This title seems a bit counter-intuitive. Don’t many believers of Bitcoin say that Bitcoin can fight the US money printing? I want to make the conclusion first. As far as the concept of anti-inflation is concerned, we hope that the purchasing power of currency will maintain or not decline, and that money will not become thinner. From the perspective of fixed depositors, inflation is mostly slow and gradual. In this way, the tools to fight inflation should also be slow and gradual and have little volatility. Therefore, the volatility of Bitcoin as an asset is too large. In fact, it will be brushed off in the first level. Taking Bitcoin as an example, the annualized standard deviation of BTC (the indicator we use to measure volatility) is about 65–70%, while the standard deviation of the US stock S&P500 is about 15–18%. If the fixed deposit family wants to invest in Bitcoin To fight against inflation, it may not have time to enjoy the effect of anti-inflation. The fluctuation of currency prices has already eaten up the benefits of anti-inflation.
What is inflation?
How is inflation defined? Usually one of the clearest indicators for judging inflation is a comprehensive and continuous rise in prices or a rapid rise. It is worth noting that inflation mainly depends not on the absolute level of prices, but on the speed and magnitude of price increases. For example, if the price level rises by 1% or 2% every year, everyone will feel that it will not be too obvious, but if it rises by 5% or 10%, then the risk will be significantly greater. The main indicator for judging inflation is the annual growth rate of the CPI consumer price index. In mature countries such as the United States, Europe and Japan, the annual increase in CPI is usually controlled within 2%, which means that as long as the annual increase in CPI does not exceed 2%, it is considered that there is no inflation. In developing countries, including China, with relatively fast economic development, people usually think that a CPI increase of 3% or less than 3.5% is considered a low-inflation state. If this increase reaches double digits, it is very serious inflation.
Economic growth, asset prices and inflation.
So why do we often hear that real estate, stocks, and even Bitcoin can hedge the risk of inflation? Could it be that everything I said before was wrong. Actually it is not. The current simplified version of the market is to simplify the central bank's monetary policy to "printing money." In fact, the reason why we care about the monetary policy of the central bank, especially whether its monetary policy is loose or tight, is mainly because it affects the trends of the three major economic indicators of economic growth, inflation and asset prices.
In theory, if the central bank cuts interest rates or implements a loose monetary policy, asset prices will have an upward trend. This sounds very simple. However, in fact, it is very complicated to accurately determine asset price trends based on the central bank’s monetary policy. Things. First of all, it is not easy to predict and guess how the central bank's monetary policy will adjust and make investment decisions in advance. Second, the relationship between the central bank's interest rate hikes, interest rate cuts and asset prices is not an absolute positive correlation. A rise in interest rates does not mean that asset prices will definitely fall, and a reduction in interest rates does not mean that asset prices will definitely rise. The assets we mentioned earlier, especially financial assets, are very diverse, including stocks, bonds, real estate, etc., and monetary policies often have different effects on the price trends of these assets.
According to the most basic theory of the quantity of money, we can derive a basic formula for the relationship between economic growth, inflation rate and asset price growth:
M2 growth rate = GDP growth rate + inflation rate + asset price growth rate
At the same time, the algorithm of asset price growth rate can be introduced through this basic formula:
The growth rate of asset prices = the growth rate of M2-GDP growth rate-inflation rate
In monetary theory, according to the speed of currency realization and liquidity, it can be divided into three levels. The first level is money (M0), which is the cash in market circulation; the second level is narrow money (M1), which is M0 Add demand deposits; the third level is broad money (M2), which is equivalent to M1 plus time deposits and savings deposits. There is a very simple rule of thumb between M2 and asset prices. According to this rule to judge the asset price trend, you can grasp the basic trend and judge the asset price trend based on the growth rate of M2. For example, the central bank announced that next year’s M2 growth rate will be 10%, GDP growth will be 4%, and CPI (Consumer Price Index) will grow 3%. Substituted into the formula, 10%–4%–3%=3%, which is next year. The price of assets will rise by at least 3%. Of course, this rule is only a rough estimate, not an absolute.
