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OK, let's start with a confession.
The title should be 'the death of disinflation' if we're going for accuracy.
Although... disinflation is a terrible word and once I'm Emperor it'll be banned from the English language.
So, what's this all about?
Two opposing views of the future.
In the bluuuuue corner!: The ever-optimistic Raoul Pal. He believes in the Exponential Age, and thinks we're in for continuous rapid change driven by a generation of YOLO Milennials with no fear and nothing to lose...
And in the RED corner!: Alex Good, who sees a new era of higher regulation, taxation and inflation with the wealthy using crypto as an off-ramp. 👇
Let's be really clear. These are two extremely thought-provoking twitter threads, and I'm not referencing them to pick a winner. It's really not a case of who's right or wrong. The idea is to think about (errrrm) ideas...
Raoul's is more a how we got here...
Alex focuses more on where we're going...
I'm a sucker for ideas about the future.
So I thought I'd be as open-minded as possible, remind myself that humans are terrible at predicting the future, then repost some of Alex's tweets and comment alongside them... 👇
I just read an interesting thread by @RaoulGMI talking about techno utopianism and how we are all going to make it.
We are in what I believe is the final stage of the Super Bubble.
The Super Bubble is the misconception that bailout capitalism is actually a free market.
100% agree that bailout capitalism is NOT a free market. To be perfectly honest, free markets only exist in theory. In reality, governments frequently intervene and distort market pricing.
The belief that markets are a machine is a beautiful lie, peddled very profitably by Ray Dalio. Funds invest hundreds of billions of dollars in his underperforming funds because it is so enticing to think of a system running on "levers". Capitalism - the vast Randian Railroad
Yep. Markets are not machines, and one cog in the global economy cannot be seamlessly replaced by another. Take a look at firms trying to move their manufacturing reliance away from China. It's a gradual and arduous process with limited success so far.
Dalio and others advised Central Bankers in 2008 that bailing out the financial system, and later "going big" or using "bazookas" or doing "whatever it takes" is a far better alternative to the austerity which caused the Great Depression and subsequently led to WW2
It's difficult to say if this is true or not. What is less difficult to say is that we are now witnessing moral hazard at full force in financial markets. Lunatics are fully in charge of the asylum and exorbitant excess is visible in nearly every asset class. Consider crypto.
Now we're talking. I would say that bailouts were better than the alternative. Unfortunately, the second-order effect is that we've evolved from banks being too big to fail in '08 to everything is too big to fail in 2020/1 which has led to these speculative excesses.
Bitcoin which started as a rejection of bailout capitalism has become part of it. Gensler referred to Satoshi affectionately as "Satoshisan". Bitcoin was randomly whitelisted in an infra bill. Larry Fink loves the environment but also for 'some reason' is fine with crypto.
Tether is running a $70+ billion offshore bank which is a huge player in the global commercial paper market with a whitepaper that warns that a risk is "they may abscond with the funds". Regulators are slow? Give me a fcking break. That was sane in 2018. Not anymore.
Finally something we can (kind of) disagree on!
Tether is entirely ridiculous. However, I don't believe them avoiding regulatory oversight is part of some nefarious plot, more that the regulators know that whatever they decide sets a precedent for stablecoin regulation, and they're far too scared to make a decision and fck it up.
(I have a very low opinion of our leaders and institutions. I think they're flailing badly in a rapidly-evolving world, and prefer to pass the bureacratic buck rather than make good policy)
Gensler was appointed in April this year, and I suspect his prior crypto knowledge is exactly why he was chosen.
Comments about stablecoins being regulated 'like banks' have become more frequent and internationally widespread. Sounds to me like a warning to the issuers: Get your houses in order, there'll be no pleading ignorance later.
Bitcoin & crypto more broadly is an officially sanctioned way for the ruling class to get their money out of the system before a barrage of financial repression comes into effect via CBDCs. The $ has to flow out before 2025 when all transactions are tracked, and fully taxed
CBDC's are definitely coming. I think it will be a lot longer before they dominate the global economy and all transactions are fully tracked and taxed though.
Also, what are we to believe about Bitcoin and crypto in this end-game? I don't buy the 'officially sanctioned' part, but there's no doubt crypto can serve as a parallel system.
