Inflation

United States citizens have not really 'felt' inflation for the last few decades except for the last year or so. The Federal Reserve (Fed) was slowly adding money into the economy up until the Great Financial Crisis in 2007-2008. At that time, commercial banks created bad mortgage-backed securities which exploded when the underlying property values dropped, and the bankruptcy spiral would have (and arguably SHOULD have) taken some of the over-leveraged banks down with them. However, the Fed and the federal government worked worked together to prop up those banks with new $USD. This was accomplished using federal loans and 'quantitative easing.' I think that is a fancy or hidden way of saying money printing. The Fed lowered interest rates and bought treasuries then in much the same way as what has happened in the last two years.

Note on this graph above what the money supply was in Jan 2008: $7.5T. The QE that goosed the economy was never turned off, and we all appreciated a dramatic rise in stock prices. I enjoyed watching my retirement portfolio growing rapidly as all these created dollars were 'put to work' into equities. By January 2020, the Fed had doubled the amount of dollars in circulation, up to $15.4T.

Although I had learned about Bitcoin by Jan 2020, I had not realized exactly how much money printing was going on. The Sars-Cov-2 virus (aka COVID) struck the world, and everyone panicked in March 2020 when lockdowns started. Stock prices and bitcoin tanked on March 13, 2020. The Fed came to the rescue with buckets of money, and by June of 2020, there were now $18.5T in circulation. Twenty percent of all US dollars were created in just a few months.

As I write this, the data from the St. Louis Federal Reserve Bank on that graph is current to Jan 2021. The number is now $21.8T. This is almost 3x the amount of dollars in circulation just 14 years ago. When I was born, there had been less than $1T ever created.

I would like to point out that the Covid pandemic was scary and unprecedented. Many things about the way it was handled could have gone better, and certainly some things could have gone worse as well. I appreciate that it got me thinking about the dramatic increase in the money supply. I was unaware of the rapid rate of supply. I am not here to say what response would have been more appropriate, because 1) I do not have a different solution, 2) There is no point crying over spilled milk. I think that the actions taken by the leaders at the time were the best they could come up with given the tools at their disposal.

What matters now is recognizing the situation at hand. Last year, we had people saying inflation would be 'transitory.' Theoretically, the Fed was aiming for a 2% inflation rate. This was at a rate that we probably wouldn't "feel" in our daily lives. However, let's just do some math, and look at the purchasing power of $100 over time if the 2% had been achieved.

Let's say I had $100 in my checking account in 2007, and I managed to keep it there, and do nothing besides watch the bank statements roll in. You may recall banks used to advertise their interest rates on their checking accounts. I can recall rates up to 1%. Today, that number is closer to 0.01%. Let's just split the difference and say I was earning 0.5% over those years. So, at the end of the first year, I had $100.50 in my checking account, but thanks to a 2% inflation rate, the purchasing power of $100.50 was that of $98.49. Fast-forward that $100 over these last 14 years and my $100 has grown to $109.39 (I took the liberty of rounding up fractions of a cent, I hope your bank did this for you). If the 2% inflation target had been met (2% per year x 14 yrs), the purchasing power of that $109.39 has dwindled to around $78.76.

Currently the U.S. Federal Government is primarily calculating inflation based on a formula called the Consumer Price Index (CPI). The published numbers are that the inflation for the last 12 months are just under 8%. However, if you look around and see the increased costs in your daily expenditures, you can see that your expenditures are costing more than 8%. For example, I just renewed my DEA license (for the non-doctors reading this, we doctors have to pay the government agency every year for the privilege of prescribing controlled substances). I just paid $888 for a three-year license. I happened to have my receipt from my prior renewal, it was $731 in 2019. Actually, the prices were held steady from 2013-2019. I do not have the fees older than 2013 as they are not listed on my certificates.

It is hard for me to fathom that the work the DEA does to verify me when they renew my prescribing license has gotten any harder. Indeed, since nothing apart from my address has changed over the 20 years or so that I have been paying for licenses it is logical to think the work would be getting easier. Computers that are tracking me and my prescription habits should make the job easier, not more expensive. I paid 21% more for the same ability/privilege/service than I paid 3 years ago.

Surely you are spending more for the same goods in your life as well. Remember from Econ 101, the laws of supply and demand. A free market will find equilibrium. We have seen significant increase in the money supply. Money is cheaper and people are going to spend it more on goods (think of all the stimulus check spending we had over the last two years). Prices have been rising (hence the published CPI rates of 8%). Suddenly this Ukraine invasion by Russia is now causing additional supply constraints. Prices will again rise and we will find a new equilibrium.

Some caveats here are that some goods will demonstrate price elasticity, and consumers will chose replacement goods at lower price points. Also, despite the commonly held notion that we are working in a free market, there is substantial manipulation of various industries in the form of tax incentives, rebates, credits, subsidies, and tariffs. Let's call it a free-ish market. It's still probably better than most alternatives.

I respect Raoul Paul, founder/CEO of Real Vision, and listened/watched to this YouTube podcast of his recently. One thing that he mentions in this that I had not previously considered is that the war will likely disrupt the harvest season for crops in Ukraine and also may disrupt the next planting season as well. Ukraine is a large wheat producer, and this will have ramifications on costs of baked goods for years. Ukraine also is the worlds largest exporter of neon gas, which is used in the production of computer chips. The supply chain disruptions for these and many other products will be unfolding for years.

I do not have any geopolitical insight regarding what is going to happen with regards to Ukraine, but the weaponization of the U.S. dollar is bound to have repercussions as well. Individuals and nations who thought they had wealth stored in $USD had it taken from them overnight. This is not just Russia and the oligarchs, as have made the news in recent days. However, before the war started, the Biden administration decided to confiscate and redistribute Afghanistan sovereign reserves held in U.S. banks as well. Also, some of the participants in the 'Freedom Convoy' in Canada had their assets stolen or frozen as well.

I am not here to judge if those assets SHOULD have been seized by the government, but just want to point out that if you thought those funds in the bank were 'yours,' that...well...maybe not. Perhaps you were under the impression that the wealth you had stored in the bank was entirely yours. These things are a lesson for storing your wealth in a way that is resistant to confiscation.

Bitcoin solves this because no one can take your self-custodied Bitcoin.

Elon Musk asked on Twitter the other day what people thought about inflation. Dylan LeClair posted a photo of a math question that I did not understand. Perhaps my 12th grade calculus-math-knowing self would have remembered this equation, but my adult brain has forgotten it. In fact, I am taking for granted that since no one has corrected him, that this is the appropriate formula to display that every 4 years the emission supply of bitcoin is cut in half.

What I do know is that approximately every 10 minutes a bitcoin block is created, and the miner that solved that block math first is currently rewarded with 6.25 btc. This emissions/inflation rate has been present since May 2020 and will continue until around June 2024 when the rate is cut to 3.125 btc every 10 mins. Four years later that rate will decrease to 1.5625 btc, and so on until 2140, when the last satoshi is mined.

The inflation rate of bitcoin is known and decreasing. The inflation rate of governments is unknown, but rising.

Chose where you are willing to store your assets wisely.