tend towards low negative inflation. I think that a couple of things converge. One is the long-term debt cycle. And I think that a lot of that is fuelled by central banking. A lot of that is fuelled by central banking. Then two, you just have cultural shifts. You build up institutions and, after a number of generations; the institutions simply don’t make sense anymore. It’s a new technology, a new culture, and you start to get less and less trust and more and more corruption in those institutions, both public and private, and then coinciding with that is the commodity cycle, which we talked about in our prior episode, where you know and also the globalization cycle, where we’ve kind of arbitraged geographic labour and energy and commodities.
And so I think what we’re seeing right now is this combination of the long-term debt cycle, where I think we’re kind of getting the payback period for multi-decade kind of price controls of money essentially, and then we’re also experiencing that specifically because we’re in the phase of the commodity cycle and the supply chain cycle where it’s hard not to have inflation and because central banks and other factors have led to so much debt accumulation in the economy. They can’t really raise rates and they can’t really kind of backstop and make sure that a currency kind of continues to be worth a certain amount of energy. So I think that’s where we’re in now where we have to go back to the 40s to find a similar type of extreme environment, at least in terms of fiscal and monetary policy, if you have peer-to-peer money that can be self-custody supported by encryption. It’s much harder to kind of overlay essentially controlled ideas on how that money’s going to move around, basically if you control the banking system. The way I would phrase it basically is that, you know, before Bitcoin, if I wanted to send money to a friend in Tokyo, we had to go through banks. Yep, we had to go through these large permissioned entities. So governments could control the gateways of where value is sent and they don’t have to impose on the people. They don’t have to impose price controls on the people. They don’t impose transfer controls on the people. They only have to target these well-known banks.
But as soon as we have the invention of peer-to-peer money, that kind of depowers, in some ways, that institution. But it only works if enough people understand how to use the technology and centralize around a handful or one of them rather than this kind of current hodgepodge of so many different things and a very small percentage of people actually using them. So I think, in the long run, yes. The idea is that a new type of money has been discovered. It’s unusually hard. So in terms of saying it’s stock to flow ratio and it’s decentralized and peer-to-peer and that in the long run, the question was why would you want to hold other types of money other than that money right now? You can make a case why you wouldn’t want to put all your money into something that you don’t know. It’s only 13 years old. If it’s volatile, maybe it’s small enough that governments could add a lot of friction to it. They can make it harder. They could, you know, try to hurt the value of it for a long period of time. But the more it grows, the more you think, “Why would I want to hold, you know, yen? Why would I want to hold euros? Why would I want to hold a second house as a kind of a monetary asset? Why would I want to hold a painting?” But I can just hold onto the best money. So I think if it continues to work as expected and if it gets past a number of challenges, I think it takes a pretty big chunk of the global monetary share, so I would say it’s a monetization process that clearly has a direction and the question is, do any of the tail risks make it deviate from that destiny?’
What do you think of Lynn’s comments here? Are we heading for a deflationary environment?
[This article is a transcription of a video made by Only The SAVVY]
Original video: https://youtu.be/qWjaO8aas_g
