Arthur Hayes: Looking back at the laws of economic cycles over the past century, Bitcoin is about to enter a macro turning point

Original author | Arthur Hayes

Compiled by Nan Zhi ( @Assassin_Malvo )

Some people would say:

“The crypto bull run is over.”

“I need to issue my token now because we are in the downside of the bull run.”

“Why hasn’t Bitcoin risen like the big US tech companies in the Nasdaq 100?”

This chart of the Nasdaq 100 (white) versus Bitcoin (gold) shows that the two assets have moved in tandem, but Bitcoin’s gains have stalled since hitting an all-time high earlier this year.

However, the same people make the following point:

“The world is shifting from a unipolar world order dominated by the United States to a multipolar world order that includes leaders such as China, Brazil, and Russia.”

“To finance government deficits, savers must be financially repressed and central banks must print more money.”

World War III has begun, and wars cause inflation.

Opinions about the current stage of the Bitcoin bull run and their relationship to geopolitics and global monetary conditions confirm my view that we are at a turning point. We are moving from one geopolitical and international monetary order to another. While I don’t know the exact end of the steady state in terms of which countries will rule, or the specifics of trade and financial architecture, I do know what it will look like.

I want to step away from the current volatility in the crypto capital markets and focus on the broader cyclical trend reversal we are in. I want to tease out the three major cycles from the Great Depression of the 1930s to today . This will focus on Pax Americana (but Arthur will refer to the United States in this article, and will replace American Pax Americana with USA in all subsequent articles) because the entire global economy is a derivative of the financial policies of the ruling empire . Unlike Russia in 1917 and China in 1949, the United States did not undergo a political revolution due to two world wars. Most importantly, for the purposes of this analysis, the United States is the best place to hold capital relatively speaking. It has the deepest stock and bond markets and the largest consumer market. Everything the United States does will be imitated and responded to by the rest of the world, which can lead to good or bad results relative to the flag on your passport. Therefore, it is very important to understand and predict the next major cycle.

(Odaily Note: Pax Americana, also known as Pax Americana, refers to the peace between major powers established after the end of World War II in 1945. It shows that the United States has an absolute advantage in economic and military position over other countries because its infrastructure was not affected by the war.)

There are two types of periods in history: local and global. In local periods, authorities finance past and present wars by financially suppressing savers. In global periods, finance is deregulated and global trade is facilitated. Local periods are inflationary, while global periods are deflationary. Any macro theorist you pay attention to will use a similar taxonomy to describe the major historical cycles of the 20th century and beyond.

The purpose of this history lesson is to invest wisely in cycles. Assuming the average lifespan is 80 years, you can expect to go through two major cycles during that time. I group our investment choices into three categories:

• If you believe in the system but dont trust the people who manage it, you invest in stocks.

• If you believe in the system and trust the people who manage it, you invest in government bonds.

• If you trust neither the system nor the people who run it, you invest in gold or other assets that do not require a state to exist, such as Bitcoin. Stocks are a legal fantasy maintained by courts that can send officers with guns to enforce them. Therefore, stocks need a strong state to exist and maintain value in the long run.

During times of local inflation, I should hold gold and avoid stocks and bonds.

In times of global deflation, I should hold stocks and avoid gold and bonds.

Government bonds generally do not hold their value over the long term unless I am allowed to leverage them infinitely at low or no cost, or am forced by regulators to hold them. This is primarily because it is too tempting for politicians to fund their political goals by printing money without resorting to unpopular direct taxation, which easily leads to distortions in the government bond market.

Before I divide the last century into cycles, I want to describe a few key dates.

• April 5, 1933 – On this day, U.S. President Franklin Roosevelt signed an executive order banning private gold holdings. He then broke the U.S. commitment under the gold standard by devaluing the dollar from $20 to $35.

• December 31, 1974 – On this day, U.S. President Gerald Ford restored the right of Americans to privately own gold.

• October 1979 - Federal Reserve Chairman Paul Volker changes U.S. monetary policy to target the amount of credit rather than the level of interest rates. He then restricts credit to fight inflation. In the third quarter of 1981, the 10-year Treasury yield hit 15%, an all-time high for yields and an all-time low for bond prices.

• January 20, 1980 - Ronald Regan is sworn in as President of the United States. He then moves aggressively to deregulate the financial services industry. His other notable financial regulatory changes include making capital gains tax treatment of stock options more favorable and repealing the Banking Act of 1933.

• November 25, 2008 – The Federal Reserve begins printing money under its quantitative easing (QE) program. This is a response to the global financial crisis, which was triggered by losses on subprime mortgages on the balance sheets of financial institutions.

• January 3, 2009 - Satoshi Nakamotos Bitcoin blockchain releases the genesis block. I believe that our Lord and Savior saved humanity from the evil grip of the state by creating a digital cryptocurrency that could compete with digital fiat currencies.

