If we had to identify a likely cause for the next global crisis, it would be food-price inflation — particularly in emerging markets and developing world countries.

The current situation looks dangerous and could easily become dire. When stock markets crash, people get upset. But when food prices become unsustainable, people starve — and then they riot, and even seek to overthrow governments.

 A global food crisis unfolded in 2007-2008, related to falling world-food stockpiles and sky-high oil prices (the crude oil price rose above $140 a barrel in 2008).

In the 2007-2008 global food crisis, oil prices played a factor, in part, because significant amounts of cropland and fertilizer were allocated to biofuel production. But it was really more a confluence of factors versus a single thing that went wrong.

In late 2006, agricultural prices had begun to spike in grain-producing nations due to droughts. At the same time, food transport costs were exceptionally high because of high oil prices, and institutional investors were inflating the price of commodities generally via the designation (later abandoned) of commodities as an investable asset class, like equities or real estate.

In extremely poor countries like Yemen, food riots broke out, with the riots leading to clashes on ethnic and tribal lines. During the 2006-2008 time window, average world prices for rice more than tripled, while prices for wheat, corn, and soybeans more than doubled. Fertilizer costs also doubled, with various component prices more than tripling due to scarcity.

The “Arab Spring” uprising of 2011 can also be traced to the global food crisis.

In countries like Egypt — the world’s largest wheat importer — bread prices rose 37%, and annual food inflation to nearly 19%, as a result of the global food crisis. This created intense pain for the populations of Egypt and Yemen, where 40% of citizens lived below the poverty line.

By 2011, food-related levels of civil unrest had become explosive, leading to the fall of Egyptian President Hosni Mubarak in Feb. 2011.

Two months earlier, in December 2010, a 26-year-old Tunisian food cart dealer named Mohamed Bouazizi had set himself on fire in protest, triggering the Arab Spring conditions that reverberated across the Middle East. Bouazizi had been frustrated in part by ill treatment at the hands of authorities, and in part by how hard it had become to feed his eight-member extended family, for whom he was the sole breadwinner. 

The conditions that led to the 2007-2008 global food crisis, and the Arab Spring that followed, are not hard to identify: Sky-high oil prices; sky-high transport costs and fertilizer prices; crop failures due to bad weather conditions and global drought.

Not only are such conditions still present, we could be witnessing another global food crisis in the making here and now, in 2021.

The Food and Agriculture Organization (FAO), an international agency run by the United Nations, tracks world food prices via the FAO food price index. As of this writing, the FAO food price index has been rising for nine months straight, in a semi-parabolic manner reminiscent of the explosive run-up in food prices that took place in 2007-2008.

“Global food prices are going up, and the timing couldn’t be worse,” reported Bloomberg on Feb. 28. “In Indonesia, tofu is 30% more expensive than it was in December. In Brazil, the price of local mainstay turtle beans is up 54% compared to last January. In Russia, consumers are paying 61% more for sugar than a year ago.”

Food price inflation will be felt in the rich world, too. But for Americans, it will be more of an inconvenience than a crisis factor, given a flood of transfer payments (stimulus checks) aimed at the lower-income end of the spectrum and a personal saving rate (stimulus checks again) at multi-decade highs. 

In the developing world, however, the new trends of food-price inflation developing now could easily turn deadly. Oil prices have already risen to levels last seen before the pandemic. If we see a sustained burst of global demand, the oil price could rise further.

At the same time, transport capacity was reduced by the pandemic — with less capital available for expansion — and weather events are growing more extreme.

Then, too, China is stepping up efforts to ensure food security, which means heavy stockpiling and locking up global supply. “Food security is moving to the top of the government’s agenda,” Bloomberg reported on Mar. 4, “after the coronavirus pandemic and outbreaks of African swine fever raised concerns over whether China could guarantee food supplies for its 1.4 billion people.”

The United States is also making life hard on emerging-market countries — with food-price inflation aspects part of the problem — through the exporting of tight monetary policy at the long end of the curve.

Because the U.S. dollar is the world’s reserve currency, higher yields for the 10-year note and 30-year treasury bond result in tighter monetary conditions elsewhere.

Yields are rising at the long end of the curve because U.S. economic growth — purchased with a tsunami of stimulus — is expected to be red hot (see Goldman’s call for 8% U.S. GDP growth in 2021). But other countries, whose pockets are not as deep, have weaker economies and less ability to stimulate.

This means that, when these countries’ economies are hit by tighter monetary conditions via U.S. transmission effects, they have to expend currency reserves buying their own bonds to keep interest rates down (which weakens the currency) or else take steps to weaken the currency directly, the alternative being a new downturn or recession.

And if the dollar is getting stronger on its own, as the U.S. sucks in capital through its world-beating economic growth profile, the currencies of other countries (and emerging-market countries in particular) will also weaken on their own. This currency depreciation, born of various sources, then adds to the pain of rising food prices, with higher food costs hurting economic growth, thus requiring efforts to stimulate or weaken the currency further, in a vicious spiral.   

The food price issue is worth keeping an eye on, particularly for emerging-market investors. At some point in the coming years, we anticipate turning strongly bullish on emerging markets. But given the growing risks of food-price inflation, and the ease with which a new crisis could unfold — coupled with a near-term strong dollar outlook that makes those risks worse — that time has definitely not arrived yet.

Something momentous happened on Friday of last week. The greatest bull market in history likely came to its end. We are not talking about the U.S. stock market, but the U.S. treasury bond market.

Before discussing what happened, let’s quickly revisit why the bond market is so important, and the way that interest rates work.

Stock market valuations and price-to-earnings multiples are largely a function of interest rates. When interest rates are falling over time, multiples tend to expand as the price of money becomes cheap. The easier it is to borrow at low rates, the better it is for paper assets, in terms of cheap capital supporting high stock-market multiples. 

When interest rates are rising, on the other hand, multiples tend to contract (shrink) as the price of money becomes expensive. As yields go up, it gets harder for investors and businesses to borrow cheaply and to fund aggressive projects.

As a general rule, this means less capital available to support high price-to-earnings multiples. With less capital chasing asset returns, there are fewer bidders in the market, and so the multiples tend to shrink.

This is why, to a significant degree, we can say the bond market (which determines the level of long-term interest rates) drives the stock market.

Inflation expectations, or a lack thereof, determine the level of interest rates, which in turn determine whether the price of money (how much it costs to borrow) is cheap or expensive.

And the way that inflation expectations drive interest rates is by influencing the level of the bond market. When inflation expectations are low or falling, bond prices tend to rise as a general rule. When expectations are high or rising, bond prices tend to fall.

The yield on a bond is inverse to its price, which means that, as bond prices fall, yields go up. You can think of the price like a child sitting on one end of a see-saw, and the yield, or interest rate, as a child at the other end of the see-saw. As the bond price rises, the yield falls and vice versa. 

This is a mathematical relationship because the “coupon” of the bond — the amount it pays out each year — is fixed.

Say a bond is issued with a coupon yield of 8%. This means that, if you buy the bond at “par,” meaning exactly 100% of the issue price — you will get $8 per year for every $100 that you invest, which works out to 8% exactly.

But now let’s say you buy the bond at 130, or 130% of the issue price. Now you are paying $130 for the same $8 coupon, which means your yield is reduced to just over 6%, because an $8 coupon is about a 6% yield on a $130 investment.

It also works in reverse: Say you are able to buy the bond at 80, meaning 80% of the issue price. In this instance you would get $8 of yield on an $80 investment, for a yield of 10%.

This is why, for the past 40 years, more or less, U.S. treasury bond prices have been going up, and then up some more, in the greatest bull market of all time.

The rise of the 30-year bond market is the flipside of the fact that U.S. interest rates have more or less been falling for four decades — ever since they peaked in September 1981.

We say the bond bull market was the greatest of all time — bigger than the multi-decade run in stocks — because in terms of which influences the other, the bond market is really the more important of the two.

It was a long-tail, multi-generational trend of falling inflation, falling interest rates, and rising bond prices (the flipside of falling interest rates) that enabled the stock market to do what it did.

Turning to the topic of last week, here is the momentous event: In the same week the American Rescue Plan was introduced, U.S. treasury bonds officially entered a bear market.

The official definition of a bear market is a 20% or more decline from the prior peak. Once bear-market status is triggered, the asset in question has to reach new highs before clearing the bear-market condition.

The iShares 20+ Year Treasury Bond ETF (ticker symbol TLT) triggered official bear-market status with its sharp drop on Friday (March 12).

• The TLT closing value on Aug. 4, 2020, was 170.26.
• The TLT closing value for March 12, 2021, was 136.06.
• The result is a decline of 20% — bear-market status.

You can see the visual result in the chart of TLT below. The impression is that of a large-scale top that completely erased the gains of the pandemic, and went on to eat into 2019 gains.

If this is well and truly “the end” of the U.S. treasury bond bull market, it will cap off a 40-year run, spanning the four-decade period of 1981 to 2021. It was September 1981 when interest rates last peaked and treasury bonds bottomed, setting the stage for a multi-generational rise in bond prices (and fall in yields) that took equities along for the ride.

It is true that, over the past 40 years, the treasury bond market has entered bear-market periods before. The last official bear market for TLT — as marked by a 20% or greater decline — was triggered in late 2013, with the bear condition clearing in December 2014. 

This time, however, a new high (the mechanism for clearing bear-market status) may not be in store for a decade or two, if ever. It seems likely that the Aug. 4, 2020, high will go down as the all-time high of the cycle for U.S. Treasury bonds.

Why do we say this? In part because Goldman Sachs is now forecasting an 8% growth rate for the U.S. economy in 2021, with an unemployment rate below 4% by the end of the year.

Even if Goldman is off by a third, U.S. economic growth is likely to be incredible (as the preliminary numbers already show). And with that growth will come inflation pressures — of which there are already signs brewing — and there is a fair chance many of the “temporary” programs in the American Rescue Plan will prove wildly popular with the American public, and then be signed into law.

There are analysts who say any near-term burst of inflation will be “transitory” or “cyclical.” In our view they are misreading the political situation.

