A longstanding belief that sovereign debt won’t bother the dollar is floating Bitcoin’s price, and this time may really be different.
For Maggie Stephenson, the signs were everywhere and nowhere. The late nights at work, the irritability at home and the general distance she sensed in her husband of ten years could have meant nothing or everything.
After all, which couple hadn’t had their ups and downs after a decade of marriage and two children?
And wasn’t Maggie nominated “most likely to succeed in life” in her high school yearbook? Hadn’t she been the Captain of the cheerleading squad, while her husband Chad their high school star quarterback?
Wasn’t their marriage supposed to be a fairy tale of endless bliss?
Yet she noticed that Chad had been coming home late from his job as a sales manager at a local auto dealer, more nights than was usual.
Entertaining clients he would say, yet she couldn’t think of any clients Chad would have had to entertain in their small town of Lansing, North Carolina, especially after hours.
At first she thought her mind was playing tricks on her, the lipstick stain on Chad’s shirt collar that she had dismissed as hers (though the shade was nothing she owned) and the bill for two at a restaurant that she and Chad had never eaten at before — maybe he took a client?
So imagine Maggie’s surprise when she came home one sunny Saturday afternoon — she was supposed to be gone with the kids for the weekend at her Mom’s house in Charlotte, but decided to come home early to surprise Chad — when she saw a car she didn’t recognize in her driveway.
A small Japanese convertible, in candy pink, the sort of car a high school girl might have favored.
Leaving the kids to play outside, Maggie stepped into her home and heard the sounds that no wife should ever have to hear.
From the living room, Maggie heard the loud moans of her husband, and a young-sounding girl screaming in the throes of ecstasy, creaking what were the unmistakable springs of her matrimonial bed.
Calmly, and with what seemed like premeditation, Maggie walked into the den and opened the locked drawer where Chad kept his .50 caliber Desert Eagle.
Like a trained professional, Maggie loaded the clip and cocked the high caliber pistol, walking calmly, but surely, towards her bedroom almost as if she had rehearsed the scene in her head a thousand times.
Before anyone noticed Maggie standing at the doorway, a thunderclap of .50 caliber rounds rained down on the occupants of the bed she had shared with Chad for the better part of a decade.
The first round Maggie got off was slightly off target, hitting the right cheek of Stacey Kiebler, a college freshman who was riding her husband Chad like a bronco, but was enough to send the twenty-two year old crumpling like a rag doll atop the panic stricken Chad.
Maggie, who had spent hours at the gun range without Chad’s knowledge, made sure her subsequent shots landed home.
The next shot hit Stacey squarely in the back of the head, with her forehead bursting open like a smashed watermelon, hair, skull and blood flying across the headboard, with bits of Stacey’s brain splattering onto Maggie and Chad’s wedding photo, which sat on the bedside table.
Before Chad could react, the next round hit him squarely in the face, tearing it open from the front like a sun-ripened cantaloupe bursting in the midday sun.
The second and third shots to Chad’s head were superfluous and by the time that Maggie had unloaded the entire clip from the .50 caliber pistol into both Stacey and Chad’s heads, they were nothing more than bloody stumps and completely unrecognizable.
But the signs were everywhere and nowhere — just like they have been for the dollar.
After the 2008 financial crisis, it had been assumed by many observers that the extraordinary federal government response, including the biggest bailout in American history, would gradually be unwound and that the financial system would eventually return to some semblance of normalcy.
But that never happened.
Successive American governments, hooked on the availability of cheap credit to pander to their electoral bases, (Obama is no saint in this department either), had crossed the Rubicon when it came to the federal deficit and American debt.
In the decade following the 2008 financial crisis, U.S. economic growth was one of the strongest in the rich world and that led Washington to borrow cheaply and heavily.
And positive interest rates in the U.S., versus negative rates in Japan and Germany, underpinned the strength of the dollar, supporting its broad uptrend, at a time when most analysts had expected that the Fed’s money printing would have seen the dollar decline and inflation rise.
Yet instead of using the decade after the 2008 financial crisis to get its house in order, and well before the coronavirus pandemic landed on American shores, the U.S. Federal Reserve was using low interest rates and monetary policy to boost markets instead of build infrastructure.
Instead of unwinding the era of cheap money, the Fed did what it could to encourage it.
And so when the coronavirus hit America, there was little hesitation on the part of Washington to create more debt, and the U.S. Federal Reserve, to fire up the printing presses to purchase that debt.