• 1933 – 1980 The U.S. Rising Local Cycle

• 1980 – 2008 The global cycle of American hegemony

• 2008 – present: Local cycles of the United States versus other economic powers

1933 – 1980 US Upswing

Compared to the rest of the world, the United States suffered little substantial damage in World War II. Considering U.S. casualties and property losses, World War II caused far less death and destruction than the Civil War of the 19th century. While Europe and Asia lay in ruins, American industry rebuilt the world, and reaped huge rewards.

Even though the war was good for the United States, it still needed to pay for the war through financial repression. Starting in 1933, the United States banned private gold holdings. In the late 1940s, the Federal Reserve worked with the U.S. Treasury. This allowed the government to engage in yield curve control, with the result that the government was able to borrow at a below-market rate because the Fed printed money to buy bonds. To ensure that savers could not escape, bank deposit rates were capped. The government used marginal savings to pay for World War II and the Cold War with the Soviet Union.

If products like gold and fixed income securities that track inflation are banned, what can savers do to beat inflation? The stock market is the only option.

SP 500 (white) and gold (yellow), April 1, 1933 to December 30, 1974, with index value 100

Even as gold prices rose after U.S. President Richard Nixon ended the gold standard in 1971, it still did not outperform the returns of stocks.

But what happens when capital is once again free to bet against the system and governments?

SP 500 (white) and gold (yellow), based on the period December 31, 1974 to October 1, 1979, with an index value of 100.

Gold outperformed stocks. I stopped the comparison in October 1979 when Volcker announced that the Fed would begin a major tightening of credit, thereby restoring confidence in the dollar.

1980 – 2008 US Global Cycle Peak

As confidence grew that the United States could and would defeat the Soviet Union, the political winds shifted. It was time to transition away from a wartime economy, to untie the financial and other regulatory shackles of empire and let those market dynamics run free.

Under the new petrodollar monetary system, the dollar was supported by surplus oil sales from Middle Eastern oil producers such as Saudi Arabia. To maintain the purchasing power of the dollar, it was necessary to raise interest rates to dampen economic activity and thus inflation. Volcker did just that, allowing interest rates to soar and the economy to tank.

The early 1980s marked the beginning of the next cycle, during which the United States, as the sole superpower, opened up trade with the world and strengthened the dollar due to monetary conservatism. As expected, gold underperformed stocks.

SP 500 (white) and gold (yellow), from October 1, 1979 to November 25, 2008, with the index value being 100.

Aside from bombing some Middle Eastern countries back to the Stone Age, the U.S. has not faced any wars of equal or near-equal military power. Even after the U.S. spent more than $10 trillion fighting and losing in Afghanistan, Syria, and Iraq, people’s confidence in the system and the government has not wavered.

The local cycle of the United States against other economic powers from 2008 to present

Faced with yet another deflationary economic collapse, the United States once again defaulted and devalued. This time, rather than banning private gold holdings and then devaluing the dollar against gold, the Fed decided to print money to buy government bonds, euphemistically known as quantitative easing. In both cases, dollar-based credit expanded rapidly to “save” the economy.

Proxy wars between the major political blocs have officially begun again. A major turning point was Russia’s invasion of Georgia in 2008, in response to NATO’s intention to grant Georgia membership. Preventing a nuclear-armed NATO from advancing and encircling the Russian mainland is a top priority for the Russian elite, led by President Vladimir Putin.

Currently, there are raging proxy wars between the West (the United States and its vassals) and Eurasia (Russia, China, Iran) in Ukraine and the Levant (Israel, Jordan, Syria, and Lebanon). Any of these conflicts could escalate into a nuclear exchange between the two sides. In preparation for what seems like an inevitable war, the nation turns inward and ensures that every aspect of the nation’s economy is prepared to support the war effort.

For the purposes of this analysis, this means that depositors will be called upon to finance the states wartime spending. They will face financial repression. The banking system will allocate much of its credit to the state to achieve specific political goals.

The US defaults on the dollar again to stop a deflationary collapse similar to the Great Depression of 1930. Protectionist trade barriers are then erected, just as they were in 1930-1940. It’s all nation states out for themselves, which can only mean experiencing financial repression while suffering from massive inflation.

SP 500 (white) vs. Gold (yellow) vs. Bitcoin (green), from November 25, 2008 to present, with an index value of 100

This time, as the Fed devalues the dollar, capital is free to leave the system. The difference is that at the beginning of the current local cycle, Bitcoin provides an alternative currency without a state background. The key difference between Bitcoin and gold is that, in the words of Lynn Alden, Bitcoins ledger is maintained by a cryptographic blockchain, and the currency moves at the speed of light. In contrast, golds ledger is maintained by nature and moves only as fast as humans can physically transfer gold. When compared to digital fiat currencies that also move at the speed of light but can be printed infinitely by governments, Bitcoin is superior and gold is inferior. This is why from 2009 to now, Bitcoin has stolen some of golds thunder.

