GM, this is your Daily Bolt briefing.
In today’s note of the day, we’re giving you an in-depth analysis of the evolving world order in terms of reserve currencies and highlighting how Bitcoin can potentially leverage this trend to its advantage…
Also; we are pleased to announce that our project breakdown and historical timeline on Comdex are now available and can be accessed by our free users for free. Check out our team’s in-depth research here, at no cost to you.
Stay Vigilant.⬇️
What Bitcoin Did Ep. 650 - Possible Recession, BRICS and Hyperbitcoinization
In this episode, Peter McCormack from What Bitcoin Did invites James Lavish to discuss the current economic situation, possible recession, BRICS, and hyperbitcoinization. Read our notes below to learn more.
Background
Peter McCormack (Host) - Peter interviews experts in the world of Bitcoin development, privacy, investment, and adoption
James Lavish (Guest) - James Lavish is a Bitcoin advocate and writer of the Informationist newsletter.
Recession and Yield Curves
Lavish shares his thoughts on the Recession and Yield Curves. He believes that:
A recession is inevitable in both the US and the UK.
Yield curves are an indicator of an upcoming recession.
The yield curve has been inverted since last July, which is a strong indicator that we are heading toward a recession.
In normal conditions, longer-duration assets should have higher interest rates because they are more risky.
In the current environment, yields decrease as you go further out on the yield curve, indicating that people believe interest rates will be lower in the future due to an impending recession.
The three-month, two-year, and ten-year yields are typically used to plot yield curves.
When plotted against each other, negative yields indicate that we are heading toward a recession.
Yield curves not only indicate but also cause recessions because banks cannot make as much money when yields are inverted.
Technology and Deflation
Lavish believes that technology creates deflationary pressures because it eliminates supply chains and distribution chains, reducing costs for businesses but also reducing GDP since these components are no longer being created or sold separately.
The examples Lavish includes are; cameras being embedded into phones rather than being sold separately, calculators being embedded into phones, and the elimination of supply chains and distribution chains.
Relationship Between Inflation and GDP, and The Impact of Treasuries on Inflation
The US operates at a deficit. Lavish says the US needs to borrow money to pay off its debt every year.
According to Lavish, inflation is necessary to increase GDP in nominal dollars, which increases the tax base and allows for more debt to be paid off.
Lavish believes treasuries and inflation are a way of stealing from people constantly. He states that this is a form of silent tax that hits certain people worse than others.
Lavish thinks central banks manipulate money through QE and bonds.
Lavish questions that if people get rid of central banks and bonds, GDP becomes something insignificant.
The Effects of Inflation on Households
Lavish states that households used to live on one income in the past. Now households require multiple incomes just to keep up with expenses.
According to him, people have started skipping meals to make mortgage or rent payments. This is an indicator of how inflation has pushed people too far.
Zero Interests and Recession
Lavish believes Zero Interest Rate Policies allow bad actors, poor management, and weak businesses to survive.
He believes weak businesses should not be surviving but they do because of free capital access.
Lavish thinks recessions can be good for wiping out weak businesses and jobs that aren't really needed. Strong businesses will survive during a recession.
Lavish believes that there is a high probability of hitting a healthy recession due to all the leverage, low-interest rates skyrocketing higher, and inflation squeezing people's finances.
Lavish says he has invested in safe assets such as gold and silver as well as Bitcoin.
According to Lavish, during a credit event or recession, everything sells off, so it's important to be prepared for a market downturn.
Rapid Rate Rises and Possible Results on Banks
According to Lavish, the Fed has raised rates quickly and rapidly. The effects of rate raises in 2016 were seen in 2018, 2019, and 2020.
Lavish says rate increases force companies to refinance notes and borrow capital at higher rates.
