The Far-Reaching Consequences of the $1.9 Trillion Stimulus Package for Bitcoin

The new economic consensus may be the final push Bitcoin needed to boom. What the US dollar isn’t doing and the Federal Reserve’s relationship with the theater of the absurd.

• Bitcoin & big stimulus – two sides of a different coin
• Why is the dollar not doing better?
• The Federal Reserve isn’t Waiting for Godot

Bitcoin & big stimulus – two sides of different coins

The giant $1.9 trillion Biden support package released last week will probably do more for bitcoin’s long-term activity than any headline purchase by a JP Morgan or Morgan Stanley ever will.

The obvious knock-on effect of all of those $1,400 checks has bitcoin traders salivating at the prospect of new money chasing a limited asset. The underlying effect will be much more significant.

The $1.9 trillion package is in many ways a milestone in the institutional adaptation of Modern Monetary Theory (MMT). MMT essentially holds that deficits are not and should not be a concern for central bankers. It argues that once you control your own currency, then you can issue as much debt as you like as it is impossible to default. This currency control exists in the US but not the EU where everyone, with some exceptions, has the euro.

We have written briefly about MMT before, but recent events regarding the intellectual framework behind recent stimulus plans in both the EU and the US have brought it back roaring to the forefront of economic thinking and more specifically, the reason why bitcoin is more necessary than ever before.

Throughout history there have always been competing economic theories, most famously the Chicago boys of the 1960s who exported their form of capitalism throughout South America and beyond to the more recent austerity response to the 2008 crash. It is accepted now that the austerity approach was a serious error that resulted in more harm than good. We won’t go into the rights and wrongs of the past, but one common theme is emerging in both pro and anti-MMT economists…

Bitcoin, with its simplicity and limited supply, along with complete independence from direct government, could be the ideal trap door for those investors who would prefer not to bet the farm on current economic thinking.

If the MMT proponents are correct, then a new era of economic policy that doesn’t concern itself with inflation or debt in the same way as the past will sustain and revitalize capitalism, but in a more inflationary environment. If they are wrong, then any short-term benefits will be wiped out by a big financial collapse and hyperinflation. 

As the central bank enters a new era, so too does bitcoin. It is no longer just an alternative currency. It may very well be an alternative to the entire traditional financial system.

Why is the dollar not doing better?

Amongst the high-profile market stories of the first quarter of the year from GameStop to rising bond yields there hasn’t been much coverage of something that should have happened but didn’t.

The rollout of vaccines in the US has been highly effective and rightly applauded. The rise in bond yields has shifted global investing into inflation hedges, the obvious beneficiary being bitcoin and other cryptocurrencies. So why has the dollar only appreciated against the euro by around 1% in the last three months?

Coupled with the chaos that is the EU vaccine rollout, conventional thinking would have expected to see a much stronger dollar versus the euro. The fact that the Treasury seems to be comfortable with a soft dollar at the moment isn’t really enough to explain why it hasn’t strengthened further.

Unlike normal years, we would expect much more aggressive moves in all markets as global economies begin their recoveries. There is less of an unknown when interpreting economic data than there was last year. Last year there was an expectation that with the arrival of vaccines, economies would suddenly open up. This year, the vagaries of incompetent rollouts, low vaccine rates, and people’s amnesia over how to order a meal from a sitting position will feed into investor concerns. 

Whilst our long-term view still leans toward eventual US Dollar weakness, we can only ascribe the current underwhelming dollar level to spiraling debt levels. The Democrats have made it clear that the $1.9 trillion dollar package will not be the last. It is expected that they will fully buy into the Federal Reserve’s perennial argument that “they can lend, but they can’t spend” and seek a multi-trillion dollar infrastructure package. 

On the other side, the EU will be closely watching and won’t be happy with a Euro that continues to strengthen too much. What they will do about it, or indeed, what they can do about it will be interesting but for now, keep an eye on what’s not happening a bit more. It’s going to be that kind of year.

The Federal Reserve isn’t Waiting for Godot

In the theater of the absurd, Samuel Beckett’s Waiting for Godot has its protagonists waiting for something to happen that probably never will. The Fed last week has taken the inverse approach. They are not waiting for inflation despite universal market expectations that it will happen.

Having decided to keep rates unchanged and making no adjustments to their quantitative easing program (a fancy title for buying bonds), Fed Chairman Powell reiterated the view that no rate hikes will be introduced until 2024.

Looking under the hood however and one can start to see a small shift in Fed thinking.

They have lifted their forecast growth rates, lowered their unemployment expectations, and slightly raised their inflation expectations, keeping them within acceptable ranges.

Three months ago, four out of seventeen Fed board members expected a rate rise in 2023, and in the latest report, this number has risen slightly to seven out of eighteen. Not a huge move but a direction that supports the market contention on inflation.

Central banks the world over have embraced money printing and increased debt. Keeping rates low, and thus refinancing costs, will define how our world will look like over the next ten years and further. 

The news next week

Europe re-enters lockdowns but the data out of the US and UK should start to reflect optimism. Any surprises like last week’s US jobless numbers won’t be welcomed.

Tuesday – Average earnings out of the UK and US new home sales

Wednesday – After US durable goods orders, The Fed Chair will testify. Should make for interesting viewing as he tries to maintain a contra reality narrative.

Thursday – Big day with Q4 GDP numbers out for the US along with jobless data.

Friday – Watch out for today’s German business confidence numbers. The debate around them rather than the actual numbers.

The author works exclusively for Xcoins.com and has spent almost 20 years in trading rooms from New York and London to Düsseldorf and Sydney. To stay up to date on all things crypto, like Xcoins on Facebook, follow us on Twitter and LinkedIn and enter your email address at the bottom of the page to subscribe.