Recently, Rick Rieder, Chief Investment Officer of Global Fixed Income for BlackRock published an article on the BlockRock blog highlighting the economic policy state-of-play today, and where it may lead to should economic growth falter, productivity not materialize, and populism continue to thrive.
While the Avengers: Endgame ended well for the world with Ironman being able to restore the world to the same state as it was before Thanos snapped his fingers, the same cannot be said for the implications of the current monetary policy being pursued by the Central Banks across the world.
The changes brought about by Quantitative Easing(QE) are irreversible and there is no infinity gauntlet, which can by snap of fingers, restore the world back to the state it was before Central Banks resorted to QE . It means that we have to accept the reality and brace ourselves for impact as the endgame plays out.So how is the endgame is likely to play out?
According to Rick major central banks continue to draw bigger guns in their battle against deflation, yet in some places, it appears to be of no avail. There are two ways inflation is created: one is to actually raise the prices of goods and services organically, but the other is to debase the currency in which those goods and services are sold.
Because the former method relies on traditional aggregate demand stimulus (lower interest rates), which has not been working, since the natural rate of aggregate demand growth is now so low (and in some places is contracting) and the supply curve is so flat; the endgame may well be monetary debasement.
Under the gold standard this would not have been possible, as every new dollar would have to be backed by physical gold mined from the earth, but today money is created by printing presses, or even a few computer keystrokes.
In order to debase a currency, money needs to be created at a faster pace than goods and services are (essentially, liquidity growth needs to exceed world GDP growth). Real rates will definitionally need to be negative — and in fact more negative than the real rates of competitors (think competitive devaluation).
Competitive devaluation will put countries in a prisoners dilemma like situation where the best response for any country to devaluation by other countries is devaluation of its own currency. This will almost certainly incite a response from countries who may not originally even have needed to resort to currency debasement in the first place, raising the potential for full blown currency war.
Implications of the Endgame
According to Rick, the clear implication of this outcome is that any nominal instrument will be devalued in real terms, so the solution is to hold an asset that maintains its real value — an asset that cannot be printed. By definition, the worst asset to hold would be a sovereign bond with a negative yield, closely followed by paper money at zero yield, both with a theoretically infinite supply.
What this means for Bitcoin?
The implications of the Endgame make an compelling investment case for Bitcoin, a limited supply, censorship resistant, self sovereign peer to peer asset. Unlike fiat currencies no one can print/create more bitcoins. The supply of Bitcoin is fixed at 21Mn with the current circulating supply reaching close to 18Mn. This means that there are only 3Mn more Bitcoins to be mined and the upcoming Bitcoin halving in 2020 will further reduce the supply.
Currently less than 1% of the world’s population owns Bitcoin, making it highly underrepresented in an average person’s investment portfolio. As more people discover the compelling investment case for Bitcoin its price will be hundreds of order of magnitude higher that it is today.
In conclusion, Rick is not the first big asset manager to point how the Endgame is likely to play. A few months ago Ray Dalio, CIO of Bridgewater Associates also predicated a similar Endgame in his article Paradigm Shifts.
If the Endgame plays out as predicted then Fiat currencies will have become the biggest scheme in the history of human kind where nation states would have using state sponsored apparatus of central banking systematically stolen wealth from their own citizens, the very citizens who have elected them and whose interest the nation states are supposed to protect.
So friends, take time to understand the implications of the Endgame and take the necessary action to protect yourselves. Don’t expect the governments to protect your interest because they will always try to protect themselves even at your expense.
Do let me know what you think about this article and what would you do to protect yourself if the Endgame plays out as predicted.
Disclaimer: This is my personal opinion and not an investment advice. Please do your own research or consult an financial advisory before making an investment decision. And yes, I do hold positions in Bitcoin and several other crypto currencies because I like to put my money where my mouth is.
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