Lavish mentions that all leverage is embedded in banks, particularly small banks that own commercial real estate papers. Small banks owning all this paper could be a major problem.
aiPX is the official sponsor of the Daily Bolt by Revelo Intel
In a post-FTX world, securely trading with leverage and earning real yield in a decentralized manner has never been more important.
aiPX offers cutting-edge risk management for liquidity providers, leverage trading, and a suite of products between perpetuals, binary options, and synthetics.
Earn passive yield and trade with leverage straight from your wallet.
Take the step, join the presale.
Possible Failures of Banks and Non-Financial Institutions
Lavish believes that some banks may be allowed to fail, which could have a contagious effect on other banks.
Lavish states private equity and venture capital firms may have portfolio companies struggling to raise capital, leading to a "down round" and lower valuations.
According to Lavish, as interest rates go up, the cost of borrowing goes up for private equity firms, leading to compressed margins and lower profits.
He thinks mark-to-market adjustments by private equity firms can result in lower valuations for companies, triggering repricing across the market.
Lavish states banks lend their balance sheet for leverage buyouts and syndicate debt by selling it to private equity firms or high-net-worth individuals.
Lavish believes if a company like Twitter goes under with billions of dollars in debt on bank books, it can hit smaller banks harder than expected.
The Fed's Response to a Credit Event
According to Lavish, the Fed will step in and print money if there is a significant drawdown due to a recession.
Lavish says that Fed has printed money before repeatedly, and Powell has mentioned this in his press conferences.
He believes that the Fed cannot let inflation get out of control as it damages the credibility of the US Treasury and could lead to hyperinflation.
Unsustainable Fiscal Path
According to Lavish, the US government has so much debt on its books that every time they raise rates, it must reissue more debt at a higher cost to pay down the last debt. This means that their deficit grows, making it more difficult for them to dig out of this hole.
According to a report by the US Treasury titled "An Unsustainable Fiscal Path", the historically high debt-to-GDP ratio was 106 post-World War II. The current expectation is even worse.
The projected deficit for this year is 1.4 trillion dollars. The US has already run a deficit of over a trillion dollars in just six months. If we add up all the deficit numbers from October to now, it's 1.1 trillion dollars.
According to Lavish, everything is exponential, so the problem will only get worse. The US dollar and treasury are global reserve currencies and assets, although it gives them an advantage in managing their debt it doesn’t guarantee that the problem will be solved.
Lavish says that the easy money policies adopted by successor US governments have caused inflation and it is something that drives recessions.
Future Projections Regarding the Economy
Lavish says it's impossible to predict when exactly things will collapse, but eventually, it will happen. He believes that the current economic situation can go on for decades before collapsing.
According to Lavish, Wall Street predicts that we'll start lowering rates this year because we're going to hit a spot where the Fed not just pauses but has to pivot quickly as it becomes apparent that the economy is nose-diving.
Investing in Gold
Lavish states that gold is considered a strong store of value over a long period of time and can be used as a hedge against inflation.
He believes that it's important to have a balance between holding cash and investing in gold, along with other assets such as ETFs and physical coins.
Lavish recommends the HYC ETF as it is backed by physical gold.
Bitcoin as Sound Money
Lavish sees Bitcoin as sound money that has become increasingly important over the last few years.
According to him, while Bitcoin may not be ready for prime time on the stage with the entire investment community yet, it has great potential for long-term investment.
Lavish believes that once more people see Bitcoin's potential, it will become even more valuable.
Unemployment as a Lagging Indicator of Recession
Lavish explains that high employment rates before a recession are actually a lagging indicator, and that unemployment tends to spike during a recession.
However, he also states that looking at unemployment alone can be problematic when predicting recessions.
How Recessions Develop
Lavish discusses that rate increases cause borrowing to become more expensive which leads to a recession.
He says expensive borrowing decreases profit margins and this leads companies to lay off employees. Layoffs in one company affect suppliers, manufacturers, and distributors throughout an industry.
Lavish states that many tech companies have already started laying off employees due to economic pressures.