If the inflation level stays low, there will be no reason to stop or slow the successive waves of fiscal spending initiatives yet to come.

This means that, from here on out, a combination of political incentives and growth prospects will act like a one-way ratchet: An absence of inflation will, in and of itself, be a political justification for cranking the spending dial harder, until the point at which uncomfortable inflation, or even painful inflation, finally arrives.

Given this turn of events — born of the wild popularity of stimulus, and the likely “growth first, inflation later” mix now playing out before our eyes — we feel confident in saying that, with a very high likelihood, the greatest bull market in history is now over.

The U.S. treasury bond market had a fantastic run from 1981 to 2021, moving ever higher as interest rates fell toward the zero lower bound.

Then, too, interest rates worldwide, in falling toward zero, capped a trend of falling yields that has been in place for nearly 1,000 years, if not longer (dating back to the Middle Ages, or by some analyses even further).

But zero is the realistic floor (meaningful negative rates cannot be sustained), and governments are now stepping up with a fiscal spending zeal not seen since World War II — and on various measures exceeding World War II.

R.I.P. Bond bull market , 1981-2021. A new era, of rising yields and rising inflation pressures, is here.

The American Rescue Plan Act of 2021 — or American Rescue Plan for short — has been signed into law. You can read the text of the legislation here.

The American Rescue Plan (we’ll call it ARP) is far more than just a $1.9 trillion stimulus bill. It is a transitional moment, and quite possibly a paradigm shift — a structural change in the model — for Americans’ relationship with their government.

Thanks to ARP, President Joseph R. Biden could be as consequential a president as Lyndon B. Johnson, or even Franklin D. Roosevelt. The American Rescue Plan is, in multiple ways, a reversal of trends set in place 40 years ago, via transformational legislation enacted by President Ronald Reagan in 1981.

Some will see the sweeping scope and ambition of ARP, and the echoes of LBJ and FDR within it, as a very good thing. Others will see it as a very bad thing. We are not interested in the politics, but rather the market impacts.

It might sound extreme to call this the most consequential legislation in 40 years, with the possibility of making Biden a historical successor to Johnson or Roosevelt. It is not.

The magnitude of the American Rescue Plan has to be considered in three contexts: The money that has been spent in the past year; the new programs that were just signed into law; and the way those programs were strategically introduced.

In terms of money spent, it is estimated that, on an inflation-adjusted basis, America spent the modern-day equivalent of $4.8 trillion fighting World War II. To battle the pandemic and rescue the economy, America will have spent $5.5 trillion with the ARP tally included.

Both the current and former presidents referred to a “war footing” in fighting the virus. They weren’t kidding. Uncle Sam has already reached further into his pockets than he did for World War II.

And the extent of pandemic-related relief spending remains unknown because the final bill for fighting the pandemic depends on multiple unknown factors. There is the matter of how long we spend fighting the pandemic (whether ARP is the last word or not); whether the temporary programs in ARP are extended; and how the cost of the extended programs gets tallied.

Then, too, with respect to temporary programs versus permanent ones, the American Rescue Plan does something strategically brilliant. It presents a slate of radical new relief programs, many of them involving direct transfer payments — where the government pays cash, expecting no return — on a “temporary” basis, giving Americans the chance to get used to them.

These temporary programs have a “try before you buy” aspect, in the sense that Americans could easily grow attached to them for the 12 months or more that they run. Once a relief program is given to someone — especially if it involves cash — it is politically hard to take away, and sometimes impossible.

Trying to end a program that provides monthly cash benefits means, in a real sense, taking money from voters’ pockets after they had grown accustomed to receiving it. With many of the temporary programs in the American Rescue Plan, there is a deliberate calculus of building political popularity, and then using that political popularity to make things permanent later.

And the political popularity aspect of ARP is already sky-high; the bipartisan level of approval is remarkable. According to a Morning Consult poll taken in late February, 76% of voters backed the plan, including 60% of Republicans.

Then, too, various programs in the bill are designed for later expansion. Not only could these programs prove popular enough to warrant signing into law later on, but they could expand in size and scope.

But what kind of programs are we talking about exactly? What kind of legislation in ARP might count as radical, or even wild, from the perspective of a pre-pandemic point of view?

We can see at least three things worth highlighting to illustrate how LBJ-and-FDR-like this legislation is: Means-tested universal health care; full-scale pension bailouts; and means-tested universal basic income (UBI) for kids.

With respect to means-tested universal health care, the ARP legislation stipulates that anyone whose income level is 150% or less of the federal poverty level (FPL) will see their health care premiums drop to zero. Those premiums used to bottom out at $800 — now they will cost nothing.

For a family of four, for example, the FPL is $26,500. This means that, for a family of four with household income of $39,750 or less, health care premiums will be zero.

Health care subsidies will also be substantial for households earning more than 150% of FPL, with the benefits phasing out as income levels increase.

For example, the economics blogger and journalist Kevin Drum estimates that, for a family of four with $85,000 in household income and $25,000 in health insurance costs, their federal subsidy will go from zero to $18,000 per year, meaning their health care costs will fall from $25,000 out of pocket to $7,000.

It is hard to imagine that kind of health care relief being rolled back, once tens of millions of families experience the savings. You try giving a middle-class household the benefit of an $18,000 cost reduction for a full year, and then explaining later why you need it to take it away.

The full-scale pension bailouts embedded in ARP are also a thing to behold.

Near the end of 2019, we released an e-book titled The Deadly Decade Survival Guide, a sort of handbook on surviving and thriving in the wildness of the 2020s. In that e-book, we talked about the inevitable need for pension-fund bailouts, with both public and private pension systems heading in slow motion toward inevitable disaster.

Thanks to ARP, those inevitable pension fund bailouts are now underway. The American Rescue Plan allocates $86 billion specifically to fund failing or distressed pension plans, covering approximately 10 million workers in the United States.

“The provision applies to multi-employer pensions,” CNBC reports. “These plans pay benefits to union workers in industries such as construction, manufacturing, mining, retail transportation, and entertainment.”

For millions of workers in both the public and private sector, the $86 billion bailout will literally save their retirements, in the sense that, without those federal funds, they wouldn’t have received the future checks they were counting on.

But this strikes us as another example of the camel’s nose under the tent — eventually you get the whole camel — because it wouldn’t seem fair to dole out $86 billion of pension fund relief if, say, a few trillion worth will ultimately prove to be needed. Why should some pension funds be saved, but not the rest, now that a precedent has been set?

And now we come to one of the most transformational pieces of all: Universal Basic Income (UBI) for kids. That might sound over the top, but it is hard to classify the provision as anything else; some commentators, like MSNBC host Chris Hayes, have taken to calling it “social security for kids.”

Here is Hayes describing ARP-mandated changes to the Child Tax Credit (CTC):

“If you are watching this right now, and you have one or more children, and you make less than $150,000 a year in combined household income — which is, you know, the overwhelming majority of parents — you can get money from the government, on a monthly basis, to help with the expenses of having a child.

“You won’t have to wait for a tax refund at the end of the year, because the bill increases the tax credit to $3,000 per child ages 6 to 17, and $3,600 annually for children under 6 for the tax year 2021.

“But then importantly, parents of children under 6 will start receiving $300 monthly payments, via direct deposit or through the mail starting around July. Parents with kids age 7 to 17 will receive $250 a month, and then claim the rest of the year’s tax credit when they file 2021 taxes.

“Remember, this credit — which is actually a check in certain circumstances — it’s per child. So right now, if you have a 10-year-old, a 7-year-old, and a 4-year-old, the government is going to give you an extra $800 every month.

“The U.S. has not really had a program anything like this before. Some European countries and Canada have experimented with different versions of what’s called child allowances, and those experiments have been very, very popular. People really like them.

“This will essentially be the closest thing we have to a universal cash benefit…”

In the past few years, one recurring theme we have touched on is the manner in which the ideas behind modern monetary theory (MMT) look more and more inevitable as time passes.

This is not in respect to politicians or economists officially embracing MMT, but rather the government on the whole moving toward a de facto set of MMT-style policies, primarily because the American voting public, on a bipartisan basis, will be enthusiastic about seeing this happen.

The principal idea behind MMT-style thinking — the core of the theory as a system — is the notion that budget deficits and national debt levels are an “artificial constraint,” meaning they don’t actually matter to a nation with monetary sovereignty.

MMT thinkers do, in fact, believe the government operates with constraints — but they see the true constraint as inflation, meaning, if the country is not experiencing undesirable monetary inflation, then the level of spending is fine. MMT economists would prefer to ignore deficits and debts as a kind of bogus indicator, focusing instead on the level of inflation experienced by the economy. If inflation is low, let the dollars flow; if inflation gets too unwieldy, only then does the spending need to be reined in.

One of the ways the American Rescue Plan is transformational — and there are many things we left out in this brief sampling — is that MMT-style thinking has now been ratified into law with an overwhelming level of popular support.

This also helps explain why we see sustained inflation — real, meaningful inflation — as an inevitable aspect of America’s future, almost no matter what happens.

Those who assume inflation pressures will be “transient,” or otherwise temporary, do not realize how the game works: Under the MMT framework, if inflation is low — and especially if it is dangerously low — you crank up the spending until it comes back.

Our baseline expectation, more or less, is that many of the popular cash transfer programs in the American Rescue Plan will cease being “temporary” and will make their way into law down the road, by way of sheer bipartisan popularity with the American public.

It is hard to imagine taking these programs away in a year; indeed, the only political justification we can imagine for taking them away would be an inflationary backdrop so harrowing and nasty that politicians could point to roaring inflation as a warning against overspending.

In the absence of truly nasty inflation as described, we anticipate American voters who very much like the temporary programs saying, “what is the problem exactly? We still don’t have inflation, why can’t we keep these programs going? In fact, why can’t we expand them?”

And then, ultimately — this is our sense of how things will happen, based on a feel for how complex systems work — the structural and permanent inflation that most had written off as “unlikely” or “transient” will show up with a lag, not unlike the shower head that delivers hot water on a delay (except in this case a delay not of seconds or minutes, but of months or quarters or possibly even years).