Although, the same premise will still apply in the future as now. How do you connect the two systems while maintaining anonymity?
Put another way.. How will the ruling class maintain a crypto system AND jump in and out of the new repressive monetary system while still avoiding tax?
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To understand the inevitability of tax -- consider the premise underlying the last 12 years of bailout capitalism. The 3 deflationary drivers: cheap commodities, cheap Chinese labor, and 'structural technology deflation'.
I believe these drivers were transitory. Why?
I find all of the below compelling, but see no reason why this makes tax inevitable...
First - commodities. Low rates caused an over-investment cycle in fracking that subsequently crashed and had its legs kicked out during Covid. The energy industry has heavy supply discipline now. Climate change is further accelerating food scarcity and pushing electric grids
Especially true in energy markets right now. Our energy demand is pushing electric grids and will continue to do so.
There's a double disincentive for western firms to further invest in fossil fuel extraction (green politics & disgruntled shareholders demanding returns they've not received in previous years).
Second - Chinese Labor. Louis Vuitton bags are comping at 39% vs 2019 in China. Apple is selling 89% more iphones this year than last year in China. China was poor in 2009. Now China is rich. This is outright inflationary, and doubly so when you factor in geopolitical tension
China isn't as cheap as it was, but I find it hard to define the country as 'rich'.
Growth has been driven by huge misallocations of capital/debt into property speculation and non-profitable enterprise, creating an illusion of wealth.
Bottom line, there's huge inequality there too and the assets underpinning personal wealth are likely to fall in value due to the CCP's pursuit of 'common prosperity'.
Third - Technology. Companies like Uber and WeWork are great example of venture backed largesse that never really made money and still don't. They lowered the price of office space and taxis. But now they need to hike prices to make $. Same story with cloud compute.
Put another way, low rates forced institutions up the equity risk curve into venture and private equity. VCs funded money losing companies, lowering prices and PE firms (like our Fed Chair's old employer) fired people and outsourced jobs to China lowering employment/inflation
In other words, the "deflation" which enabled vast monetary easing was funded by the gutting of the middle class at the benefit of the ruling elite. But now that China isn't cheap, and tech has largely IPO-ed - this deflation is reversing, compounded by the commodity complex
These are all excellent points. Change is definitely afoot, and the inflation debate is more live than it has been for years.
I'm coming around to the idea that the inflation equation is changing.
I just don't think it has changed yet.
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So when we say "millennials were fucked", that is true. But crypto isn't the solution or some utopian dream. Crypto is the off-ramp for the people who did the fucking, before policy makers have to raise taxes aggressively to fund giant fiscal programs.
Now, this taxation is one premise that I fundamentally disagree with.
I don't know that policymakers have to raise taxes aggressively to fund giant fiscal programs.
We've already seen what's possible with MMT-style thinking throughout Covid.
Don't get me wrong... I'm not advocating for this as the right solution...
But if the lunatics are truly in charge of the asylum, then why not?
Democrats were a Manchin & Sinema away from a $3.5 trillion spending plan being passed without too much objection.
Debts must be paid. Everyone cannot print at the same time. globally a new tax regime will come into place within 3-5 yrs that will punish shareholders in a way which I think will resemble what is happening right now in China. Sure, the elites will get out first. I own BTC.
Why must debts be paid?
History suggests they don't need to be paid at all.
Check in with the national debt clock. It's essentially meaningless.
As long as debts can be serviced everything can continue just the way it was...
And if everyone is 'printing' at the same time, there's a weird status quo between nations that makes it more acceptable than if one individual nation were printing alone.
I didn't say it was right, I just call it how I see it!
The final breakdown of the Superbubble isn't so a crash in markets so much as the crash in the premise of the monetary fueled bailout capitalism that has been on fever pitch since 1987. The market isn't a machine. There will be inflation. Then unrest. Then control. Then tax.
Thus we are not in some techno-utopian dream world. Climate, web3, meme stocks, Bitcoin & the fusion of big tech with the government isn't some panacea for millennials. It's incredibly dark and will only get darker. It isn't time to rejoice. It is time to prepare for battle
I'll leave it on that cheery note! Let's hope he's wrong, eh?
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