The same applies to cash once a critical mass of people believe there's an effectively unlimited amount of it flooding the market. That's what hyperinflation is. You really don't want to be in cash if that happens.
See the performance of Venezuela's stock market over the last 5 years:
(The "crash" in late 2018 was the redenomination of the bolivar at a 1:1000 ratio, which affected everything denominated in bolivars, including the stock market.)
My grandfather bought a mansion in SF (Dolores St) for $8K in 1934 (approx). You can optimize for a 1929-style crash (hold cash), and you can even plan for hyperinflation (anything but cash), so the trick is to figure out which way to go.
I think that's the appeal of Bitcoin and/or Gold: it's both cash in that it might act as a safe haven in the case of an asset crash and would retain it's value during hyperinflation (since you can't print more of it).
Though bitcoin has really been untested as a safe asset and currently behaves more like a speculative one.
I think Bitcoin has huge potential right now, even after its recent run up. It could easily 4x to 6x from here, before the next halving. It could also drop by half, but at least the rewards are asymmetric with the risks.
But even though I'm optimistic about Bitcoin, I don't see it as crash-proof except in one crash scenario. It's mostly a speculative risk-on asset that loses value in crisis scenarios. We saw that in the covid crash in March last year as Bitcoin prices tumbled along with other markets.
The one crash scenario where Bitcoin doesn't crash is if Bitcoin is the thing that triggers a crisis of confidence in fiat assets. That's the hyperbitcoinization scenario that still looks improbable, but easier to imagine now than it was a couple years ago.
Gold has been confiscated by FDR. Bitcoin clamp down is coming: we have recently learned from Yellen that it's primarily a terrorist tool, and that it also causes global warming.
It would be interesting to see how much the gold mining industry contributes to global warming (including not just extraction, but processing and shipping). Trading, too, but I suppose that's done mostly by contract, and not shipping gold bars around...
People are giving too much credit to cryptocurrencies as the only vehicle for dodging inflation. Any asset that rises with inflation (most of them) is a sufficient vehicle for avoiding having your cash devalued.
People could simply exchange their domestic currencies for foreign currencies of more stable countries. That's what happens in countries with hyperinflation right now, despite access to cryptocurrency.
The only real advantage of cryptocurrency is that it could be transferred around hypothetical government controls. That's more of an extreme edge case scenario, though.
To be clear: The US inflation is too high, IMO, but it's nowhere near hyperinflation or government collapse. The average citizen is more likely to benefit from recent stimulus packages than to lose out from it. It's not like everyone keeps their 401K invested in pure cash.
That said, we're overdue for interest rates to start creeping up. COVID is coming to an end quickly and the unemployment never really got out of control in the first place. People aren't going to go bankrupt if their mortgages go back to 4-5% instead of 2-3%
> People could simply exchange their domestic currencies for foreign currencies of more stable countries
Most of the developed nations are competitively devaluing their currencies. If one country does it, they gain a trade advantage: their exports are relatively cheaper on the world market, so consumption flows to their industries and makes them wealthy. Therefore once one country does it, they all have to do it, lest all their export industries become uncompetitive and they lose those jobs.
I've heard some speculation (nicely backed up by data [1]) that the real reason we couldn't follow through with monetary tightening 2015-2018 is because it created a carry trade of investors borrowing in Euros and investing in dollars [2], which led to a continual outflow of dollars out the door.
If hyperinflation hits it will likely hit nearly all the developed world in short succession. If the dollar goes, all investors are going to dump dollars for Euros, but if they do that the value of the Euro will skyrocket, which means European exports will become super expensive and Euro-denominated debt will be harder to pay off, which will spur European central banks to dump more Euros into the system. As long as we have free capital flows there's no way around this: inflation in one fiat currency will lead to inflation in others. That's why people are looking for non-fiat currencies. (You're right that tradable assets like stocks can fulfill this job rather than cryptocurrency, though.)
> As long as we have free capital flows there's no way around this
I think that's the gist of it, and as such I also think that free capital flows will be massively restrained in the scenario you mention (a scenario which I also find very likely).
A similar thing has just happened with the freedom of movement for people, a "right" that the great majority of us had taken for granted, and then Covid came and that "right" was forgotten about like it never had existed.
The ECB is a lot more politically constrained than other central banks. It doesn't have a single master but is beholden to various degrees to the member states of the EU and especially Germany which is utterly paranoid about currency devaluation.
Don't forget the ECB raised rates during the onset of the financial crisis circa 2007-8 when everyone else was cutting desperately because of their inflation targetting mandate.
Buying Bitcoin to hedge inflation instead of just buying TIPS is like saying: I think the price of AAPL will go down, so I'm going to get some lottery tickets.
And you would be wrong. Inflation != asset prices. Don't make me post the global savings glut thing again... Also "rigged" is just conspiracy language. YOU CAN LITERALLY LOOK UP THE INDEX YOURSELF. Channel your inner hacker and do it, learn something, you don't need anyone's permission. I'll even help.[1]
I'll give you the "Angry" part, but you're going to have to work harder to convince me of "Skillzz." I can imagine a thousand ways to "rig" an inflation index to rationalize money printing. A couple years of latency here, a trimmed mean over there to exclude assets, bingo bango mission accomplished. Money printer goes brrrrr!
I actually have spent considerable time poking through the basket definitions and while I was generally impressed by the effort I saw, the extreme sensitivity to minutiae and extreme incentives to obtain a particular conclusion make me hesitate to bet my portfolio on its integrity. I haven't re-implemented their entire methodology in an economic model and run monte-carlo simulations to evaluate their competence in the face of obvious hypotheticals but I'm pretty sure you haven't either. By comparison, "bet on assets to hedge inflation" requires much less concentrated faith in the continued wellbeing of a convenient scapegoat.