Some observers think the American Rescue Plan is the best thing to come out of Washington in decades, with the potential to transform America for the better by lifting the labor sector and helping low-income Americans like no legislation has done within half a century. Others believe the American Rescue Plan is a turn toward disaster, and a road to fiscal ruin.

What both sides can agree on, or should, is that ARP is transformational. For good or ill, we will not be going back to the ways of the past 40 years. A new era of government expansion, and a deeply expanded relationship between American citizens and the state, has begun.

Whereas a cat has nine lives, Bitcoin appears to have 400-plus and counting.

99Bitcoins, a crypto site, has a “Bitcoin Obituaries” page that tracks media declarations of Bitcoin’s death. There have been 403 “Bitcoin is dead” instances as of this writing — 10 of them in 2021 alone — with the oldest dating to Dec. 15, 2010.

And yet, for the second time in less than a month, Bitcoin has surpassed $1 trillion in market cap.

To benchmark Bitcoin against gold, the total value of the above-ground gold supply is presently just under $11 trillion; at $1 trillion in comparison, Bitcoin has an 8%-plus market share in the “physical gold versus digital gold” face-off.

We anticipate Bitcoin’s “digital gold” appeal to take further market share from physical gold over time, rising into the 25 to 50% range. Were Bitcoin to achieve a 50% market share versus gold, the Bitcoin market cap and the total value of the above-ground gold supply, as measured in U.S. dollars, would be equal.

Thanks to fiat currency creation and debt monetization over time, this parity between digital gold and physical gold could happen at much higher price levels. It is possible, for example, that one day both Bitcoin and gold are worth $16 trillion, for a digital-and-physical combined value of $32 trillion.

But getting back to the “Bitcoin is dead” talking point, Bitcoin was supposed to have died hundreds of times by now; instead it is demonstrably stronger than ever before.

For instance, there is ample evidence that Bitcoin’s latest gains are being driven not by retail interest, but increasingly widespread institutional adoption. Insurance companies with century-old pedigrees — some of the most conservative financial institutions on earth — are adding BTC to their asset mix. Investment banks like Goldman Sachs are scrambling to open (or re-open) crypto-focused trading desks. And white-glove banking institutions around the world are adding Bitcoin-related services to their private client mix (because clients are demanding that they do so).

Bitcoin’s critics desperately wanted it to die — and many of them still do — but the more rational ones have recognized they won’t be getting their wish. So, many of them are switching arguments.

More specifically, in recent weeks the “Bitcoin is Bad for the Environment” argument has taken on new life. The argument has been around for a while, but it is getting more attention now that the “Bitcoin is dead” talking point is, well, dead.

The thrust of the “Bitcoin is bad for the environment” criticism revolves around the power usage required for Bitcoin mining. Bitcoin is supposedly bad for the global energy grid — and awful for the climate — because of the shocking amount of electricity it requires to mine a single coin.

Some Bitcoin critics have gone even further, arguing that Bitcoin’s outsized energy use amounts to not just a waste of power, but an outright climate catastrophe, further implying the adoption and promotion of Bitcoin is a crime against humanity and the planet.

In our view, the “Bitcoin is bad for the environment” argument, as commonly presented, is non-serious. It is less of a real argument and more of a rhetorical weapon, and a way to criticize Bitcoin without thinking.

In this sense it is a substitute for the old “Bitcoin is dead” declaration; now that it is plainly obvious Bitcoin is not dead, “Bitcoin is bad for the environment” is a lazy substitute.

A logical debate relating to Bitcoin and energy use is certainly possible. It just needs to consider the nuanced mix of factors involved, rather than sensationalizing a handful of cherry-picked bullet points deliberately presented with no context.

For example, consider the reason Bitcoin mining uses tremendous amounts of power in the first place.

The implied suggestion is that Bitcoin’s power usage is just a flat-out waste, and an utterly pointless use of finite electricity stores. But this overlooks the fact that high power usage is a feature of Bitcoin’s design, not a bug, with respect to maintaining the integrity and security of the Bitcoin blockchain and ledger.

It takes a lot of power to mine new Bitcoins, in other words, because the proof-of-work process has to be inherently hard, if not flat-out impossible, to hack or counterfeit or fake. There is a direct relationship between computational power, physical computing power, and the amount of energy used.

This sounds wasteful until one considers the end result that is achieved: A globally decentralized digital asset, that can serve as an immutable store of value, with no need for physical security or physical world protection other than the processes embedded within the Bitcoin code.

That global store of value result is very hard to achieve. That is why Bitcoin, as digital gold, is the first store of value asset to present a legitimate challenge to physical gold; and it is also arguably why Bitcoin has a trillion-plus market cap in early 2021, after being declared “dead” hundreds of times.

Then, too, it is crucial to remember that physical gold achieves its security and immutability through its properties as a scarce metal that is hard to store, hard to transport, and hard to extract from the ground.

All of those activities — from storing physical gold in vaults, to shipping gold bars on airplanes or in armored trucks, to the environmentally destructive process of gold mining — should count toward gold’s “energy footprint” in terms of how much it costs to maintain physical gold as a global store of value. 

So the first step in analyzing the Bitcoin energy footprint rationally is recognizing that Bitcoin’s power usage is a function of creating the decentralized security and scarcity Bitcoin has achieved; the second step is comparing that cost to the energy footprint (and environmental footprint) of gold.

For physical gold, the environmental footprint is separate from the energy footprint because there is a deeply destructive component of gold mining: You have to dig up gold where you can find it, which can often mean destroying a pristine bit of wilderness, introducing noxious chemicals into nearby groundwater, and using large amounts of local water — not to mention the shipping and refining processes. With Bitcoin there is no comparable footprint on the environmental side.

“Fine,” some environmentalists might say, “if physical gold is terrible for the environment, why not just use the monetary process enabled by central banks. The Federal Reserve and other central banks can create currency at the push of a button, without polluting anything or using huge stores of electricity.”

To that argument we would say: The fiat currency creation and protection process has a huge energy footprint, too — possibly the largest one of all.

To have a functional fiat currency system that operates on a global scale, you need a nation-state that issues the currency, which in turn requires a standing military equipped with missiles and warships and the like. Talk about an expensive footprint!

And then, to run a centralized fiat currency distribution system managed from the top down, connected to a network of banks, you need a huge investment in ongoing digital security measures, coupled with all manner of excursions into the physical world (think bank vaults, armored trucks filled with cash, servers to reconcile bank transactions, and so on).

The point here is not to say that the energy footprint of gold is bad or evil, or that the energy footprint of running and maintaining a large-scale fiat currency system is bad or evil.

Instead, the goal is to point out that criticizing Bitcoin’s energy footprint in a vacuum — without considering the benefit it offers in relation to alternatives like gold or fiat — is flat-out intellectually dishonest. To put Bitcoin’s power cost in perspective, one has to compare what Bitcoin offers to the pros and cons of alternative store-of-value systems, with the attendant costs factored in.

To stop considering Bitcoin’s energy footprint in a vacuum would be a big step in having an honest debate about Bitcoin’s value versus its environmental costs. But we can go much further.

For example, consider the fact that Bitcoin mining, as an economic activity, is geographically independent. From Canada to China to Siberia to South Africa, one can mine for Bitcoins anywhere.

This geographic variability is a hugely important feature, because it means Bitcoin miners — as free- market entities who pay for the electricity they use — will gravitate to areas where electricity costs are lowest. Nobody has to order the Bitcoin miners to do this, they have a rational free-market incentive to do it: If you are paying too much for electricity in your mining operation, you are hurting your profit margin.

That, in turn, makes Bitcoin mining a valuable means of absorbing surplus power creation in regions that have more electricity than the locals require for daily needs.

This is a common occurrence in areas where, say, hydropower accounts for a significant percentage of electricity generation, or where population density is low relative to large-scale power sources. If a region in, say, the Canadian wilderness has plenty of fast-moving water, but not a large population, it could make sense to mine Bitcoin there, because the surplus hydropower is available at a lower cost.

And this exposes another deception in the “Bitcoin is bad for the environment” argument: Looking at power usage as if all electricity is the same makes no sense. To the degree Bitcoin miners gravitate to regions with excess power generation, they are using power that otherwise may not have been used; that is very different than, say, competing for scarce electricity in high-demand, population-dense areas.

We can keep going: Think about a country that wants to lift itself out of poverty, but has no significant advantages other than a surplus of natural resources.

If this country chose to set up renewable energy facilities, it might be able to sell the electricity generated by those facilities to some free-market entity, creating jobs and local economic activity in doing so.

Ah, but electricity is nearly impossible to store and transport efficiently, so what type of free-market entity would have the ability to parachute into a geographically remote area and make immediate use of its low-cost, renewable-electricity-powered creation?

Enter crypto mining: An industry that, as we already noted, is 100% geographically independent.

To the extent that Bitcoin miners can gravitate to regions where renewable-energy electricity sources are created from scratch, crypto mining can add additional power to the global energy grid, while powering beneficial economic development in lower-income countries besides.

Then, too, the sufficiently motivated lower-income country we just described doesn’t necessarily have to  mount a marketing campaign to attract Bitcoin miners, per se: It could simply recognize its undeveloped renewable energy capacity as a resource, and then start mining for Bitcoins itself.

And this segues to the last key point why the “Bitcoin is bad for the environment” argument is, quite frankly, incoherent to the point of bordering on silly: A globally flexible activity that facilitates the accelerated adoption of renewable energy is good for the planet, not bad for the planet, even if it uses large amounts of power as it goes.

Consider the fact that, in the space of one hour, the sun bathes the earth in enough energy to power human civilization for an entire year. Or consider the fact that, at current rates of efficiency, the entire world could be powered by an array of solar panels that would fit inside the state of Texas. (Then consider that solar panel efficiency is still increasing, even as costs are plummeting.)

The way forward for human civilization, we would argue, is not in wringing our hands and clinging to notions of artificial energy scarcity. Instead, it is accelerating our efforts to unleash the vast abundance that renewable energy sources can provide.

