Why your assets don’t have to keep up with monetary debasement.

Why your assets don’t have to keep up with monetary debasement.

This is an argument that gets thrown around in finance, especially amongst the crypto crowd and places like Real Vision. Here are the reasons you don’t need to keep up with the so-called debasement due to bank reserve expansion:

  • Both the Fed balance sheet expansion and the Nasdaq/Bitcoin exponential growth were a 2008 – 2020 phenomena. This was specifically a time of deflation or disinflation, monetary flow being directed into the financial markets, a transfer from labour to capital and consequently a transfer from the poor to the rich. During this time, yes you wanted your assets to keep up with monetary debasement. However if we are transitioning into an inflationary time and swing back from capital to labour, the entire point is that asset prices are not going to keep up with inflation, but wages, short-duration assets and commodities will.
  • Reserves without velocity do not equal more money, the money that is primarily in the economy is from bank credit creation.
  • If governments are spending money in to the real economy, part of that expansion of the money is going directly to people either through direct transfers, or through jobs from the government stimulus.
  • Populations generally expand at 1-3% a year, while the population is still expanding, more reserves are needed to support this population.
  • Under a gold standard reserves would expand to 1.5% – 2% naturally, since 1970 when the Fed started targeting interest rates rather than money (de facto Keysians over Monetarists), they didn’t expand reserves at a steady rate. Much of the “money printing” since 2008 was making up for the reserves that should have been created since 1970 to support the fractional reserve banking system and corresponding Eurodollar system, which had become over-levered and led to things like the 2008 GFC and 2011 European banking crisis.
  • Large asset prices are a result of baby boomers/low interest rates and reserve expansion is mainly coincident, and only causative in limited ways (psychological / anti-deflationary / lowering bank reserve asset duration).
  • In the inflationary / fourth turning environment that we’re in is precisely the time when we address the wealth inequality, and the “inflation” that was QE caused in asset prices will be reversed and actually driven into short duration / value stocks / wages / real assets.