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Bitcoin's Up, Gold's Down, Euro's Dragging - It's All Tied

Bitcoin, the inflation hedge; the return of the prodigal son.

This week, the U.S. Bureau of Labor Statistics issued the consumer price index (CPI), sometimes known as the "inflation rate," for June. Since CPI was unattractive, this week's highlighted flavour is macro trends. Before seasonal adjustment, the all-items index grew 9.1 percent over the last year, according to a news statement.

Therefore, if you are an American who did not receive a 9.1 percent wage rise last year (which is the majority), everything is more costly. If you examine the components of that 9.1 percent, you will find that the truly essential items (i.e., food and energy) outperformed it. Food costs increased by 10.4%, while energy prices increased by 41.6%.

Consequently, gold, the traditional inflation hedging asset, should increase. Except it didn't? And bitcoin did that. Also, the euro is now a dollar-pegged stablecoin. What's up?

That (and maybe more) is detailed below.

George Kaloudis

I’ll spend a lot of this newsletter on a soapbox because inflation really annoys me. But also because as a son of a Greek immigrant, I find the euro really annoying. And gold as a monetary asset never really made sense to me. Plus, I really like Bitcoin.

Since a lot of things have been said about all of these things recently, there’s a lot for me to latch onto and get worked up about.

So it goes.

No, inflation is not ‘good for you’ and no, we don’t ‘need it’

“Inflation is good for you.” Google it. Real-life articles have been published that claim this.

And they’re serious.

Inflation is good for you because it favors debtors. That makes sense. If you have a $100,000 loan, that $100,000 doesn’t adjust as things get more expensive. It’s still $100,000. So if that $100,000 is a fixed-rate, 30-year mortgage, then your debt burden is lessened.

Assuming of course that your wages increased enough to make up for the fact that burritos are more expensive. For the record, wages largely didn’t increase enough in the U.S.. So while inflation might be good for your mortgage burden, does it make up for the additional 40% you’re paying at the gas pump or the additional 10% for burritos?

“We need inflation.” Google that too. Plenty of articles.

All serious.

The basic gist of the argument for needing inflation is that a deflationary currency – one that increases in value over time rather than decreases – will lead to excess saving (or “hoarding”) and lack of spending in the economy given the time value of money (TVM). TVM is the core tenet of finance. A “dollar today is worth more than a dollar tomorrow” given the earning potential of that dollar.


That's a whiteboard world. In the real world, there’s nothing wrong with saving. Also, and this should be shocking to absolutely nobody, people buy things because they either a) need them or b) want them. While they may be doing a TVM calculation implicitly, no one is pulling out a HP-12C to decide if they do want guac on their burrito.

Is anything an inflation hedge?

There’s a really good theoretical argument for the fixed-rate 30-year mortgage mentioned in the previous section as an effective inflation hedge (but don’t give Wall Street any ideas … again). But normally gold is touted as the ultimate inflation hedge. Gold has been money for millennia and it’s relatively rare. And it’s difficult to produce more gold. So in times of high inflation, we expect gold to increase commensurately.

Except now we have gold 2.0 in bitcoin. Here’s how both have fared since the June CPI was announced.

Bitcoin told gold: “Look at me, I am the captain now.”

I know this is a very short, cherry-picked time period, but it’s pretty profound. Bitcoin is finally doing that thing you’d expect it to do as gold 2.0. Maybe bitcoin can be an inflation hedge after all.



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