Why inflation has become an endangered species

Why inflation has become an endangered species

By Aristos | cryptobot | 6 Jun 2020


The balance sheet of the major central banks has risen to $ 7.1 trillion since 2008, but they have not seen the light of day. How stock market prices were affected and how the picture for bitcoin is shaping up.

The big central banks are not aggressively inflating the monetary base due to the pandemic. They have been around for a long time. Since 2008, they have expanded their balance sheet from $ 800 billion to $ 7.1 trillion . This means that they have increased the base currency supply by an average of 22% each year.

Because the human mind finds it difficult to perceive such large numbers, the following visual representation of the FED balance sheet is revealing. The crises of 2008 and secondarily of 2020 have created a huge. Swelling . Some do not hesitate to call it a bubble. We will call it unusual.

Where has this money gone? There are no disagreements on this issue. Everyone knows that they are moving towards buying financial assets, such as bonds.

The curious thing is that while the rate of increase in the money supply M2 (blue line) increases at an unprecedented rate, at the same time the speed of money (yellow line) decreases. That is, fewer purchases are made . Speed ​​is calculated from the number of transactions of one dollar for the purchase of goods and services, per unit time.


That's where the secret lies in keeping inflation under control. Freshly printed money directed to the financial system has not been transferred to consumption . Inflation exists, but it only affects the poor, who are constantly finding out that their money is losing value. Inflation is lacking in "real economy" goods, but rising prices are evident in the value of assets such as stocks.

 

Who benefits? Those who own shares, bonds, real estate. Billionaires have been the biggest winners in the last two months, at a time when unemployment is at an all-time high . That's the free market, one might argue. Error! This is not a free market, but openly manipulated by governments and central banks.

Because the stock market is going up

Is that why the (US) stock market is going up? Definitely a major parameter. If we evaluate the shares of the Dow Jones index with gold, instead of the dollar, we have a completely different picture. Dow Jones may be close to the all-time high of February, but has actually lost 60% over the past 20 years to gold.

Why gold? Because it is more reliable. This is a currency that central bankers cannot "print" as they see fit. Dow Jones began to plummet before the dot.com bubble burst, when Alan Greenspan had begun to be seduced by artificially low interest rates and rising liquidity.

 

The second reason concerns the psychology of investors. The dynamics that have prevailed in recent weeks are about the prospect of recovery. The US economy is reopening. The American media may be dominated by the headlines of unrest and violence, but the economic data has left the worst behind. They can only be improved, even if they find it difficult to reach the level they had before the crisis broke out.

With that in mind, as long as the market doesn't back down, confidence goes up. The rise is driven by hasty or impulsive markets, as investors fear losing the opportunity.

The stock market and economic reality are two different entities . The indices will recover their previous prices. They always succeed, it's only a matter of time. However, many companies will never do that. This discrepancy is due to two reasons. One is that companies that close or show significant deterioration in their size are excluded from the indicators. But the main thing is that the stock markets do not represent the economy as a whole. They do not include hundreds of thousands of other small and medium-sized companies.

Inequality exists even within the S&P 500. The five largest stocks (which are all of the new economy) have left the rest behind. The yield gap is constantly widening. It has risen to 20% among the top companies in terms of capitalization and the index. Even bigger is the difference with S&P Equal Weight, which is equivalent to all 500 companies on the index.


The red dot of bitcoin

The most popular mathematical model in the cryptocurrency community, which predicts the price of bitcoin, is the Stock to Flow ratio (S2F). The calculations are based on the ratio of existing stocks to the rate of mining per year. For example, in gold, the rate of extraction per year compared to the existing stock is 1.6%.

With this model, the concept of rarity is quantified, revealing its relationship to market value. There may be other factors that affect price, such as news or psychology, but the most important factor is rarity.

Where did we remember it? Because the red dot has finally appeared, marking the beginning of a big upward wave. As we can see in the diagram, this dot appeared shortly after halving. Like now!

Of course, the fact that it has happened twice in the past does not necessarily mean that it will happen a third time. What is certain is that despite the impact of the pandemic, bitcoin continues to rise. It surpassed the March test faster than any other stock market value. Whether it's international stock indexes or commodities.

The vision for bitcoin has shifted . Many no longer see it as "a strange investment value, ideal for speculation", but as "an asset capable of protecting itself from crisis".

Of course, this did not happen in March, when it fell at the same time as traditional markets. Actually. However, in cases of severe crises, all assets slip. The thirst for liquidity is stronger than any rational criterion. Gold did not escape this rule either. Does this mean that it has ceased to be considered a safe haven or an unrelated item in relation to shares?

What is worth noting is that the cryptocurrency market has managed to float without the slightest help or support from the authorities. The endless billions generated by the Central Banks have a different direction. If bitcoin finally fails, the taxpayer will not be charged anything. Who can really claim the same for the current banking system?

 

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