Bitcoin has performed so well that you can’t tell the difference between the returns of gold and stocks on this chart. Gold has underperformed stocks by nearly 300%.

The end of quantitative easing

While I am extremely confident in my context and description of the past 100 years of financial history, this does little to assuage concerns that the current bull market is over . We know we are in a period of inflation, and Bitcoin is doing what it is supposed to do: outperforming stocks and fiat currencies. However, timing is critical. If you bought Bitcoin at its recent all-time high, you may feel like a loser because you extrapolated past results into an uncertain future. That being said, if we believe inflation is here to stay and a cold, hot, or proxy war is imminent, what can the past tell us about the future ?

Governments have consistently suppressed domestic savers to finance wars, support winners in past cycles, and maintain systemic stability.In the era of modern nation-states and large, integrated commercial banking systems, the primary way governments finance themselves and key industries is through control over banks’ allocation of credit.

The problem with quantitative easing is that the market invests free money and credit in businesses that do not produce the physical goods needed for a wartime economy. The United States is the best example of this phenomenon. Volcker ushered in the era of the all-powerful central banker. Central bankers created bank reserves by buying bonds, thereby reducing costs and increasing credit lines.

In private capital markets, credit is allocated to businesses that maximize shareholder returns. The simplest way to boost stock prices is to reduce outstanding shares through buybacks. Companies with access to cheap credit borrow money to buy back their own stock, rather than borrowing to add capacity or improve technology. Improving a business in the hope of bringing in more revenue is challenging and doesn’t necessarily boost stock prices. But the math shows that reducing outstanding shares should boost stock prices, and that’s exactly what large companies with cheap and plentiful credit have done since 2008.

Another easy way is to increase profit margins. So, instead of building new capacity or investing in better technology, stock prices are used to lower input costs of labor by moving jobs to China and other low-cost countries. American manufacturing is so weakened that it can’t produce enough ammunition to defeat Russia in Ukraine. Moreover, China is a much better place to make goods, and the U.S. Department of Defense supply chain is filled with key inputs produced by Chinese companies. These Chinese companies are, in most cases, state-owned enterprises. Quantitative easing, coupled with shareholder-first capitalism, has made U.S. military power dependent on the country’s “strategic competitors” (their words, not mine).

The way the US and the collective West allocate credit will be similar to how China, Japan, and South Korea do it. Either the state will directly instruct banks to lend to an industry or company, or banks will be forced to buy government bonds at below-market yields so that the state can issue subsidies and tax credits to appropriate businesses. In either case, the return on capital or savings will be lower than the nominal growth rate or inflation rate. The only escape is (assuming no capital controls) to buy a store of value outside the system, such as Bitcoin.

For those who obsessively watch the changes in the balance sheets of major central banks and conclude that credit growth is not enough to drive further increases in cryptocurrency prices, it is now necessary to focus on the amount of credit created by commercial banks . Banks do this by lending to non-financial companies. Fiscal deficits also release credit because the deficit must be financed by borrowing in the sovereign debt market, and banks will dutifully buy these bonds.

In short, in the last cycle, we focused on the size of the central banks balance sheet. In this cycle, we must focus on the fiscal deficit and the total amount of non-financial bank credit.

Trading straregy

Why I am sure Bitcoin will regain its momentum

Why am I convinced that we are in the middle of a new large, localized, country-based inflation cycle?

Check out this news:

The U.S. budget deficit is expected to soar to $1.915 trillion in fiscal 2024, exceeding last years $1.695 trillion and marking the highest level outside the COVID-19 era, according to a federal agency, which attributed the 27% increase from its earlier forecast to higher spending.

This is undoubtedly good news for those who worry that Biden will not pass more spending to keep the economy running before the election.

The Atlanta Fed projects real GDP growth in the third quarter of 2024 to be a staggering 2.7%.

For those worried about a US recession, it is mathematically extremely difficult to have a recession when government spending exceeds tax revenues by $2 trillion. That is 7.3% of GDP in 2023. For context, US GDP fell by 0.1% in 2008 and by 2.5% during the 2009 global financial crisis. If a global financial crisis similar to the last one occurred this year, private economic growth would still not fall by more than the amount of government spending. There would not be a recession. This does not mean that large numbers of ordinary people would not be in financial trouble, but the US will continue to move forward.

I point this out because I believe fiscal and monetary conditions are and will continue to be loose, and therefore holding crypto is the best way to preserve value. I am convinced that the situation today is similar to that of the 1930s to 1970s, which means that since I can still freely move from fiat to crypto, I should do so because the devaluation caused by the expansion and centralization of credit allocation through the banking system is imminent.