BRICS Nations
Lavish thinks that the growth in the number of BRICS Nations (Brazil, Russia, India, China, and South Africa) could be healthy for Bitcoin.
According to Lavish, many countries suffer under US economic imperialism, so breaking away from the US could be good for them.
He says BRICS Nations aim to create their own trading economy and currency.
He believes there is a chance of shattering the dollar’s dominance, with other countries like Iran and Saudi Arabia considering joining the BRICS Nations.
Lavish states that China settled a large natural gas trade with the United Emirates in Yuan, indicating that settling trades in non-US dollar denominations are happening.
Could BRICS Cause the Collapse of the US Treasury?
According to Lavish, the real question is whether BRICS could cause the collapse of the US Treasury as a global reserve asset.
He says countries hold treasuries as an easy way to get dollars without currency risk. If countries can break away from holding treasuries and use their own currency, they don't need to worry about propping up the United States and its treasuries.
Lavish thinks that gold is a potential alternative for a global reserve asset since it has been around for centuries and is trusted as a store of value.
Rise in Gold Purchases by Countries
Lavish explains that after the great financial crisis, central banks started buying gold, causing a flip where gold was not being sold by sovereigns and central banks.
He states Russia, China, India, and Turkey accounted for most of the recent purchases of gold.
According to Lavish, this rise in gold purchases indicates that countries are looking for alternatives to holding treasuries as an easy way to get dollars without currency risk.
He believes that Goldman Sachs may be shorting massive amounts of gold through paper derivatives to hold down prices.
Lavish states that it's unclear exactly how Goldman Sachs is marking their paper or manipulating prices.
According to Lavish, keeping gold prices low helps the US to prevent other countries from usurping Treasuries as a global reserve asset.
He believes that a massive credit event could occur if institutions like Goldman Sachs short gold and gold prices rise. This could cause Goldman to mark their books correctly, which would not be good for them.
Challenges with BRICS Nations Forming Their Own Currency
Lavish states that there are deep structural problems with those countries already that prevent them to stand against the dominance of the US dollar.
He says countries need a single currency for it to be competitive with the dollar but the probability of achieving this is low.
Lavish also doesn’t think any of these BRICS countries are really trustworthy to anyone or each other.
Lavish states that the biggest economy among BRICS Nations is China. However, the Chinese economy is not tremendous. They have their own debt-to-GDP problems which would put them in a dire situation against the US dominance.
According to him, if Iran and Saudi Arabia join BRICS, other countries may start to join as well which would increase their chances against the US.
Bitcoin and the Global Reserve Asset
Lavish believes that the decentralized nature of Bitcoin makes it anti-inflationary, easily transferable, and desirable as a reserve asset.
According to Lavish, if the US backs its currency with Bitcoin, it will remain the global reserve asset even if other nations adopt Bitcoin.
Lavish states that if other nations adopt Bitcoin widely and it becomes a natural reserve asset, people may turn to it instead of the US dollar. If this happens while the treasury is printing trillions of dollars, hyperbitcoinization could occur. If the US cooperates by backing its currency with Bitcoin, it will remain the global reserve asset.
Lavish thinks nations can either cooperate by using and accumulating Bitcoin or defect by ignoring it. If other nations use a new currency backed by Bitcoin while the US defects, hyperbitcoinization could occur.
According to him, hyperbitcoinization should not happen overnight as it would be devastating for everyone economically. He thinks some nations may not be accumulating large positions in Bitcoin because they are not thinking about inflation or are unaware of its potential impact.
Check out these important links
aiPX is the official sponsor of the Daily Bolt by Revelo Intel
In a post-FTX world, securely trading with leverage and earning real yield in a decentralized manner has never been more important.
aiPX offers cutting-edge risk management for liquidity providers, leverage trading, and a suite of products between perpetuals, binary options, and synthetics.
Earn passive yield and trade with leverage straight from your wallet.
Take the step, join the presale.