Suddenly figures in the trillions were deemed insufficient to backstop the worst economic crisis in American history since the Great Depression and politicians engaged in fierce debates in a race to see who could spend more on behalf of the American people.
And that’s why this time may really be different.
Growing signs that the U.S. economy is not on the mend, and surging coronavirus infections across the country are leading many to bet on more fiscal spending and a rising deficit.
These expectations have been bolstered by a pliant Federal Reserve that has put forward extremely dovish comments with regards to interest rates and monetary policy.
And that has exerted downward pressure on the dollar, which has benefited a string of dollar-denominated assets, from stocks to gold, commodities to cryptocurrencies.
Despite data from FactSet revealing that earnings of American companies on the S&P 500 are expected to fall by some 44.1%, stocks have already recovered all of their losses for 2020 an the Nasdaq Composite, a measure of America’s tech companies, hit a new record.
Gold has hit all-time records and industrial materials from copper to lumber have soared as well.
Thus far, the Fed has signaled that near-zero interest rates may persist for many years to come, at a time when the central bank is thinking of abandoning a long-held policy of preemptively raising rates to stave off any signs of inflation.
Because record low levels of unemployment in the U.S. before the coronavirus pandemic hadn’t triggered inflation, despite economist expectations to the contrary, the Fed seems ready to tolerate inflation exceeding its self-set 2% target for a period of time (not specific), given the persistently tepid inflationary pressure of the last decade.
Yet judging by the price of gold, more than a few investors are betting that inflation will matter — and in a big way.
Gold recently set a new record in terms of price and soared through US$2,000 for the first time ever.
Worries over faltering economic recoveries, geopolitical uncertainty and fears that the massive wave of liquidity being created will eventually result in runaway inflation, have seen a flight to gold and a spillover into gold’s digital equivalent — Bitcoin.
With near zero interest rates, the holding cost of gold, a non-yielding asset has become negligible and that applies for Bitcoin as well.
Long derided as an asset class that does “nothing,” gold and Bitcoin may be doing, “nothing,” but the bigger fear is that eventually fiat currencies will be worth “nothing.”
Gold and Bitcoin’s lack of yield is in fact more attractive than negative yielding bonds as a means of preserving capital, which helps in part to explain why both have soared to new highs this year.
Empirical evidence also suggests that gold is positively correlated to the amount of negative-yielding debt, which has been soaring.
And what’s good for bullion appears to be good for Bitcoin as well, with a weakening dollar fueling a rally in the world’s first cryptocurrency, that has seen Bitcoin emerge as one of 2020’s best-performing assets.
Relentless money-printing and a lack of yield has floated all asset boats, with even some investors comparing U.S. sovereign debt as being equivalent to highly-rated U.S. corporate debt, because such debt now comes with an implied Fed backstop.
If the United States had an opportunity to roll back an addiction to cheap money in the last decade, that addiction has since degenerated into gorging on free money.
With the Fed essentially promising to buy any new bonds issued by the federal government, the implied monetization of debt will have a profound effect on foreign perception of the dollar and will keep demand for even non-yielding assets such as Bitcoin and gold robust for some time to come.
The signs are everywhere and nowhere.
Patrick is an innovative entrepreneur and a lawyer passionate about cryptocurrencies and the business world. He is the CEO of Novum Global Technologies, a cryptocurrency quantitative trading firm. He understands the business concerns of founders and business people helping them to utilise the legal framework to structure their companies to take advantage of emerging technologies such as the blockchain in order to reach greater heights. His passion for travel, marketing and brand building has led him across careers and continents. He read law at the National University of Singapore and graduated with Honors in the Upper Division and joined one of Singapore’s top law firms, Allen & Gledhill where he was called to the Singapore Bar as an Advocate & Solicitor in 2005. He created Purer Skin, a skincare and inner beauty company which melds the traditional wisdom of ancient Asian ingredients such as Bird's Nest with modern technology. In 2010, his partner and himself successfully raised $589,000 from the National Research Foundation of Singapore under the Prime Minister’s Office. He has played a key role in the growth of Purer Skin from 11 retail points in Singapore to over 755 retail points in Singapore and 2 overseas in less than a year. He taught himself graphic design, coding, website design and video editing to create the Purer Skin brand and finished his training at a leading Digital Media Company.