To understand what is about to happen, I need to explain Keynesian Economics and Monetary Policy. Once you understand Keynesian Economics and Monetary Policy, what is about to happen will be apparent.
Before the world went off into the insanity of printing paper ( now digital) money by Central Banks, the interest rate cycle went like this:
- Expansion: When things are good, money flows, people forget the past crashes and believe things will always go up. As more goods are produced, more money flows around in the economy which causes interest rates to go down. The expectations of lenders for defaults declines, and competition to lend money heats up, and interest rates down down further.
- Recession: When things are bad, money flows tighten, people pull in the reins and believe things will always go down. As money supply declines, interest rates go up. Lenders begin experiencing defaults and losses, and lenders no longer want to lend, and interest rates go up even further.
This is the way a Free Market Interest Rate works.
I recently had a friendly disagreement with a friend of mine who is a Financial Analyst for a major bond fund. When I told him this, he disagreed. He said, no, the Central Banks lower interest rates when times are bad, and raise interest rates when times are good. He fundamentally disagreed with Market Economics because the Central Banks have controlled interest rates for so long, his perception of reality is the distorted reality of Keynesian Central Bank Monetary manipulation.
I was a Modern Monetary Theorist, what I would call a development of Keynesian Economic Theory, until last year. I actually found MMT to match my own personal philosophy of economics that I came up with myself. But I discovered I was wrong.
You see, over the past 80+ years, Central Banks have been manipulating our monetary system by raising interest rates when things got good, and lowering interest rates when things were bad to smooth out the massive oscillation in interest rates that markets experienced prior to Central Bank Manipulation. This provided for stability of interest rates, and theoretically higher long term growth rates (Austrian Economists would argue that the suppression of volatility actually impedes creative destruction and the massive efficiency gains through the normal ebb and flow of the boom and bust of fear and greed that causes the economic cycle).
But as one of my favourite MacroEconomic Analysts Raoul Pal says “suppressed volatility always leads to hypervolatility.”
The way I Illustrate this is by comparing Keynesian Central Bank Monetary Policy to a massive reservoir and dam built to prevent flooding on the southwest side of the 2 million + metropolitan area I live in. When it rains (when a recession comes during normal business cycles), instead of letting the water out at the same rate it flows, which would cause flooding (and in this illustration, flooding would beget more “rain”) the level of water behind the dam is allowed to go up (interest rates are lowered). When it’s dry, water is let out of the dam (interest rates are raised) so that when the next time it’s rainy season, the level of the dam can go up, so that there is minimal flooding.
Last year, when the Federal Reserve deferred raising interest rates at the March 2016 meeting, which they were supposed to do if things were getting good, they didn’t. That was the signal that something was not just wrong, but was fundamentally wrong with the entire Monetary System.
To use the illustration, The Dam is full of water, and it’s about to rain.
The thing of it is, even when it’s not rainy season, water still flows down the river behind the dam into the reservoir. It doesn’t have to start raining for the Dam to overtop and begin flowing down the emergency spillway, spillways built into every dam so that they can empty without overtopping (which would cause the dam to erode and spill out, emptying the entire contents of the dam into the river below the reservoir – an event that would cause massive damage and even significant fatalities.
I believe that there is an equivalent “emergency spillway” in Economics, when the floodwater / reservoir / dam management of the Keynesian Economists fails – and it is about to have a catastrophic failure.
When the Spillway begins to flow with water (money flowing into it) everyone who has their money trapped in the economic system (the Reservoir) will do whatever they can to get out – they will load up Cranes on top of the Dam, and begin digging (a massive Bond Selloff as foretold by Michael Pento) to get their money out. The only problem is that this will destroy the dam, causing a catastrophic failure.
Throughout history, this “Spillway” would have been Gold and Silver.
But anyone who follows the Gold and Silver Markets knows that the same Monetary Manipulators of the Fiat Currency system are also manipulating the Gold and Silver Markets.
The only market that is Free Market Money, that is not currently manipulated, is Cryptocurrencies.
WHEN, not IF money begins to flow into the Cryptocurrency market in a massive superspike, that will be the beginning of the end. Is the current spike in Cryptocurrencies the “Spillway” spilling over, or is it just a precursor to the real event? Only time will tell.
Here’s how it will play out, when it does.
When the Dam Begins to spill over, how much money will try to flow into Cryptocurrencies? What percentage of the Monetary Supply that this “Reservoir” is holding will flow into Cryptocurrencies? 1% 5% 10% 25%?
Cryptocurrencies in a catastrophic failure of the Monetary System that is about to happen, will in my view end up, despite being repressed massively by Governments, replacing 10% of M2 Global Money Supply. Total M2 Global Money Supply is approximately $70 Trillion (http://inflation.us/money-supply/) which means Cryptocurrencies my economic analysis places a target for Cryptocurrency Market Cap is $7 Trillion
I have had this number in mind since the Market Cap of Cryptos was a total of $20 Billion. My 3-5 Year price target for Bitcoin alone is $100,000.