To the extent the planet is saved from destruction by more intelligent energy use, the saving will be done not by using less energy, but by being more efficient and smart in scaling up the energy mix that is deployed — which in turn means incentives to invest aggressively in low-cost renewables (like, say, an opportunity to build out a crypto mining industry) could have a net positive impact, not a negative one.

What’s more, encouraging renewable energy use through free-market-oriented activities (crypto miners don’t need government subsidies, just cheap electricity) is a good thing, not a bad thing, because the faster that renewable energy facilities are built out, the faster that production costs for renewable energy will fall.

(Rapid adoption of a technology at mass scale means lower costs through larger volumes of factory production, coupled with greater economic incentive to improve the technology through research and development).

What all of this means is that Bitcoin is arguably a friend to the environment, not an enemy, to the extent that, first, Bitcoin mining is a geographically independent activity that uses surplus power (which tends to be cheapest); second, that Bitcoin mining is potentially an economically beneficial activity that can encourage new sources of renewable energy development; and third, the faster we develop new renewable energy sources, the better it is for the planet (with Bitcoin mining adding to that demand in a free-market manner).

Given all the above, there is still plenty of scope for intelligent debate in regard to Bitcoin’s environmental impact and the cost of Bitcoin power usage. But that debate should focus on real questions, such as:

• How can we measure the difference between scarce energy usage (competing for electricity in high demand) and surplus energy usage (low-cost electricity that is functionally a surplus)?

• How can we weigh the positive impacts of Bitcoin mining and other forms of crypto mining as a beneficial economic activity, particularly for lower-income countries, if done in the right way?

• How can governments or local regions regulate crypto mining to avoid undesirable outcomes while facilitating positive ones — like requiring electricity sources to be renewable, for instance?

There are lots of ways the discussion can move forward, and likely will. But just declaring point-blank that “Bitcoin is bad for the environment” is not a way to move forward, and not even a real argument. It takes all of the nuanced aspects and ignores them in favor of a dumbed-down attack, perpetrated by those who lost their “Bitcoin is dead” cudgel and have now switched to a red herring — a means of distracting from the fact their obituaries were wrong.

In 2020, arguably the single best asset to own in size was Bitcoin. For the coming year, that could easily hold true once again, with BTC having a reasonable shot at it before the year is out.

Apart from Bitcoin — which is practically its own asset class — one of the assets we are most bullish on is the U.S. dollar as a currency, relative to all other fiat currencies. The U.S. dollar looks set to romp and stomp on its fiat counterparts this year.

In the TradeSmith Decoder portfolio, we turned aggressively bullish on the dollar a few weeks ago, establishing sizable positions in various forex pairs, for reasons we’ve covered in these pages (primarily the Quantum Deficit Effect).

This call was well-timed as shown by the price action in U.S. dollar index futures, which registered a near-term bottom on Feb. 25 and surged higher.

An early surge in the dollar could just be the beginning.

If our read on the situation is correct, the dollar could be in for a quasi-repeat of its 2014-2015 experience, when the world’s reserve currency rose explosively for months on end (as shown in the chart below).

The natural question, then, is what happened to make the dollar rise so ferociously back then — and what are the comparable factors that could create an encore performance in 2021?

In 2013, the bond market had its historic “taper tantrum” — a surprise spike in long-end yields triggered by fears of a shift in Federal Reserve policy.

For years on end, the Federal Reserve had been purchasing large quantities of treasury bonds in the aftermath of the global financial crisis. By 2013, the Fed had started thinking it was time to cut back, at least a little, in a transition back toward normalcy.

And so, in a congressional appearance on May 22, 2013, Federal Reserve Chairman Ben Bernanke said the following in a question-and-answer session:

“If we see continued improvement and we have confidence that that’s going to be sustained, then we could in the next few meetings, take a step down in our pace of purchases.”

Bernanke thought he was suggesting a mild course of action, just easing things back a bit. Wall Street famously responded with its “tantrum,” causing bond markets to plummet and yields to spike.

What the Federal Reserve did in 2013, by accident, was meaningfully tighten monetary conditions. They didn’t do it on purpose; Wall Street overreacted and did it for them.

By the way, Wall Street overreacting to the Fed — and running wildly in one direction or another — happens more often than people think. In the past we have compared the Chairman of the Fed to a jockey riding an elephant. Under normal circumstances the jockey appears to have control, but it’s mostly a psychology trick. If the elephant decides to panic, forget it.

So, the Federal Reserve tightened monetary conditions substantially in 2013 — not just locally, but globally — through a careless choice of words that triggered a “taper tantrum” and a spike in yields.

The global monetary tightness created by a spike in U.S. long-end yields led to weakness in various economies, while making the U.S. economy look stronger by comparison. This created a snowball effect: As more capital started pouring into the U.S. economy, the dollar got stronger, which attracted more capital still, making the whole thing a runaway train.

A comparable scenario looks to be happening again, but for slightly different reasons.

This isn’t just our view, but also that of Robin Brooks, the chief economist for the Institute of International Finance (IIF) and the former chief forex strategist for Goldman Sachs.

“We’re back to a strong dollar world,” says Brooks. “After the global financial crisis, it took four years (from 2009 to 2013) before we got dollar strength. Now it’s only taken a few months. So this recovery is like post-GFC, except it’s on ‘speed.’ Much more stimulus, much faster USD recovery.”

There are a handful of factors here that stand out:

• The expected U.S. growth rate is being revised sharply higher, even as the growth rate for most other countries is being revised downward.

• The sharp rise in long-end yields is a form of monetary tightening, which the Federal Reserve and Treasury are fine with — even as it creates tight monetary conditions in the rest of the world.

• Hedge funds and speculators have larger net-short USD positions in dollar index futures than at any point in the past decade — which makes them ripe for a GameStop-style short squeeze.

One of the reasons the U.S. growth rate is going to be wild in 2021 is because the United States, as the richest country in the world, can afford to splurge on bunker-busting stimulus.

No other country can “buy growth” the way the United States can — they simply don’t have the balance sheet to get away with it, at least in the short-term.

And buying growth is exactly what the U.S. is going to do: We are going to see hundreds of billions in stimulus go directly to Americans whose incomes are below the cost-of-living level.

Those Americans are in turn going to immediately pay rent and otherwise buy “stuff” — diapers, peanut butter, new tires, a new refrigerator, you name it — in a way that will add directly to consumer spending and thus to nominal GDP.

With U.S. growth set to blow past rivals like they are standing still — the outlook for Europe is surprisingly gloomy, due to a badly botched vaccine rollout — there will be plenty of scope for long-end yields to rise further, as investors rotate out of bonds and into financials, energy, transports, and the like. 

And as long-end yields in the U.S. bond market rise further, other economies will feel the squeeze of tighter credit conditions through global transmission effects.

Those countries not growing as fast — or possibly not growing much at all — will be forced to proactively weaken their currencies, or otherwise loosen local monetary conditions, to keep their own recoveries from being suffocated.

Then, too, as long-end yields rise for U.S. treasuries, and the U.S. dollar strengthening trend becomes readily apparent, sovereign debt holders in Europe and Japan will be strongly tempted to swap out their lower-yielding European bonds and Japanese Government Bonds in favor of higher-yielding U.S. treasuries.

For those entities that have to hold sovereign debt as part of their charter, going to treasuries will be a double win: If they have to hold sovereign debt anyway, they might as well get the benefit of a higher yield (the U.S. 10-year or 30-year) and a strengthening currency (the U.S. dollar) at the same time.

What we are describing here is a self-reinforcing feedback loop. Blistering growth in the United States powers higher long-end yields; the higher long-end yields create tighter credit conditions for other countries, forcing them to weaken their currencies against the dollar; and a desire to own U.S. treasuries (because of their higher yields) will cause more capital to flow into an already-rising dollar.

As a further benefit to the feedback loop, the willingness of sovereign debt holders to buy U.S. treasuries at superior yields to their home market bonds could keep the bond market from falling too far and too fast.

That, in turn, will let the Federal Reserve and Treasury stay somewhat relaxed, knowing there is a buffer in place (global yield seekers) that will keep yields from rising to too-painful levels via their stepped-up treasury purchases as the U.S. dollar strengthens.

And then, as icing on the cake, futures data via the Commitments of Traders report, updated regularly by the Commodity Futures Trading Commission (CFTC), shows that net-speculative positions in dollar-index futures are at their most bearish levels in more than a decade.

It was an easy thing to be short the U.S. dollar on the assumption that trillions in fiscal stimulus meant a lower relative value for the greenback — but this assumption gets the structural mechanics backwards when the most important factors are added in: Dynamic U.S. growth feeding a rise in long-term yields.

There is even a credible argument that rising long-term yields could help growth accelerate further, to the extent that, against a booming growth backdrop, higher interest rates will incentivize banks to lend cash to small and medium-sized businesses that can actually grow quickly — as opposed to, say, facilitating yet another megacorp loan at an artificially low rate.

If any of this makes it sound like the $1.9 trillion stimulus is a free lunch, it most certainly is not. It just happens to be a lunch (or maybe an epic feast) where the bill comes in delayed installments, in the form of persistent inflation that erodes the value of dollar-denominated debt (thus transferring wealth away from the creditor class, and toward the debtor class, as a matter of de facto policy).

Here and now, though, U.S. growth will begin to roar like clockwork when consumer spending ramps up — indeed it is roaring already, as evidenced by recent “nowcast” numbers from the Federal Reserve Bank of Atlanta.

The Atlanta Fed’s “GDPNow” methodology looks at economic data series in real time — crunching numbers as they come in — to create a rolling forward forecast for U.S. growth.

As of their March 8, forecast, the GDPNow expectation is 8.4% — a growth rate not seen in 60 years or more! — and that is based on data before the stimulus hits bank accounts. 

Barring some wild surprise twist, the outlook is clear. The U.S. economy is going to roar, leaving global counterparts in the dust; long-end yields are going to rise further, creating tighter monetary conditions around the world; and the U.S. dollar is going to roar, too.