In contrast, the reason why we believe that real estate, stocks, and even Bitcoin can resist inflation is actually because the growth rate of cash, an asset, is almost zero. When the economy is booming and the GDP growth rate is high, the growth of M2 The rate is usually high. At this time, real estate, stocks, and even Bitcoin will rise in line with the economic growth rate. Therefore, at this time, you will feel that the assets you can buy with cash on your hand are reduced. In fact, this is mainly because of assets. Prices are rising, and the inflation at this time is healthy and is considered good inflation. And when there is hyperinflation, for example, the inflation rate reaches 10%, and the economy is not growing well, then printing money to rescue the market is like raising oil to fight fires. The economy does not improve, and asset prices have a high chance of being negative, that is, stagnation. inflation. The stock and housing market at this time is usually accompanied by a sharp decline.
The reason why we mention "at least" in the formula for calculating asset prices is because the actual increase in asset prices may far exceed the growth rate of M2. Sometimes the central bank may affect the market's expectations of monetary policy with just one sentence, and the stock market may rise or fall sharply. This is an overreaction of asset prices. In addition to the overreaction of asset prices themselves, the speed of currency circulation is also a variable. Suppose there is an economic recession, and the central bank has increased the money supply M2 to stimulate the economy, but it has no effect. Where is the problem? The situation that may need to be considered is that the speed of currency circulation has fallen, thus offsetting the attempt to stimulate the economy. Currency is stuck in a certain link in the circulation chain, but where is it stuck? It may be that after the currency reaches the hands of consumers, the velocity of circulation has become extremely slow. For example, in 2020, the new crown epidemic rages and the velocity of currency M2V has dropped to a historical low. Because people have fears and worries, they choose to increase preventive measures. Cash reserves, that is, to save money in the face of possible hard times, or people think that the bank may fail, so the money is stored under the bed.
Because according to Fisher’s equation: MV=PQ, where V is the velocity of money and M is the money supply. MV stands for total output. PQ stands for the nominal GDP (P is the price level, Q is the quantity of goods and services produced, or called the nominal GDP). In 1992, Friedman pointed out that there was a significant time delay from the expansion of the money supply to its greatest impact on inflation: for M1, the average was 20 months; for M2, the average was 23 months. That is, the initial effect of MV→Q→P monetary stimulus is positive (increase Q), but the negative effect of excessive stimulus (increase P) is only revealed in the later stage. Because of this sequence and time delay, some excessive money creation was caused. It's like, when we take a hot bath in winter, because we think the water is too cold, we turn on the hot water. When the hot water comes up, it is too hot. Now everyone seems to be concerned about inflation, but at this time it is just a short period of hot water that is too hot. The Fed’s M2 number has dropped, and the flow of currency is still very slow, as if the cold water has been adjusted. In the beginning, there will be a time difference. Inflation will gradually decrease, the economic growth rate will decrease, and the M2 growth rate will decrease. The asset growth rate in 2022 will definitely be much lower than in 2021.
After the Breton Forest System collapsed in 1971, mankind entered the era of credit currency. Since the US dollar broke away from the gold standard, the US dollar has lost 98% of its purchasing power compared to the price of gold as an asset. If we look at the world as an economic system, the global base currency has increased hundreds of times from 48 billion U.S. dollars in 1971 to over 20 trillion U.S. dollars. Correspondingly, the M2 growth rate is of course very fast. In the past half century, the growth rate of the global real economy has been very low. Especially in mature economies, the growth of the real economy has generally slowed down sharply. At the same time, the prices of financial assets and the total amount of financial assets in developed countries have grown rapidly. Now the total amount of global financial assets has exceeded the global GDP by more than 5 times. Therefore, with regard to the issue of "anti-inflation", we should actually say that "close to asset price growth" is more appropriate. In fact, the inflation rate CPI index of various countries is not out of control obviously. What is out of control is the price of assets.
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