Think Bitcoin™ Issue #27
Recession risks, global events, and what it all means for Bitcoin
Hey friends, welcome back to Think Bitcoin™ for issue #27. Special welcome to all the new subscribers. Glad to have you on board! As always, if you have any questions or comments, feel free to reach out. You can also find me on Twitter (@TheWhyOfFI).
In this issue:
Headlines/Insights: Making sense of global events and what it all means for Bitcoin
Content Round-Up: 1 video, 1 article
As always, if you find this newsletter interesting or useful, please share it with others who might find it interesting or useful, too!
Headlines and Insights
“Things Fall Apart, the Centre Cannot Hold:” Making Sense of Global Events and What It All Means for Bitcoin
A part of me wanted to use this issue as an excuse to attempt a contemporary, macro-focused rewrite of Barry McGuire’s “Eve of Destruction” as “Eve of Destruction (For the Post-71 Dollar System)” or maybe revive Bob Dylan’s zeitgeist-defining “It’s Alright Ma (I’m Only Bleeding)” as “It’s Alright Ma (I’ll Keep On Stacking).” The mood expressed by both songs is certainly resonant. But since I want to retain readers and not repel them, you’ll have to forgive me for abandoning the attempt and opting instead to make sense of things a little less poetically.
“Darkness at the break of noon…”
Are we in for a recession later in the year? Can the Fed still hike rates? What’s the effect of cutting Russia off from the global economy? In light of the increasingly precarious, increasingly volatile macroeconomic situation, I think it’s worth taking some time to think through some of these questions and consider the implications for Bitcoin, both short-term and long-term.
Let’s begin with the situation in Russia and Ukraine. The U.S. and the EU have essentially decided to kick Russia out of the global economy. The act itself, and the methods through which it’s being effectuated, have and will continue to have cascading and widespread effects on not just the global economy, but also the exceedingly tenuous post-1971 dollar system that underpins it.
First, let’s talk about food. Russia is the world’s largest exporter of wheat. Ukraine is also a significant exporter of wheat. Cutting Russia off from the world economy is going to harm those countries who import their wheat from Russia.
Moreover, Ukraine plants winter wheat in the fall and harvests in May/June. It also plants wheat in March. Obviously being at war grievously complicates these processes. Both the near-term harvest and the eventual harvest of wheat normally planted in March is going to be affected. The effects of this will ripple through everything.
Then there’s fertilizer. Russia is an enormous exporter of fertilizer, which is integrally important to agriculture.
Moving on to energy. Anyone who drives a non-electric car is acutely aware of the issue here. Russia is one of the world’s biggest exporters of oil and natural gas. Keep in mind also that energy is an input for pretty much every industrial process, so anything made in a plant, a factory, a facility of some kind that requires machinery, etc. is affected by rising energy prices because rising energy prices mean inputs are more expensive.
Putin also signed a decree last week banning the export of certain as-yet-unnamed products and raw materials, a move obviously designed to inflict pain on the West.
So the downstream effects of all this are continued disruptions, bifurcations, and reconfigurations of supply chains, coupled with shortages and price spikes of key commodities and materials. Many countries are painfully realizing how dependent they are on Russia for various resources and materials, which is galvanizing an urgent and concerted effort to work toward diminishing that dependency in the future. This effort will result in some reconfiguring of trade relations, but it will also lead to de-globalization and protectionism, a trend we’re already beginning to see, with more countries opting to restrict various exports.
A common refrain relating to the energy situation is the call for more electric vehicles. I think we can all agree that this is the goal to which we want to aim, but traversing the space between our current reality and our desired reality is far more complex and far more fraught than merely buying an electric vehicle. Electric vehicles require lots of metals to make, among them nickel. Guess who’s one of the world’s biggest exporters of nickel?
Electric vehicles also require a variety of other metals in great quantities, which need to be mined. Mining, lest we forget, is a hugely energy-intensive process that (currently, at least) requires fossil fuels to engage in.
All of this disruption with respect to materials and resources is going to be massively inflationary. Prior to the breakout of war in Ukraine, I was of the camp that inflation would moderate, though not return to any kind of “normal,” as the year progressed. The war changes everything. Inflation will remain high and likely get worse in the near- to mid-term. And this is a huge problem for a plethora of reasons.
First, it means the odds of a recession are rising. Commodity spikes generally precede recessions.
Second, it means the Fed’s hand is likely forced. They have to raise rates to try to get this under control. But doing so, with our current level of sovereign debt, presents its own unique problems, which we’ll touch on below.
Third, it crushes a huge percentage of the population who cannot afford to have things like food and gas double or triple in price. The risk of widespread social unrest thus rises, as well. This year is an election year, remember. So, despite the risks to our solvency as a country, the incumbent powers cannot afford spiraling inflation and attendant unrest in the months leading up to elections.
Now, in light of this intensely inflationary environment, let’s think about how the Fed can respond. Normally, the fight-inflation playbook is to raise rates and do so aggressively, a la Paul Volcker. But the problem now is that, unlike in Volcker’s day, our debt to GDP is currently sitting at 125%. In 1980 it was 35%. This means every rate hike is going to significantly increase the cost to service our debt.