The bursting of the tech bubble has taken down the Nasdaq, but left the Dow intact. This has created the greatest divergence between the Dow and the Nasdaq since 1993.

March 8 was “the first time since 1993 that the Dow rose and closed within 1% of a record,” Bloomberg reports, “while the tech-heavy gauge was down more than 10% from its high.”

As we’ve explained at length in these pages, silly-season tech valuations were a byproduct of the implied belief that near-zero interest rates would last forever. That was always a foolish assumption.

Even the mega-cap tech juggernauts — Apple and the like — are starting to feel the pain, as a combination of rising rates and real economic growth make their inflated valuations look non-sustainable.

You can see mega-cap distress in the path of the NYSE FANG+ Index, which, as of the March 8 close, was nearly 17% below its Feb. 16 highs. That is well into correction territory (a 10 to 20% decline) and nearing full-on bear market status (a 20% or greater decline).

Value investors have an old saying: “Good things happen to cheap stocks.”

What we are seeing now in tech-land is the reverse application of that maxim: “Bad things happen to insanely expensive stocks.”

It’s all about the valuation, which is why even world-class profit machines like Apple (AAPL) are in trouble here. As we explained in comparing big tech to zero coupon bonds, even the mightiest FANG can take a share price haircut of 40% (or more) if valuations are inflated enough.

Technology stocks also have an ARK problem: The ARK Invest family of funds swelled to gargantuan size at almost the worst possible time. (In TradeSmith Decoder, we shorted an ARK fund in late February.)

The ARK Invest family of funds increased its total assets under management (AUM) by more than 1,000% in 2020, going from $3.1 billion to $34.5 billion. In the first two months of 2021, ARK accumulated assets at an even faster clip, adding $12.5 billion in just six weeks or so.

The trouble is that, as the rate-driven tech bubble unwinds itself, the late-to-the-party arrival of tens of billions of dollars means a sizable portion of ARK investors are now underwater.

The vast majority of inflows ARK has ever accumulated came within the past six months — and most of those purchases are now in the red. This increases the odds a critical mass of investors will rotate their capital out of ARK, putting further pressure on ARK’s illiquid technology holdings via forced redemptions.

Perhaps long-end yields will stop going up, and thus give tech investors a break? Don’t count on it. The 2021 growth rate for the U.S. economy is now expected to be blistering hot, which strongly implies long-end yields are still too low.

A combination of one of the best vaccine rollouts in the world, plus a $1.9 trillion stimulus, which will put immediate spending power in the hands of low-income consumers, has led the Organization for Economic Cooperation and Development (OECD) to more than double its U.S. growth projections.

At the same time, average growth projections from Bloomberg surveys now have U.S. GDP growth at 7.6% on the year — a pace that could make China’s look tame.

With that kind of growth ahead, long-term treasury yields look surprisingly low.

“Treasury yields haven’t been this low relative to U.S. economic growth estimates since 1966,” Bloomberg reports. That suggests there is plenty of scope for long-term yields to rise further — which means more pain for rate-dependent tech stocks.

A red-hot growth forecast, coupled with a cartoonishly steep yield curve, also suggests various reflation-oriented areas of the market, like energy stocks and financials and transports, could be considered reasonably priced in valuation terms, or mildly expensive at best.

As economic growth gains take hold, long-end rates should head higher still, with recovery-oriented areas of the market (the aforementioned energy and financials and transports) able to handle it, because growth means a sharp rebound in revenues and margins.

This is, frankly, a slow-motion disaster scenario for overvalued tech stocks.

Not only is tech-related pain likely to increase (via an ongoing rise in yields), there are other parts of the market investors can readily shift capital toward, making it even easier to dump the old paradigm (perpetual near-zero rates) in favor of the new one (real growth in stuff that isn’t insanely valued).

Perhaps, though, the Federal Reserve or U.S. Treasury will come to the rescue?

Nope. The curious keep asking — Are you worried about rising yields? Are you worried about inflation? — and Jay Powell and Janet Yellen keep saying no.

In a CNBC interview on Monday, Yellen was asked if runaway inflation was a concern, given the tremendous size of the stimulus.

“I really don’t think that’s going to happen,” Yellen replied. “If it turns out to be inflationary, there are tools to deal with that,” she added.

There will be rebounds and optimistic rallies — hope springs eternal and all that — but the picture is fairly clear at this point.

We are going to see blockbuster rates of U.S. economic growth, in part because pent-up demand, further powered by stimulus checks, will send consumption through the roof. That, in turn, will generate concerns of inflation, while igniting keen interest in energy, transports, and financials (this has already started).

In response to the growth, long-end yields will likely continue to rise overall, even as capital continues to rotate out of technology stocks. If inflation becomes an issue, the Fed and Treasury’s most likely move is to pretend it isn’t actually an issue — until long-end yields rise even more.

And if the Federal Reserve feels compelled to “do something” about inflation, that something will be a tightening effort — whereas if they feel compelled to “do something” about spiking long-end yields, their only last-ditch option (yield curve control) might require making inflation worse.

It is hard to see how tech stocks rebound (other than temporarily) under these circumstances. It is easy to see, in contrast, how they could fall much farther.

Our view of inflation is complicated, but not too complicated.

In TradeSmith Decoder, we have large-sized bullish U.S. dollar forex positions as of this writing, and short precious metals positions, because the near-term mantra is “growth first, inflation later.” These positions are doing quite well.

A little bit of history may help clarify our stance. While the 1970s were a spectacular decade for gold, the middle-going was quite rough.

In an interim period spanning most of 1974 to 1976, the gold price fell 47% peak to trough. Why? Because the U.S. was coming out of its 1974 recession, allowing long-end rates to rise, and inflation concerns to retreat, as growth picked up temporarily. Sound familiar?

The gold price then bottomed out in August of 1976, and more than quadrupled into the 1980 peak. Right now, in growth-versus-inflation terms, we are closer to 1974 than 1976.

Ultimately, though, we do see inflation taking hold — even if it takes another six months, or 12 months, or 24 — because the powers that be will ultimately desire it to happen.

This means that, at some point, we will be aggressive buyers of gold again — but not yet.

That is what we mean by complicated, but not too complicated. In the medium-term, our conviction right now is almost “anti-inflation,” because growth comes first: This favors our temporary bullish U.S. dollar and bearish precious metals stance.

But eventually that stance will reverse dramatically back toward inflation, with a follow-on sentiment reversal for the dollar versus precious metals — and a combination of economic data points and price action signals (the message of the charts) will tell us when.

Then, too, in recent weeks there has been an active debate over whether government stimulus can create inflation. Those who are skeptical of government stimulus as even a temporary transformative agent still doubt inflation will come.

Bitcoin, meanwhile, continues to trade on a wholly separate dynamic from gold at the moment — it is all about the adoption curve — and TradeSmith Decoder continues to be aggressively long (as we have been consistently since March 19, 2020).

But getting back to the longer-term outlook for inflation, there are grumpy bond bulls — who have been grumpy bond bulls for quite a long time — who think the U.S. economy will soon enough sink back into the deflationary muck, based on the rule-of-thumb argument that you can’t buy growth with government spending.

There are multiple things the long-term inflation doubters fail to see.

First, it’s true one may not be able to “buy” long-term growth with government spending — but one can certainly rent it.

Give any business in the world a trillion-dollar credit line, and it’s guaranteed that the business can find, at the minimum, near-term ways to make the growth numbers look good.

Then, too, there is a big difference between a tidal wave of government spending in the depths of malaise with sentiment bleak, and a tidal wave of government spending that comes on top of a robust recovery, with breakout levels of optimism from consumers and CEOs alike, that was already in the making pre-stimulus (by way of pent-up consumer demand and a world-beating vaccine rollout).

And of course, there is a jaw-dropping difference between monetary policy effects — lowering the interest rate at which businesses can borrow, for example — and the bunker-buster fiscal effects that come from enabling mass-scale “helicopter drops” (where currency is sent directly to bank accounts).

But most importantly — and this is perhaps the biggest thing the malaise crowd misses — the real question is not even what impacts the $1.9 trillion stimulus (which passed muster in the U.S. Senate this weekend) will have.

The real question is whether trillion-dollar stimulus packages will be seen as a one-off — a kind of historical anomaly born of the pandemic — or the beginning of a policy paradigm shift.

Consider: The $1.9 trillion “stimmy” (to use the trading desk nickname) now on the way is neither the first, nor the second, but the third in a sequence.

Two data points make a trend, and three make a story. So who is to say the stimulus story ends here? What if, instead, the story is only beginning?

More simply put, the forward-thinking investor has to ask: What happens when stimulus becomes a normalized paradigm, where the stimulus keeps coming in various forms, for various reasons?

Some talking heads have argued the market is over-reacting to inflation concerns, on a longer-term basis, relative to what the $1.9 trillion stimulus will do. This is possible.

It is also possible, however, that the market is looking farther into the future, and seeing the sequence: After this $1.9 trillion round, another $2 trillion round for infrastructure and a comprehensive overhaul of the aging electric grid. Then another trillion-plus round when the post-pandemic rebound has a hiccup. Then another round because stimulus is deeply popular with the American public, with critical mass percentages of both Democrats and Republicans demanding it, and so on.

The political popularity of stimulus is one of the key data points to consider, in our view. The level of bipartisan support for direct transfer payments, all across the political spectrum, is little short of stunning.

And yet, it makes sense when one considers the majority of Americans have more debt than savings.

The simple fact that most Americans are indebted — with notably more debt than savings — leads to another conclusion the financial press seldom talks about: Inflation is a desirable outcome for the powers that be. And we don’t mean just a little bit of inflation either, but a lot.

Both the U.S. government and the Federal Reserve have their own reasons — which they will never admit out loud — why letting inflation run “hot” for a number of years, even 1970s-style hot, could be a useful thing.

This means that, when the day comes where inflation starts to feel wild and woolly, we may hear lip service to resisting it from both politicians and central bank officials — but actual resistance will not be found. Instead, inflation will be allowed to roar.

