What does Stagflation do to Bitcoin?
With growth slowing, inflation jumping, and empty shelves hogging the headlines, the hills are alive with fears of stagflation. What does stagflation mean for Bitcoin? What does it do to Bitcoin’s price, and what does it do to Bitcoin’s odds of replacing fiat.
Where does Stagflation come from?
First, what is stagflation? It’s a combination of inflation and economic stagnation, and what’s interesting about it is that mainstream economists thought it was impossible until it actually happened in the 1970’s.
That might strike you as odd – how could humanity have not known that printing, or counterfeiting, money is bad for the economy. Alas, it was well known for many centuries – see Diocletian Rome or late Song Dynasty China. But the fact that inflation ruins countries was forgotten (or suppressed) as governments took over money in the early 20th century. Instead, those governments claimed, without evidence, that money printing is actually good for the economy.
How did they get away with it? They used the quirk that new money creates a short-term “tissue fire” of economic activity before crashing – what Austrians call the “boom-bust cycle.” Keynesians explain this cycle by blaming the crash on greed, or OPEC, or “animal spirits,” while claiming the only thing money printing caused was the boom itself. It’s fun to ask them if inflation’s so good why isn’t hyperinflation hypergood, but we’ll save that for another time.
1970’s Broke the Cycle
Now, usually, the boom-bust cycle does not lead to stagflation. In fact, outside the 1970’s, the fiat boom-bust hasn’t led to proper stagflation for 100 years.
What usually happens instead is that “tissue fire” burns out as easy-money projects are wound down or liquidated. This leads to unemployment and stagnation, so central banks ignite a new “tissue fire” with easy money again. Hence the cycle.
Instead, what happened in the 1970’s is that governments saddled so much tax and regulation on the economy that stagnation persisted despite the Fed’s easy money. So the Fed was pouring gasoline and throwing sparks like it always does, but the government was pissing on the kindling. It couldn’t ignite.
The result on the ground was stagnation continued, but with the additional misery of a crashing dollar and soaring prices. The “misery index” – the sum of joblessness and inflation – hit the highest levels since the Great Depression.
Where are we in 2021?
Unfortunately, governments around the world are now following the 1970’s playbook: new taxes and regulations on top of absurd amounts of easy money. The number of dollars in existence is up nearly 40% in the past 2 years, and trillion- dollar regulation and tax hikes are now commonplace. The world seems hell-bent on repeating the 1970’s.
Now, does this mean we get stagnation for sure? No, because the economy by nature “wants” to grow, therefore it “wants” to be deflationary (growth makes stuff cheaper). This is because the “economy” is made of people, and those people try to improve their business, or learn new skills, or build new capital. The economy is trying by nature to grow without inflation, for its own thoroughly greedy reasons. While governments, also by nature, try to get in the way.
This means that if governments simply pause their destruction for long enough, the economy will bounce back. No magic required — the glorious laissez faire in action. Of course, doing nothing is easier said than done for a government on the march. And, indeed, the strong trend today is for governments to cause more, not less, destruction.
So, yes, there is a very real possibility of replaying the 1970’s, but it could still go either way.
Stagflation and Bitcoin’s Price
So what does stagflation mean for Bitcoin?
I wrote recently about gold’s excellent adventure in the 1970’s, during which it jumped 20-fold after having been stable for roughly 2500 years. Gold did this because it was the best inflation hedge in those stagflationary 1970’s. And Bitcoin is now a much better hedge than gold, since it’s decentralized and cannot be controlled by governments, suggesting it will probably go up a lot instead of gold.
Of course, there’s always the risk of fighting the last war — the 2020’s are not exactly the same as the 1970’s. So we can also analyze it economically: inflation itself mechanically makes anything priced in dollars go up, while stagflation leads central banks to print money to counter slow growth — the banks are very open about doing this. That combination can cancel on stocks — slow growth hits their profits. But it reinforces on hedges like Bitcoin, which get both the mechanical and that game-theoretic central bank sequence where inflation leads to stagnation leads to more inflation.
Indeed, so far in this crisis Bitcoin is knocking the socks off gold, with Bitcoin up 32% annualized vs gold at 6.7% annualized. Gold even failed to even keep up with stocks — what it’s supposed to hedge — which were up 19% annualized. Note stocks were savaged in the 1970’s, down as much as 70% and staying down for decades.
So gold is definitely not what it used to be.
Stagflation and Hyperbitcoinization
Now, the other question is how stagflation impacts Bitcoin’s odds of replacing fiat — hyperbitcoinization.
You might root for this because fiat destroys humanity, or you might want it simply because replacing fiat makes bitcoin’s price soar into millions.
Either way, just as the 1970’s stagflation single-handedly birthed the millions-strong “goldbug” community, a serious stagflation is likely to massively increase the number of Bitcoiners in the world. Some will come as shelter from the fiat storm, others will simply be drawn in as Bitcoin reaches $100,000 or beyond. Others may come because their governments have turned rabid.
However they come, these millions of bitcoiners act as regulatory “plot armor” against pestilential bureaucrats, while those same millions draw ever more institutions and billionaires into Bitcoin, both of whom know how to call Senators.
Bottom line, it’s a positive feedback loop for Bitcoin: stagflation drives people into Bitcoin, politicians and institutions follow and make good things happen to regulation and ease-of-use, and those good things bring yet more people into Bitcoin.
Conclusion
Stagflation is certainly not guaranteed, both because economies naturally counter it and because central banks still have a healthy fear of inflation. But both trends are getting worse fast: governments are causing more, not less, trouble in the wake of Covid, and central banks appear to be egging each another on to fresh monetary depravities.
Meanwhile, if stagflation does come we really don’t know how long it will last – that’s a political dynamic above all. In the 70’s it lasted about a decade. But it’s also accepted wisdom that it took an election-losing recession to end it for poor Carter.
And, so, today’s greedy, self-interested politicians fortified with a pet media could well feel they should let stagflation rip and just blame capitalism, or rich blondes, or Bitcoiners. It’s true that Bitcoin does reduce the odds of catastrophe by pulling some power away from governments, but given our numbers that’s still not very much.
And so, as so often in Bitcoin, it’s a life-boat for stagflation, a silver lining if the world goes to smoke, along with a comeuppance for the elites if they do drive us off that cliff. I’m certainly not rooting for stagflation, but if governments insist then Bitcoin is ready.
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