This means that even at current Cryptocurrency Market Cap of $70 Billion, even after the recent “bubble” Cryptocurrencies may still have 100X to go. If they only reach 1% of M2 Money Supply, Cryptocurrencies will still go up 10x.
This massive superspike in Cryptocurrencies will initially cause deflation, and a slowing in Monetary Velocity. People will be trading their Fiat for Crypto, and not spending it, causing M2 Supply growth to flatten out. It will not take a large amount of money pursuing Cryptocurrencies to cause the Superspike. If $70 Billion in Fiat were to pursue a $70 Billion Market Cap of Cryptocurrencies, prices would not go up linearly, but exponentially. The Crypto total Market Cap would go to $700 Billion. This spike would cause even less liquidity (in Economics called the “Giffen Good” dynamic) and an additional $200 Billion in Fiat (only!) would cause the Crypto Market Cap to hit $7 Trillion.
When this massive increase in value of Cryptocurrencies begins to flow back into the “real economy” the value of these Cryptos going up will cause assets like Gold and Silver to superspike. Any assets will spike, causing rampant inflation.
Cryptocurrencies will initially trigger deflation, but will be the ultimate catalyst for Hyperinflation.The other thing that will happen is massive repression of cryptocurrencies by Central Banksters / Central Governments. When Cryptocurrencies post $7 Trillion in Capital Gains, they will absolutely, absolutely want their pound of flesh.
o They will require tax reporting and compliance by Cryptocurrency Exchanges.
o They will require if possible, reporting by Crypocurrencies of all transactions. This will be especially true of
Cryptocurrencies run by what are essentially business models.
o Any Centralized Cryptocurrencies will be required to report 1099s to their holders, or will be shut down and / or prosecuted for Tax Fraud / Racketeering.This will cause a spike even higher than the average Cryptocurrency for those cryptocurrencies that 1. have completely anonymous transactions / are completely anonymous and 2. are completely decentralized.
How should you position yourself?
- Buy Cryptocurrencies that are built to BE Currency, to act as a means of exchange between individuals.
- Buy Cryptocurrencies that are Private / Anonymous. I’m not a computer programmer, but one of the flaws identified with Bitcoin is that its Blockchain is Public: the to and from addresses as well as amounts are visible on the Blockchain. Believe me, if the government thought there were trillions of dollars of capital gains identifiable using a computer to track these transactions, they absolutely would try to track down the taxpayers behind those Bitcoin addresses, and require disclosure of who owned those addresses by all exchanges.
- Avoid like the plague “Cryptocurrencies” that are a part of business models, or used and derive their value becuase they are used primarily within a business. These first of all are NOT Cryptocurrencies in the original sense of the term, they are nothing more than Business Tokens, and I refer to them as “BizCoins.” When, not IF, the government comes to tax them, their value will quickly approach zero, or immediately go to zero when the government shuts it down for regulatory non-compliance. Beware, there are many new coins with very high market capitalizations right now that fit this description!
- Avoid like the plague Cryptocurrencies that are not radically decentralized. If there’s a board employees who make decisions as what could be seen by the IRS as “owners” – any regulatory compliance costs alone would cause the rapid collapse / shut down of those coins. Beware, there are many new coins with high market capitallizations which fit this descrption!
Surely all the powers that be (IMF, WorldBank whoever just buy all 16+ million bitcoins and others when mined(price does not matter to them) and then they just keep it all and that's the end of bitcoin
If they did, they'd drive bitcoin up to $1 million+/coin by the time the last people were selling... it would effectively make anyone who was into bitcoin incredibly wealthy... and then they'd just move over to another crypto after... they can't stop it ;)
Yea thats an advantage they have. Yet they cant buy it all and not all cryptos
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In terms of government regulations, you're already starting to see some of the things you mentioned, take place. FinCEN has been cracking down on individuals selling bitcoin on localbitcoin. Bitcoin is legally treated as a commodity, but is also bound by the rules of currency transmission. It's a weird double standard
Don't forget limited supply as well as anonymous and decentralized.
That's actually another fallacy in the crypto space I'm working up an economic report on. Static Limited supply can be a huge problem. The most important thing to know is that when Cryptos hit 1-25% of M2 Global, the price will superspike to that level (over months, not years). The other most important thing to know is that in plain English, many currencies are built with to start cost structures that sometimes include massive internal costs (paid by YOU but hidden) - funded under the assumption that when supply becomes "static limited" these massive costs can be externalized (paid by YOU, only now obvious). From a fundamental economic analysis, that is insane, and will at some point in the near future cause a shift in how the market treats those costs.
Looking forward to it.
Raoul Pal....great guy as are everyone at realvision