There are two big reasons for this:

• Inflation is an egalitarian force in a society where the majority are heavily indebted, meaning that persistent inflation is a way to reduce the inequality gap.

• Persistent inflation is the easiest way to escape a government debt trap; instead of defaulting on the debt or sacrificing heavily to pay off the debt, you just inflate away the nominal value.

It may sound strange to think of inflation as egalitarian — a kind of equalizing force that reduces the gap between, say, the top 10% and the bottom 70%.

It makes sense, though, when you think about who benefits on a net basis from aggressive inflation, if a particular mix of policies are in place that generally favor the labor economy.

Jeff Currie, the global head of commodities research at Goldman Sachs, has pointed out that the most “equal” period in America’s history — in terms of a minimized economic gap between rich and poor — came at the end of the 1970s.

Why would that be so? Because, in the 1970s, inflation was eating away the debt burden, even as powerful unions used negotiating power to keep wage growth in line with inflation.

As a general rule, inflation helps the debtor and harms the creditor. Inflation reduces the nominal value of debt, which gives relief to whomever who has taken on the debt. At the same time, inflation erodes the value of debt as an asset, which reduces the real value of the creditor’s debt holdings.

Since most Americans have more debt than savings, inflation thus reduces the debt burden for most (in the same manner it reduces the debt burden for the U.S. government).

The pain of this process then falls on those with the most savings — call them the “creditor class” — who happen to be the top 10% or even the top 1%.

Ah, but what about inflation’s impact on the cost of living? In the 1970s, that is where the power of the labor unions came in.  As the unions negotiated persistent wage increases — which contributed to inflation — union workers were protected from inflation, at least somewhat, by seeing the size of their pay packets increase. So their nominal wages were keeping pace with inflation on the one hand, and the value of their debts were falling on the other.

Fast forward 40 years or so, and unions have far less power than they did in the 1970s.

But this is where normalized stimulus comes in: To the extent that the U.S. government starts engaging in normalized transfer payments to the lower half of the economy, it is the functional equivalent of negotiated wage hikes for the labor sector on a regular basis.

Some who fail to connect these dots argue that you can’t have real, sustained inflation unless wages are persistently going up. But that argument fails to see that normalized stimulus — if that is what we get — is a de facto implementation of the same idea, in an even more efficient way.

If the government is routinely sending checks to households below a certain income level on a routine basis, it is like the labor unions doing a bulk agreement with Uncle Sam directly once or twice per year, rather than going industry by industry.

Again, too, political popularity is the key to understanding this. Deficit hawks tend to reside exclusively among the creditor class.

The average American doesn’t really care about the deficit at all, regardless of political persuasion. Republicans seem to care more than Democrats, but not by a supermajority (and not by enough to make a difference).

One may hear lip service paid to the virtues of fiscal prudence — a classic instance of telling the pollster what conventional wisdom says they want to hear — but the actual response to stimulus offers tells the real story. Just as the Reddit army likes to chant “WE LIKE THE STOCK!,” Americans seem to chant “WE LIKE THE CHECKS!”

Grumblers as this point will highlight a rising cost of living as something that will hurt low income Americans, and they will have a point. But guess what the politically popular solution for cost of living discomfort will be: “More stimmy!” To the extent rising inflation makes life more expensive, the go-to answer will be more transfer payments.

The technology deflation thesis plays into this, too — to the extent that rapid advances in software and machine-learning eat into job security and earnings prospects for the white-collar middle-class.

The New York Times recently ran a piece titled “The Robots are Coming for Phil in Accounting,” essentially arguing that, while Phil himself may not be replaced right away, larger and larger chunks of his job are being automated at the margins, with the net effect of only needing, say, two human bean counters in the accounting department rather than the previously required six. As more and more Phils hit the bricks, their jobs eaten by software, guess what they will favor: More stimmy!

Then, too, “hot” inflation (meaning inflation that runs uncomfortably above trend, even far above trend) has another unspoken virtue in the eyes of debt-burdened policy makers: It is the only realistic way to reduce America’s debt-to-GDP level over time.

The difference comes down to nominal numbers versus real ones.

• Say the U.S. national debt is around $28 trillion while U.S. GDP (the size of the economy) is $22 trillion. That is a debt-to-GDP ratio of 127%, which exceeds World War II levels.

• Now say inflation cranks up, and the nominal GDP level (the size of the economy expressed in dollars) grows to $50 trillion — a number that reflects a modest portion of real growth with lots of inflation (a mega-scale increase in the money supply) on top.

• If the nominal debt goes up less than nominal GDP during that time, rising sharply but not by as much — to, say $44 trillion — then the debt-to-GDP ratio has improved: At $44 trillion (debt) versus $50 trillion (GDP), the debt-to-GDP ratio fell to just 88%. This fall happened even as the nominal debt level rose, because inflation caused the nominal GDP level to rise even faster.

The upshot is that you really can inflate away debt, presuming the underlying economy has a sustainable rate of growth as such that society can handle the inflation without falling apart.

Nor is it a magic trick — instead it is a wealth transfer, in the sense that the creditor class (those with net savings in treasury bonds) wind up transferring a chunk of wealth to the debtor class (those whose net worth is negative by way of holding more debt than savings).

When we say “this is probably the way it will go,” we are neither endorsing a path of events nor offering a policy recommendation — both actions would be pointless. Instead we are simply observing the U.S economy as a system, one which intertwines democracy and capitalism, and gauging the likely emergent effects based on where the system is going.

In the title of this note, we said “it begins” because, in our view, the passing of the $1.9 trillion stimulus is likely to be remembered as a watershed moment.

In our view, the $1.9 trillion stimulus is almost certainly not just the third round of relief in an effort to slingshot America out of the pandemic; it is the beginning of a paradigm shift in which direct transfer payments, and a government-level embrace of eventual “hot” inflation, whether admitted out loud or aggressively denied, becomes a normalized part of American life, as a means of both closing the yawning wealth gap and inflating away the national debt.

Thursday (March 4) was a pleasantly bullish day with plenty of green on the tape — if you were long energy stocks, that is.

The crude oil price shot higher, with West Texas Intermediate in the $64 range, after a surprise decision from the Saudis to maintain their million-barrel-per-day production cut. This was excellent news for oil and gas-related names, which were already at 52-week highs.

For most of the market, however, Thursday was a sea of red. For overinflated technology stocks, it was full-on bloodletting.

Emblematic of the inflated tech space is Virgin Galactic Holdings — ticker SPCE — which was down 49% in less than three weeks as of Thursday’s close. This is not the return from orbit bulls were hoping for. 

Meanwhile, fund managers are casting a wary eye on the ARK Invest family of ETFs — and especially ARKK, the flagship — in the same manner all eyes were on Long-Term Capital Management (LTCM), a famous hedge fund, in fall 1998.

As LTCM discovered back in 1998, it’s a very dangerous thing to have a huge book of illiquid portfolio holdings that you can’t easily sell, with all of Wall Street watching in the knowledge that redemptions are forcing you to sell.

“ETF analysts and traders worry that a combination of broad market declines and additional outflows could create a snowball effect across ARK’s portfolio,” the Wall Street Journal reported this week, adding that this “could potentially cause some of its more-illiquid, small-cap holdings to trade sharply lower.” 

Indeed. The whole thing smells like a market structure event, where investors are forced to dump positions en masse for reasons unrelated to sentiment.

A similar feel is taking hold in the U.S. Treasury market, where a sell-off in bond prices is driving yields higher. To our ears the new chatter about “bond vigilantes” makes little sense: The forced sellers of USTs are not trying to punish markets or make a statement here; they are selling because they have to.

Take the average yield on a 30-year fixed-rate mortgage, for example, which rose above the 3% threshold this week for the first time since July 2020.

Rising mortgage rates mean that institutional investors in the mega-sized mortgage-backed securities market (the U.S. has roughly $17 trillion worth of mortgages) will be closing out of long-end U.S. Treasury bond positions for technical reasons, in a process known as “unwinding convexity hedges:”

This source of downward pressure on long-end bond prices, and upward pressure on rates, has nothing to do with vigilantism, or with any type of macro opinion at all in regard to inflation or the proper level for long-term yields: It’s a market structure thing.

This is why, on Feb. 26, we explained the drivers for a market structure meltdown event; unfortunately those drivers are in full effect now, as evidenced by Thursday’s close. (Who knows where Friday will close — we are finishing this note on Friday morning.)

As long as the pain in tech stocks is confined to high-flying speculative names, the Federal Reserve can pretend not to care. “You pays your money and you takes your chances,” the old saying goes.

Real trouble may hit, though, if the pain spreads to the tech juggernauts, where staggering sums of capital are now at risk. Consider the following numbers:

• As of the March 4 close, the combined market capitalization of five tech juggernauts — Apple, Amazon, Google, Facebook, and Tesla, in descending order by size — was $5.6 trillion.

• The market capitalization for the entire S&P 500 index — all 500-plus companies’ worth — was $31.3 trillion as of January 2021, per YCharts data.

• The market capitalization for just five mega-weighted tech companies — Apple, Amazon, Google, Facebook, and Tesla — is thus nearly 20% of the entire S&P 500.

What kind of world is it where five megacaps can have a combined weighting that amounts to 20% of the entire S&P 500 index? An extremely out-of-whack world, that is what kind, given that all the juggernauts have price-to-sales ratios wildly inflated by the “lower for longer” long-end yield assumption that now appears “wrong and wronger.”

We’ve explained repeatedly how the macro-inflated share price of, say, Apple (AAPL) could fall by 40% in a rising rate environment with no change to the underlying business model or cash flows; with long-end rates rising relentlessly, we are a big step closer to seeing that scenario play out.

Meanwhile the Federal Reserve is offering no help here: The Fed keeps going on about staying accommodating on the short end, and keeping short-term rates near zero; but the long end is where all the action is, and where the intensifying source of pain is as the “lower for longer” case evaporates.