From a programmer's perspective, you are right that there are no technical barriers to constructing an arbitrary index that delivers whatever value of inflation you want. But of course that is the case for most human things. Which is why institutions are important - hopefully while we are over here being honest and thinking hard about programming, there are people over there being honest and thinking hard about the consumption basket. But then a lot of us work in adtech so maybe that honesty is questionable...
And then there are the other even more severely complicated parts. If next year's iPhone is better but costs the same amount, that's deflation. You got more for the same amount of money. How do we quantify that? Those are called hedonic improvements. How do you account for free services? What is Google worth? What if a new thing comes out that has never existed before? How do you compare that to the previous consumption basket? It would be relatively easy to argue that the preponderance of brand-new, incomparable, improving every year, cheap/free tech stuff that we are living in a relatively deflationary environment. You get more, better stuff every year for less money!
Hedonic improvements like the ones used to multiply up Intel's revenue in order to claim that "US manufacturing is doing better than ever!" while we were shipping our entire industrial infrastructure to China?
I found that episode informative and convincing, but in the exact opposite direction. I stuck my neck out on the basis of those numbers while arguing with conservative family members and it turns out the numbers were rigged after all. For a very reasonable definition of rigged.
In the face of shenanigans, I tend to put more faith in simple concepts like "assets hedge inflation" than in indices.
I'll take the other side of that argument. It's an interesting article! But it doesn't make me think that the numbers are "rigged," just that they have been misinterpreted. Semiconductors are getting way better, and have been for a few decades, and that counts as an awesome productivity improvement in manufacturing. If you just look at the top-line number, it says "manufacturing is getting more productive," which in an aggregate sense is still true! But it seems a lot of people though that meant "manufacturing is getting more productive because we have a lot of robots" even though manufacturing employment is declining, rather than "manufacturing is getting more productive because our semiconductor fabs are awesome and the rest of the sector is bleeding out." Which is what it actually meant.
The "US manufacturing is super productive" narrative is unfortunate, especially if policymakers were making decisions based on it. But it doesn't really call into question the data or methodology, just that people have misinterpreted it. But the people who are actual experts in this area are writing papers about that! This paper is from 2014[1], and she's been writing about this since 2010! With economists from the Federal Reserve system, no less.
edit: I guess my point is, the point that article makes isn't, "the game is rigged, inflation is made up, we should use shells for currency." The point it makes is, "don't just read the top-line number and then write an opinion article, make sure you read the breakdown first."
Also, assets do hedge inflation. Most of them, anyway. I never argued otherwise. Just that asset price increases are not the same thing as inflation.
I'll grant you that it's entirely possible for this sequence of events to have happened spontaneously, without any malice, on the basis of misunderstandings. It could also have happened through the selective promotion of convenient metrics (which I'd argue does constitute rigging, just by a different party), or indeed through actual malice, though I tend to share your doubts on that front.
My invocation of the term "rigged" was not charitable but that's pretty far from saying it was actually incorrect. If I had to bet, I would bet on the middle possibility: metrics are built honestly but selectively promoted in accordance with political agendas in a manner that I would be comfortable to characterize as "rigged."
In any case, assigning blame is one thing and designing portfolios robust to this kind of mishap is another. Fortunately, the difficult parts of assigning blame are completely irrelevant to portfolio design. No matter who was responsible, the correct response is to avoid metrics that are easy to misunderstand (or rig!). Which brings us right back to favoring "assets hedge inflation" over "TIPS hedge inflation."
> Also "rigged" is just conspiracy language. YOU CAN LITERALLY LOOK UP THE INDEX YOURSELF.
The idea that the government inflation indexes are rigged is conspiracy language. They are talking as if people from conservative think tanks and corporate boards are having the government fix inflation indexes to their way of thinking, or even retroactively setting inflation indexes to their way of thinking ( https://en.m.wikipedia.org/wiki/Boskin_Commission ).
They probably will, but central government authority tends to collapse when hyperinflation begins. Venezuela (and the international community recognizing Venezuela) can't even agree on who the president is, and 60% of the Venezuelans who do work do so in the informal sector.
Remember Crypto knows no borders, it's decentralized, peer to peer, and private keys aren't seizable by force. Central banks may outlaw it, and that will hurt, but it's not going to put an end to it. Especially should USD go into hyperinflation and all hell breaks lose.
1. Central banks (at least, the US Fed) doesn't have the authority to declare crypto tokens illegal unilaterally.
2. EO 6102 made sense with the gold standard. It wasn't just an "FU" to gold hoarders, but a way to raise revenue to counter the depression. It's not clear to me that it would make sense for such a confiscation of crypto, especially if the legislature were to try option #1.
> Central banks will outlaw it because they can't control it and devalue it
Except that, many rich investors and large corporations are putting money into crypto as we speak. Some of those large investors may include people who work in the government and at central banks. I tend to think that, these people will have a conflict of interest there. It might be in their own best personal interest to not ban crypto, and to leave that door open. In other words, it might soon be too late to ban crypto. The ball already started rolling down the hill.
> In other words, it might soon be too late to ban crypto. The ball already started rolling down the hill. In other words, it might soon be too late to ban crypto. The ball already started rolling down the hill.
Great analysis. Give it another few years: then when most of the S&P companies will hold crypto, along with your richest supporters and voters, trying to ban it will become political suicide.
Virtually any investment, other than cash or a money market account.
Assets, stocks, real estate, all of the things that inflate with inflation. Crypto gets a lot of undue attention as a way to escape inflation, but investors have been investing in assets to losing buying power long before crypto came along.
