TD₿: Contagion by Arthur Hayes
TL;DR Over a long enough time horizon, all central banks will succumb to some form of Yield Curve Control aka money printing.
Hey Bitcoiners,
At the end of 2021, central banks around the world started to worry about rising CPI inflation. The Bank of England was one of the first major central banks to begin hiking interest rates to combat the rise in the prices of goods and services in their economy.
Federal Reserve officials were late to respond (per usual) and instead spent their time denying that CPI inflation was anything but transitory. This lasted until March 2022, when they could no longer deny the new inflationary environment that their policies had contributed to. It was at this time that they reversed course and began hiking interest rates in earnest to combat CPI inflation.
Since then, CPI inflation has only worsened, despite the Federal Reserve going on the fastest rate hike cycle in its history. This has caused the dollar to spike relative to other fiat currencies and has caused immense strain on this highly-leveraged global economy.
Here is a prime example of this reality…
Specifically, it has posed a challenge for foreign countries to keep pace with the Fed’s rate of increase rate hikes. If they fail to raise with the Fed, they risk their currencies falling rapidly against the dollar. The problem is, a lot of these countries are up to their eyeballs in debt which constrains their ability to raise interest rates. As they raise rates to fight CPI inflation and try to save their currencies, they risk causing a deflationary debt spiral.
This is exactly what has started to unfold around the world. As these foreign central banks raised rates rapidly, their bond markets have started to act “dysfunctional”, as central bankers like to call it. This has resulted in many central banks, such as the BOE, BOJ, PBOC, and ECB, resorting to intervening in their bond markets in order to keep rates down to prevent a large deleveraging event from unfolding.
The problem? The interventions are not working too well. Kyle Bass highlights this below.
So what will these central banks decide to do now? Well, if history is any inclination, they will choose to do what they always do — more! Central banks will continue to intervene in markets and try to throw more money at the problem even though this risks further exacerbating the situation.
Arthur Hayes wrote this phenomenal blog post that lays out the dilemma these central banks face today and what he thinks the outcome will be in the future. (10/06/2022)
In the end, all roads lead to central banks and governments returning back to their bond-buying programs and stimulus checks in order to try to kick the can down the road and keep this highly-leveraged system alive. The alternative is for these politicians and bankers to do nothing and allow a severe global recession to ensue, which I believe will be too hard for them to stomach.
This is just a fancy way of saying — more currency debasement is likely on the horizon.
In that scenario, it would be prudent for individuals to save a portion of their net worth in a money that functions outside the control of these organizations that is impossible for them to debase, and difficult for them to censor and confiscate.
Tick tock next block,
Cory Klippsten
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