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Thursday, May 06, 2021 - 23:55 SGT
Posted By: Gilbert

Of Fake Money And Real Dodges


Where are those values now?
(Source: twitter.com)


I don't think of myself as a particularly cautious investor (or speculator, whatever), but what's been going on these past days has left me gasping a little. I had just taken my eyes off Ethereum for a bit, only to be informed in passing that its price had gone up to US$3500, from the two-thousand plus I had last seen it at... and the less said about Dogecoin, the better. It's a swell time to be in the crypto and stocks and all (which has evidently gotten some blowback from those less interested in personal finances), but surely this can't end well?

The single most influential position in the world right now has to be that of Federal Reserve chair, with financial markets hanging on his every word - will he or won't he (raise rates, that is)? We've groused about inflation last month, and while such concerns had somehow almost without exception been dismissed out of hand by the corporate media up until very recently, the likes of Buffett and Zell are finally giving voice to the obvious. Not a patch on former Fed chair Janet Yellen, though, whose throwaway comment on "some very modest increases in interest rates" was enough to crash the market, necessitating an immediate walkback on there being no inflation problem, with Powell's official stance being "transitory inflation".

It's hardly a big secret that this is just the usual mindgame song-and-dance; expectations of inflation can drive actual inflation itself, and thus the Fed would rationally want to suppress such expectations as far as possible, such as through their pledge not to raise interest rates until inflation hits their target of 2% - which they had pencilled in for 2023 or thereabouts. Trouble is, despite the unquestioning support of the Fed's narrative by the FAKE NEWS, it's becoming increasingly evident that inflation may far surpass that, and there's only so much one can tweak the underlying consumer price index (CPI) formulas, before their credibility is shot.

Some have (correctly) noted as far back as 2018 that inflation due to the ongoing quantitative easing has simply expressed itself as asset inflation at the "higher levels", i.e. in stocks, real estate, art, crypto, etc., if less for Main Street goods and services, for now. This is also known as the Cantillon effect, in which those closest to the money spigot (the banking and finance industries) get to enjoy its benefits first, before the funds trickle down to the masses, and inflation gets registered (if it helps, this can also be thought of as reconciling allowed assets to supply tokens only at the end of a period/turn, a mechanic that's been used in some board games)

Another way to think about this, is that the ostensibly-quantitative public target that the Fed is guided by - the inflation rate as determined by the CPI - can in fact have very little to do with the total amount of fiat money in existence, depending on the distribution of that fiat money. Consider a simplified worked example involving a Sociopath 1%, and the Clueless/Loser 99%:

  • Year 0: Financial crisis; Sociopaths own US$1 trillion as a class, Clueless/Losers also own US$1 trillion total, despite collectively being much greater in numbers

  • Year 1: The Fed starts printing; much of the money gets directed to the Sociopaths through high finance tricks, with some scraps thrown to the Clueless/Losers; Sociopaths at US$1.5 trillion largely thanks to booming equities markets, Clueless/Losers at US$1.1 trillion after stimmy cheques (and some brave crypto plunging)

  • Year 2: More of the same, markets go bananas, bananas go for over a hundred grand, Sociopaths smoking cigars with US$3 trillion on paper, Clueless/Losers at US$1.25 trillion, FAKE NEWS continue churning out articles on how inflation has been solved thanks to changing economic fundamentals, and how everybody will soon be chomping on airfried artificial chicken and guzzling sugar-free soda after driving to the nearest high-diversity diner in their Teslas.

    Of course, seen this way, the reason for minimal observed inflation is bloody obvious - the Clueless/Losers who determine inflation through their everyday spending, have not experienced the price increases - yet. However, the extra money has already been created and assigned (to the Sociopaths); they just haven't "spent" much of it

  • Year X: Nobody wants to take away the punch bowl while the party's on, but it's gonna go empty by itself sometime. Sociopaths are at US$5 trillion, and Clueless/Losers at US$2 trillion, when the Fed chair suddenly scratches his head and goes, well, like, you all knew that this made no sense with burgers costing US$20, right? Markets crash, blood in the streets, and when the dust settles and inflation is wrested back under control after some painful years, the new equilibrium becomes: Sociopaths with US$2 trillion, Clueless/Losers with US$0.8 trillion (and are "relieved to have cut their losses wisely"). The rich get richer!


Anyway, congratulations to all those who have done well for themselves through crypto or otherwise, in this easy-money era. I'd recommend conservative assumptions for future returns in charting one's FIRE plans, however, just sayin'.



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