You can see investors’ distress in the steepness of the yield curve, which basically measures the difference between short-dated U.S. treasury yields and long-dated ones. With the Fed actively suppressing the short end, but letting the long end run free, the yield curve is taking on a parabolic feel.

In another ominous sign, there was hope that Jay Powell, Chairman of the Federal Reserve, would calm the stock market with prepared remarks on Thursday; instead, his words made things worse.

Powell took pains to confirm that the Fed would stay easy, which means no rate hikes at the short end of the curve; but as we’ve explained, the short end isn’t the pain point.

In a virtual interview with the Wall Street Journal, Powell was asked about the long-end spike in yields. His answer implied the Fed would continue to do nothing — unless the pain gets significantly worse.

“If conditions do change materially, the committee is prepared to use the tools that it has to foster achievement of its goals,” Powell said.

That is Fed-speak for “we’re not worried about it yet” — which means something big may have to break before the Fed is roused into action.

And that in turn means technology stocks could get slaughtered — including the juggernauts — to a far more extreme degree than has already been seen, before the Fed decides to “do something” about the long end of the curve.

Then, too, Powell might be playing it cool for the sake of hiding something.

Powell may be fully aware that, if the Federal Reserve tried to calm down the stock market by capping bond yields at the long end of the curve, the Fed’s actions could actually make everything worse.

Why is this the case? Because, in order to keep long-dated yields under control — to keep them from spiking — the Federal Reserve would have to agree to buy long-dated U.S. Treasuries in unlimited quantities.

That is what “yield curve control” (YCC) means. It is buying all the bonds that others want to sell, which creates a floor for the bond price and a ceiling for the corresponding yield.

YCC is currently being deployed by various central banks around the world, including the Federal Reserve, in modest amounts. But it is mostly being used at the shorter end of the curve, meaning, they are buying maturities of five years or less, not the 10-year and 30-year issuance.

That is because, if you go for full YCC — and try to fully control the long end, even as fiscal spending greatly increases the quantity of issuance coming to market — you can wind up with the optics of full-on debt monetization, in which open-ended quantities of bonds are exchanged for open-ended quantities of newly created currency without limit.

What this means, in practice, is that technology stock investors hoping for the Fed to “save” them may not only be engaged in last-ditch wishful thinking, they may be hoping for the impossible.

It could simply be that, with roaring economic growth in the cards for the U.S. economy in 2021 — by credible estimates the U.S. could grow more than China this year! — the Federal Reserve simply cannot risk the appearance of full-on debt monetization at the long end of the curve (the de facto result of yield curve control), with long-run inflation expectations already a problem.

For example, imagine Powell in effect telling the market, “To keep rates low, we will buy all the treasuries available at a certain price floor — so that the yield never goes above X — and in so doing we will replace all the bonds we buy with dollars.” 

Were Powell to do that, one could see two immediate responses: First, central banks around the world that had been waiting to sell their excess USTs in bulk would dump them en masse, knowing the Fed was a guaranteed buyer regardless of incoming supply volume; and second, the price of oil could easily go straight to $100, with food price inflation in various agricultural commodities (already becoming a problem) exploding through the roof.

It would potentially create an even bigger problem than before, and a bigger problem than the stock market getting shellacked, were the Fed to try and keep the U.S. treasury bond market in a “lower for longer” reality even as the U.S. economy transitions to “rapid growth” reality. 

This also neatly explains why energy stocks can be breaking out to new 12-month highs all over the place, on the same day that tech stocks get destroyed. The outlook for super-strong U.S. GDP growth is the game changer in this mix.

When the economy is growing, logical reflationary bets (like energy stocks) that aren’t yet hyper-valued get bought with both hands, whereas the “lower for longer, inflation will never happen” type stuff — the goofy bets predicated on science fiction or return payoffs 20 years out — gets aggressively dumped.

To the extent this environment continues — and it should; we are in early innings for the U.S. growth story — tech stocks are in serious trouble.

Be very clear on this: “Buying the dip” is seriously questionable advice for anything that has fallen precipitously as of late; it is less catching a falling knife and more like catching a falling safe.  

Then, too, it will be fascinating to see what Powell does if the mega-cap tech names — Apple, Google, and so on — start melting down along with the low-liquidity hype vehicles and futuristic space junk.

If the Fed still refuses to reign in a long-end yield spike and bond market tantrum, even as a true market structure event unfolds — in U.S. treasuries, in small-cap tech, in mega-cap tech, or all three — then you’ll know the Fed has been rendered powerless by the macro picture, as long-end debt monetization for the sake of yield curve control (their only move left in an effort to cap yields) could be like pouring kerosene on an inflation-expectations fire.

You can’t make this stuff up. On Feb. 23, TradeSmith Daily said the following:

As we have explained repeatedly in these pages, the case for Buzz Lightyear valuations — “To infinity and beyond!” — is predicated on perpetually low interest rates. If you change that equation, the valuations are no longer sustainable.

Fast forward a week or two, and what do we see: Tech stocks with nonsense valuations getting hammered by the bond market, as spiking long-end yields blow up the “lower for longer” case like a botched SpaceX landing.

And like a premium slice of New York cheesecake, the irony is almost too rich: Even as we warn of “Buzz Lightyear” valuations — a tongue-in-cheek reference to silliness — the self-professed king of day traders is launching BUZZ, a social-media-algorithm ETF meant to capitalize on the retail mania.

As the old saying goes, they don’t ring a bell at market tops. But perhaps they launch ETFs.

As we write this note on the morning of March 4, BUZZ is getting ready to launch for trading. Meanwhile, on the day prior, March 3, the ARK Invest flagship ETF (ARKK) officially entered a bear market.

We should do a quick review of the retail mania’s royal family.

• Dave Portnoy, aka “Davey Day Trader,” is the self-professed king of day traders.

• Cathie Wood, the founder of ARK Invest, is the queen of technology stock investing (the Mary Meeker of the modern age, for those who remember the dot-com bubble).

• The ARK Invest family of ETFs is the magic castle; Tesla is the crown jewel and the ultimate source of ARK’s power; and Elon Musk is the emperor of stonks, who rules by  tweeting memes.

If you don’t know what stonks or memes are, you might want to consider yourself lucky.

This is all part-and-parcel of the retail mania that unfolded over the past year, through a combination of zero-commission trading apps, “bored in lockdown” trading enthusiasm, near-zero interest rates, and trillions of dollars in monetary and fiscal stimulus.

But let’s get back to ARKK, the flagship ETF of the ARK Invest family.

The fact that ARKK has entered a bear market is extra meaningful because, first, rising long-end yields are the culprit; and second, Tesla entered a bear market just a few days prior.

On Feb. 12, ARKK closed at $156.58. On March 3 (yesterday), it showed a closing-basis decline of 20%, as shown via the chart below.

On Feb. 24, we noted that “the EV bull market is over,” noting that Tesla (TSLA) had gone full-on bear. Now ARKK has followed it to the same fate.

This is not coincidence, or a quirk of the calendar. It is the impact of rising interest rates at the long end of the curve, which are, in turn, a function of an accelerating U.S. recovery, with the Federal Reserve showing willingness to stand back.

Those long-end rates will almost certainly rise further — to the benefit of reflation plays but not to tech stocks — which makes it an exceptionally bad time to launch, say, a social-media-algorithm ETF designed to capitalize on the tech-heavy enthusiasms of retail message board traders.

But today’s planned launch of BUZZ, the new ETF in question, is perhaps not a calendar quirk either, because this is the kind of stuff that happens at “the end.” As a mania matures, and then gets long in the tooth, there is a rush to monetize it as aggressively as possible. That is what we are seeing today.

To lay out some details, BUZZ is the ticker symbol for the VanEck Vectors Social Sentiment ETF.

The ETF is designed to invest in stocks with “the most bullish investor sentiment and perception,” as defined by a proprietary algorithm that scrapes message boards, Twitter streams, and other forms of social media streams to accumulate stock mentions and vet them for sentiment.

(Social media sentiment is the data driver for our friends at LikeFolio. Founder Andy Swan says, “While I’m personally a big fan of Dave Portnoy and what he’s doing at Barstool Sports, this is not a project we are involved in. I’m concerned about both the methodology of stock selection and the high expense ratio [75bps] of the fund. That said, at LikeFolio we appreciate anything that shines a spotlight on the value of social data as a powerful tool for investors.”)

The ETF itself looks somewhat boring in its construction. It will officially target 75 holdings, with regular rebalancing (typically monthly) to keep each name at 3% of assets.

The launch of the ETF, though, was far from boring: It was a spectacular Twitter affair, powered by a launch video from Dave Portnoy (aka Davey Day Trader), who has a stake in the index provider behind the ETF.

Here is a quote from the “emergency press conference” launch video — which you can watch via Twitter here — to give you the flavor (viewer discretion advised):

“I can’t guarantee returns… but in 20 years, I haven’t lost. It takes a lot for me to put my reputation, my balls, on the line. I am doing it this time. Buzz ETF. Thursday. New York Stock Exchange. Is this big? It’s f–g huge.”

Not your ordinary ETF launch, to be sure! But then, Davey Day Trader is not your ordinary promoter. As the founder of Barstool Sports, Portnoy gained stock-trading fame (and millions of online followers) after switching to stock trading when sports were put on hold during the pandemic.

The concept behind BUZZ is actually not new. A version of the same concept — an ETF for stock selection based on social media sentiment — was launched roughly five years ago, and Van Eck has a tracker index based on the same idea.

The BUZZ 1.0 version was shut down in March 2019, however, due to lack of investor interest. (If an ETF does not achieve a critical mass of volume, it loses money for the provider via day-to-day execution costs and rebalancing costs.)

The BUZZ 2.0 version is presumably expected to succeed where 1.0 failed, however, because of Portnoy’s aggressive involvement, and that is a big part of the problem.

We more or less expect BUZZ to fail — possibly with a whimper, but possibly in a spectacular blow-up — for one of three reasons:

• Bull-market strategies don’t work in bear markets.
• BUZZ could self-destruct via conflicts of interest.
• Social media traders will learn to game the ETF itself.

