Expansion of the Fed’s balance sheet will lead to low or negative yields. Investors will seek assets that are scarce, like bitcoin.
The Federal Reserve's policies are fueling deflation, not inflation, according to a well-known hedge fund manager. A deflationary environment could send bitcoin sharply higher. | Image: KAREN BLEIER / AFP
By now, it’s no longer a secret that the Federal Reserve is responsible for pushing the stock market into all-time highs.
The Fed continues to pump billions into the financial system as it grew its balance sheet from $3.7 trillion to nearly $4.2 trillion in a matter of months. During the same period, the S&P 500 and the Dow Jones skyrocketed to all-time highs.
One analyst believes the central bank will continue to expand its balance sheet because it has no other choice. A host of factors are forcing the Fed to plug a black hole in the U.S. economy. These conditions could act as rocket fuel for scarce assets like bitcoin.
Many analysts are betting that the Fed’s money printing will eventually result in hyperinflation. But it appears that the exact opposite may be happening.
The Fed is flooding the financial system with hundreds of billions of dollars yet the consumer price index (CPI) is not overheating.
How is that possible?
The Federal Reserve is doing a marvelous job of keeping the money out of the hands of ordinary people. They’re giving it to banks and hedge funds who are either hoarding cash or betting it on the stock market. Brendan Bernstein, founding partner at crypto hedge fund Tetras Capital, adds that many are using the money to service debt rather than buy goods and services.
With inflation out of the equation, the crypto hedge fund executive explains how deflation will strike the United States. First, the boomers will leave the workforce in the next five years. This will start a trend where the growth of the country’s working-age population steeply declines. Less workers means less money to spend.
With the boomers leaving the workforce, they will also take money out of the stock market. Bernstein reveals that they will suck $10 trillion out of the equity market due to mandatory withdrawals.
According to Bernstein, the weakening workforce growth and the boomer retirements will force the Fed to double its balance sheet in the near-term just to keep the economy stable. Even with the Fed pumping trillions, Bernstein predicts the economy will experience very little growth.
As the Fed continues to grow its balance sheet, yields will suffer. Otherwise, the U.S. government won’t be able to service its debts.
In this environment, investors will turn to other assets to generate returns. Bitcoin is a prime candidate. Alex Kruger shares the same view. When asked if the top cryptocurrency will thrive in a deflationary environment, the economist responded,
Yes, same as gold. Gold benefits from periods of hyperinflation or negative real yields. Bitcoin should be the same in this regard.
Hans Hauge, analyst at Ikigai fund, has the same sentiment. He told CCN.com,
I think this is where we see if bitcoin can move from being a risk asset to a safe haven. Right now, bitcoin is benefiting from the massive asset bubble that we see in private equity, the stock market, venture capital, etc. But bitcoin is also spreading roots into the global financial system. It’s like an insurance policy that just keeps getting bigger.
In other words, the Fed will be busy propping assets while devaluing the U.S. dollar and generating low to negative yields. This will drive investors to seek alternatives that are proven to be scarce. Bitcoin is on course to become ultrahard money, harder than gold.
It appears that the Fed is creating the rocket fuel that may send bitcoin to the moon.
The above should not be considered trading advice from CCN.com. The writer owns bitcoin and other cryptocurrencies. He holds investment positions in the coins but does not engage in short-term or day-trading.
Last modified: March 4, 2021 2:41 PM
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