As Luke Gromen has been pointing out for some time, Treasury spending plus entitlement obligations is already greater than 100% of tax receipts and tax receipts are at an all-time high. Add defense spending in there and we’re over 120% of tax receipts. If we start paying more to service the debt (because of rate hikes), that 120% of tax receipts starts to rise dramatically. We then have the choice either to cut something (like entitlement spending or defense) or print the money we need to cover the shortfall. Per Gromen, it seems obvious that we’re not going to cut entitlements. That’s not politically feasible. And we’re probably not going to cut defense spending with Russia out here invading Ukraine. So the Fed will almost certainly print.
It’s a similar decision tree for handling a recession. A recession means a drop in tax receipts. A drop in tax receipts means that 120% number above rises. We’re then presented with the same dilemma: cut something or print what we need. Also worth noting that a recession will likely require stimulus and QE, as well.
In other words, it’s really difficult to envision an outcome in which the Fed does not have to keep expanding the money supply at an accelerating pace. This, as you undoubtedly know by now, debases the dollar and will continue to encourage foreign nations to look more skeptically at U.S. Treasurys as an attractive reserve asset.
Keep in mind, also, that when the West opted to freeze Russia’s offshore central bank reserves it effectively telegraphed to the rest of the world that reserves (like U.S. Treasurys) can be rendered value-less by decree. U.S. debt is the reserve asset of the global economic system. The idea that U.S. Treasurys can be rendered value-less means the asset that underpins the entire system is not as secure or as reliable as heretofore thought. This has potentially transformative implications.
It essentially incentivizes countries to diversify and on-shore their reserves. This means central banks will likely accelerate their purchases of gold. I also think the possibility of a central bank buying bitcoin has dramatically increased.
The Fed’s impossible situation, which likely ends in an ever-expanding money supply, coupled with the discrediting of U.S. Treasurys as reserve assets, will likely be destructive to the post-1971 dollar system.
So what is Bitcoin’s place in all this? A disintegration of or an evolution from the current post-1971 system of the dollar as the reserve currency and U.S. Treasurys as the reserve asset is, in my opinion, bullish for Bitcoin in the long-term. A multi-polar, multi-currency world means hard neutral assets like gold and Bitcoin will benefit. A world that opts for the adoption of a singular neutral reserve asset is similarly bullish for gold and Bitcoin.
What will be interesting to observe is whether the U.S. sees the proverbial writing on the wall and makes a bold, preemptive move to front-run this imminent and seemingly unavoidable paradigm shift. One way to do this would be to bet on Bitcoin. There will only ever be 21 million bitcoin. And, as of now, only small countries are holding it or making moves toward holding it. By moving first on Bitcoin, the U.S. could gain an advantage in an emergent monetary system because later purchasers would face higher prices, and the ultimate supply is finite.
In the meantime, though, we are certainly looking at an acutely inflationary environment. It would appear that the Fed is going to have to slam on the breaks via rate hikes. Various shortages, supply chain disruptions, and consequent de-globalizing measures will ripple through the economy and cause pain. It’s shaping up to be an incredibly volatile ride.
I think we’re certainly going to see many countries strive vigorously to achieve energy independence, which will include a heightened focus on renewable energy. I expect Bitcoin will catch some predictable and, if past experience is any indication, uninformed flak since, as a proof-of-work chain, it uses real-world energy. I would not be surprised to see some politicians seize on this characteristic as a reason to take a harsh posture toward Bitcoin.
However, as I’ve written before, and as many others have more eloquently outlined, bitcoin mining can actually incentivize the transition to renewable energy by making renewables more profitable and providing flexible load to energy grids. Increasingly, I think serious conversations about achieving energy independence and transitioning to a more renewable energy mix will have to include Bitcoin.
We’re living in a world undergoing unsettlingly rapid change. But it’s hard to imagine a sustainable resolution or a restored state of relative equilibrium that does not eventually involve Bitcoin.
Content Round-Up
1. “Lamar Wilson On The Basics Of Bitcoin and Crypto’s Impact On The Black Community.” Lamar Wilson went on the Breakfast Club to talk about Bitcoin and answer lots of questions. I’m not sure I’ve ever heard anyone answer the basic, beginner questions about Bitcoin as clearly and effectively as Wilson. He has an incredible ability to frame a concept in a way that’s easy to understand and grasp almost immediately, which I think is the mark of a truly great teacher. If you’re someone who has questions about Bitcoin’s volatility, the difference between Bitcoin and other cryptocurrencies, etc., definitely check this out. You won’t find a more effective teacher. He’s a true OG, a legend, a leader, and an absolute gift to the space.
2. “The Questionable Ethics of Bitcoin ESG Junk Science,” an article by Level39. This piece addresses the many biases and flaws in some of the ESG-themed “science” purporting to show Bitcoin’s outsized environmental impact.
As always, thanks for reading! If you enjoyed it or found it useful, share this newsletter widely and freely!
“Civilization is in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.” -H.G. Wells
See you next week,
Logan
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DISCLAIMER: I am not investment advisor and this is not investment advice. This is not, nor is it intended to be, a recommendation to buy or sell any security or digital asset. Nothing in this newsletter should be interpreted as a solicitation, a recommendation, or advice to buy or sell any security or digital asset. Nothing in this newsletter should be considered legal advice of any kind. This newsletter exists for educational and informational purposes only. Do your own research before making any investment decisions.
© Copyright Logan Bolinger