The first possibility is the most straightforward: Bull market strategies don’t work in bear markets.

The backtested returns for BUZZ are spectacular, but they also represent the past five years, not the coming five years. If someone offered you the chance to retroactively put your nest egg into Tesla (TSLA) circa January 2016, with a holding period through year-end 2020, the move would be a no-brainer; if offered a similar deal for 2021-2025, not so much. (We see TSLA falling 50-70% from here, but who knows.)

It’s kind of a similar deal with BUZZ: What worked spectacularly well over the past five years is not likely to work so well over the next five — particularly if a slow-but-persistent rise in long-term yields has begun, as rolling fiscal stimulus efforts give a 1970s feel to a global economy inflating away its debts.

If it is, in fact, a plain old bear market that kills BUZZ, it would probably do so quietly: Investor interest in the ETF would simply fail to pass muster, and lack of profitability would lead to closure.

But BUZZ could also see fireworks on its way to oblivion, thanks to factors like the Portnoy effect, namely: What happens when an ETF that algorithmically picks stocks based on social media chatter — that is the chief idea — is openly promoted by someone who dominates the social media trading landscape?

Per Dave Nadig of ETF Trends, Portnoy’s involvement means that BUZZ “now crosses over into a weird quantum state.” Nadig then wonders aloud as follows:

“If Portnoy is arguably one of the most influential voices on Stock-Social-Media, how can he also be economically involved with an index that is supposed to track the very thing he personally influences, and quite dramatically at that?

“If he decides tomorrow, for whatever reason, that NadigPharma is the next stock to go to the moon, we’d expect him to do a bunch of videos and interviews and live streams and clubhouses and whatever else, talking about how NadigPharma was going to cure cancer and will go right to the moon (it isn’t, it won’t). And then NadigPharma gets added to the index because he does his Davey Day Trader shtick really well.

“It’s really quite easy to see how this becomes a sort of Post-Modern Ouroboros, where the hype train drives the stocks, which drives the index, which drives the fund, which drives the hype train all over again when the stock gets added, ad infinitum. And this brings to mind a whole pile of unanswered, and probably unanswerable, questions…”

Indeed, the whole thing seems bizarre: We’re surprised the SEC is fine with it.

Then, too, we have to wonder: What about the social media trading community, which can actually be quite intelligent at times — and which occasionally displays a sophisticated understanding of market mechanics, as evidenced by the GameStop saga?

Imagine, say, the Reddit army figuring out when BUZZ has to do its monthly rebalancing (a standard window of activity where shares are bought and sold to keep percentages in line with targets).

Then, because the behavior of BUZZ is based on social media activity — and the Reddit army can drive social media activity through force of collective will — imagine the Reddit army figuring out how to reflect the BUZZ algorithm’s buying and selling decisions back on itself in a kind of doom loop.

The idea that a social media community could turn a social-media-themed ETF into a self-destructing doomsday device sounds kind of crazy, except the Reddit army did something comparable with the “gamma squeeze” that almost drove GameStop shares into four-digit territory. (According to Thomas Peterffy, the founder and chairman of Interactive Brokers, the GameStop squeezers were minutes away from succeeding, and breaking the system, when broker restrictions shut them down).

And so, when it comes to the outlook for BUZZ, the would-be investor can pick their poison: Death via bear market; death via bizarro-world conflicts of interest between the promoter (Portnoy) and the promoted; or death via gaming at the hands of the gamers (the Reddit army and so on) whose sentiments were intended to be gamed in the first place.

It’s all very silly — another hallmark of manias toward the end. To infinity and beyond!

The digital dollar — a USD version of central bank digital currency — is now a “high-priority project.”

That was the phrase used by Jay Powell, Chairman of the Federal Reserve, in a U.S. Senate hearing on Feb. 23. “We are looking carefully, very carefully, at the question of whether we should issue a digital dollar,” Powell said. 

With each passing day, the digital dollar project is making progress behind the scenes. Just as importantly, political momentum strongly favors a digital dollar.

The incentives are there, and the technology is close behind; the digital dollar is an idea whose time has (almost) come. What that means for the U.S. economy — and the world — we shall see.

The Federal Reserve wants a digital dollar and is now laying the groundwork. Fed Chairman Powell made that clear via two days of hearings on the hill — one with the U.S. Senate and one with the House of Representatives — on Feb. 23-24.

U.S. Treasury Secretary Janet Yellen — the most pro-labor, pro-Keynesian, pro-Modern Monetary Theory (MMT) U.S. Treasury Secretary in the nation’s history — is also a digital dollar fan. Her enthusiasm is a big shift from the attitude of the prior Treasury Secretary, Steven Mnuchin, who showed little interest at all.

In a Feb. 22 virtual interview with Andrew Ross Sorkin of the New York Times, Yellen expressed her favorable view of central bank digital currencies (CBDCs).

“It makes sense for central banks to be looking at” CBDCs, Yellen said, adding that “too many Americans don’t have access to easy payments systems and banking accounts, and I think this is something that a digital dollar, a central bank digital currency, could help with.”

It was probably no accident that Yellen’s pro-digital-dollar comments came just before Powell’s Senate and House testimony, where he delivered more or less the same message.

The Federal Reserve, meanwhile, is doing more than just talking. It is digging deep into the technology of a digital-dollar project.

On Feb. 22 — the same day Yellen spoke approvingly of CBDCs — the Fed announced via press release that Sunayna Tuteja would be joining the Federal Reserve System as its new Chief Innovation Officer.

Prior to her just-announced new job, Tuteja was the head of digital assets at TD Ameritrade. In effect, this means that, rather than hiring consultants to help them figure out the crypto space, the Fed put a crypto person in charge of all innovation initiatives moving forward.

The Federal Reserve also released a white paper on Feb. 24 titled, “Preconditions for a general-purpose central bank digital currency.” You can access the paper here. The introduction is notable:

“Money is a social and legal construct underpinned by trust. Conceptions of money have evolved and money has taken many forms over the years. In North America, pre-colonial trade was often conducted in wampum, corn, and fur pelts. In fact, wampum, which are decorative beads made from shells, were recognized as official currency by the Massachusetts Bay Colony in 1650.

“The Federal Reserve note, which was first issued in 1914, is a relatively recent development by historical standards. Today, there are ongoing discussions on a new form of central bank money distinct from physical cash and limited-access central bank deposits. This report focuses on the potential for a general-purpose CBDC that can be used by the public for day-to-day payments…”

The report takes an in-depth look at the various issues surrounding a digital dollar, from technology to policy to safeguards and stakeholders. It uses the following graphic to illustrate driving forces and restraining forces (incentives and obstacles) to issuing a CBDC:

If you’re getting the sense this is a full-court publicity press in favor of a digital dollar initiative, you wouldn’t be wrong. While it is still early days, Powell and Yellen are clearly laying the groundwork for political buy-in and public acceptance.

Why is a digital dollar needed? Some fear the motives behind this blatant push for a CBDC.

In policy terms, it’s possible a digital dollar could pave the way for all manner of creative transfer payments — going from “helicopter money” stimulus drops to precision-targeted delivery of funds to households, sliced and diced by income decile or geographic region.

Then, too, there are the “big brother” possibilities of money that can track its own movements, or have built-in expiration dates, or be turned off or blocked by a central authority. The Chinese government is arguably using its digital currency rollout to extend and deepen its vision of a digital authoritarian state; it is possible that, in embracing a digital dollar, U.S. authorities could go in a similar direction.

Powell and Yellen are aware of the policy dangers in promoting a CBDC, and the possibility of skeptics questioning their motives.

As such, the Federal Reserve has wisely separated out the technology side and the policy side for the sake of optics, with the basic idea being: “We’ll figure out the technology and the logistics, and then leave it up to you — Congress and the public — in terms of where you want to go on the policy side.”

In the House Financial Services hearing on Feb. 24, Powell said:

“So this is going to be an important year. And this is going to be the year that we engage with the public pretty actively, including some events that we’re working on. Which I’m not going to announce today, but there’s things that we’re working on…

“The sense of this is not “here are the decisions we’ve made, what do you guys think.” It’s “these are the trade-offs”… there are both policy questions and there are technical questions that interrelate between those two. And they are very challenging questions.

“And so we’re going to want to have a public dialogue about that with all of the interested constituencies… In the meantime, we’re working on the technical challenges, and also sharing with the other central banks around the world who are doing this. And we’ll need, depending on what we do, we could well need legislative authorization for such a thing.”

Powell understands the optics of this thing. In bringing about a digital dollar, he is presenting the Federal Reserve as a neutral facilitator of congressional will.

If the digital dollar winds up being a Trojan horse for modern monetary theory (MMT), Powell seems to be implying, that won’t be the Fed’s fault. It will happen if that’s what you want. 

And in our view, that is exactly what will happen: The digital dollar will become a technology-driven mechanism for implementing a whole new world of MMT-style initiatives.

This will not happen because Powell and Yellen pull a fast one, in our view, but rather because it is exactly what the American public wants.

“Joe Biden’s $1.9 trillion stimulus package is one of the most popular bills in decades,” The Economist magazine writes.

“According to data compiled by Chris Warshaw, a political scientist at George Washington University,” The Economist goes on to add, “the spending bill is one of the most popular pieces of important legislation in three decades.”

As it turns out, Democrats like helicopter money, and Republicans do, too. Americans on the whole, on a surprisingly enthusiastic and bipartisan basis, have an attitude amounting to “the more, the better” when it comes to direct stimulus payments.

In the future, a digital dollar will make it easier to send out laser-targeted relief payments; to spot-target weak geographic regions; to directly credit specific industries or households; to facilitate near-instant tax rebates; and so on.

Americans will love this — a critical mass of them, anyway — and that means the political will is there, with pandemic-era precedents getting the ball rolling.

And if you think all of this sounds wildly inflationary, we agree — but remember the timing aspect. “Growth first, inflation later” is the sequential order of impact. First the U.S economy grows like weeds, in a kind of honeymoon stretch coming out of the pandemic — and then the macro picture will truly get interesting.