The tables have turned. The FED concedes defeat and acknowledges bitcoin. Of course, they twist both numbers and words to try to make it seem like the dollar is the better money, but we all know what’s going on. A quote wrongly attributed to Gandhi describes the situation: “First they ignore you, then they laugh at you, then they fight you, then you win.” We are clearly in the “then they fight you” stage. How did the FED do this round?
First of all, let’s see who we’re dealing with. The FRED blog published the article in question.
“Short for Federal Reserve Economic Data, FRED is an online database consisting of hundreds of thousands of economic data time series from scores of national, international, public, and private sources,” according to themselves. The organization was “created and maintained by the Research Department at the Federal Reserve Bank of St. Louis.”
That being clear, let’s analyze their words.
What Does The FED Think About Inflation?
The first trick the FED pulls to confuse the masses is to use a skewed concept of inflation and try to mix it with bitcoin’s admitted volatility.
“Even our currently high inflation rate in U.S. dollars is dwarfed by the towering peaks of the inflation rate in Bitcoin—not to mention Bitcoin’s wild gyrations. Never in the history of the U.S. dollar has the inflation rate reached the heights that Bitcoin has on several occasions in a few years.”
Doesn’t the FED know what inflation is? Of course they do, but if they used the right concept their whole argument would fall apart. Inflation is not a general price increase. According to Austrian School economist Ludwig von Mises, “Inflation is an increase in the quantity of money without a corresponding increase in the demand for money.” And the FED has been printing money like there’s no tomorrow since the pandemic. That’s what’s causing the chaos.
So while Keynesians argue that deflation is bad and it collapses the economy, Austrians point out that this is confusing the issue.
— Stephan Livera (@stephanlivera) July 12, 2022
Bitcoin’s inflation, on the other hand, is embedded in the code. The supply is fixed at 21 million bitcoin, and the amount that’s released to the market is predictable and known to all participants. It remains constant through four-year cycles until the “halving” comes. Bitcoin inflation decreases by a whopping 50% each halving.
So, the quoted paragraph is intellectually dishonest and meant to confound the general public.
BTC price chart for 07/13/2022 on Cexio | Source: BTC/USD on TradingView.com
What Does The FED Think About Bitcoin?
To make things worse (for them), the FED haphazardly tries to frame bitcoin’s price increases as bad. Their own graph starts in 2016 and clearly shows, as podcaster Stephan Livera puts it, “Bitcoin holders are literally up 45 TIMES the fiat equivalent over that time period.” Also, notice how the author is talking about bitcoin’s volatility but doesn’t even mention the term. Why is that?
“Bitcoin also exhibits severe deflations. That’s problematic for a currency used for transactions: With deflation, consumers expect goods to become less expensive and thus wait to buy, which can lead to a collapse of the economy.”
That’s the Keynesian economists’ argument in a nutshell. That school of thought purposely ignores a key fact: people have to eat. And they have only one life. How much can they wait for “goods to become less expensive”? People might not buy a new phone each year, but they will buy a phone. Back to Stephan Livera, “While Keynesians argue that deflation is bad and it collapses the economy, Austrians point out that this is confusing the issue.”
The world is quickly finding out that a "reserve currency" which creates a reference rate for all other currencies is neither secure nor stable.
Neutral reserve currency is required.
For the US and the world. #Bitcoin— Jeff Booth (@JeffBooth) July 11, 2022
Speaking about confusion, look at how the FED tries to misdirect the general public. They frame deflation as a bad thing and blame the gold standard they worked so hard to destroy for… making the dollar worth more?
“Notable dollar deflations haven’t happened for a long time. Why not? All the significant deflations happened during a period where the supply of U.S. dollars was tied to the quantity of gold: in other words, when the U.S. economy was on the gold standard. With no means to manage the supply of dollars, there was no way to avoid fluctuations in price when the demand for money fluctuated.”
Another intellectually dishonest take. The FED’s rampant money printing is what causes prices to fluctuate in the first place, destroying accurate price signals.
Can The Federal Reserve Avoid High Inflation?
They actually could, if they gave the money printer a much-deserved rest. That’s not how the FED frames it, though.
“Bitcoin is similar in that it also has a more-or-less fixed quantity that cannot respond to fluctuations in demand. Thus, its price is bound to fluctuate more than the U.S. dollar, the supply of which the Federal Reserve can manage to avoid high inflation, deflation, and inflation volatility.”
This is intellectual dishonesty at its best. The author finally says “volatility,” but pairs it with the word “inflation.” Also, if “the Federal Reserve can manage to avoid high inflation,” why is it at an all-time high? Plus, why does the FED say that bitcoin “has a more-or-less fixed quantity”? There are only going to be 21 million BTC and that’s that.
To close this off, this might be the worst lie in the whole article:
“To be clear: Bitcoin is used very little for transactions anyway, maybe because of these repeated deflations.”
Oh yeah? That’s funny, because the Federal Reserve Bank Of Cleveland just published an article called “The Lightning Network: Turning Bitcoin into Money.” Bitcoinist will cover it later today.
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