In today’s Exponential Investor

  • 65 litres of pain
  • Bonds, banks and busts
  • From TradFi to DeFi

In response to the 2008/9 global financial crisis, the Bank of England decided to “ease” £200 billion into the economy.

That was a cool £200 billion to help “… push up on the value of shares, making households and businesses holding those shares wealthier.”

This was expected to result in making them “… likely to spend more, boosting economic activity.”

Those are not my words. Those are the words of the Bank of England (BoE). You can see it here as it describes what quantitative easing (QE) does.

The BoE also notes when asking the question “Does quantitative easing work?” that:

A number of studies have shown that QE can have a big impact on inflation and spending in the economy.

The only problem there is the BoE doesn’t actually define what “big impact” means.

But let me help you out here.

On Thursday last week, I filled up the car with some diesel. There was nothing too out of the ordinary there.

A full tank for me earlier in the year cost £92.

Thursday’s cost me £108.

A £16 rise at the pump within the space of a year. In this instance, that’s a 17.39% rise in the cost of travel for me. Within just one year.

Well, the BoE is right, QE certainly does have a big impact on inflation.

What goes up, can’t come down

The BoE didn’t just use November 2009 as a one off. It has been undertaking QE ever since. It’s the BoE’s ace up the sleeve when it wants to be seen to be doing something.

In the last year however, the BoE turned up the wick on this metaphorical candle.

Where the bond buying programme was at £200 billion in 2009, it was up to £645 billion in March 2020. Then to £745 billion in June 2020. Then to £895 billion in November 2020 which takes us through to today.

It’s an astonishing amount of “easing” into the bond market. It’s also leading to clear and obvious inflation issues. The price at the pump is only the tip of the iceberg.

The price of energy only goes to increase the cost of production, supply and transportation of goods. This knock-on effect is almost always passed on to the end customer. No business ever actively decides to make less money in order to make prices cheaper for customers. Competition might force that outcome, but not the goodwill of the company.

That means central banks push asset prices up, push valuations up, and push inflation up. With a bit of luck, wages growth also trends higher, negating some of the inflationary forces.

That is usually true only when economies are booming. But when you get recessionary events, like a global pandemic and enforced economic shutdowns, while the central banks pump the economy and asset prices, then businesses aren’t productive. The result is stagnation in wages and incomes: inflation hits savers, and damages the middle class. In this outcome, wealth is pushed even more to one end of the socioeconomic spectrum (and it’s not down… only up).

Which leads us to the point we get to today. The traditional financial system (TradFi) is widening the economic gap faster than ever before. Social unrest is building because prices are going up and affordability is going down. Asset owners are happy, until they realise that they can’t sustain themselves as they’re cash poor. Meanwhile, new taxes will find their way in to reduce whatever’s left (read: inflated assets) and the whole process reaches an unpleasant conclusion.

That is what could happen in 2022, although there is a way out.

Ultrasound money?

TradFi’s problems are a making of its own doing.

At some point, things will likely get a lot worse. Now the sceptics suggest that in that event all “risk assets” would get sold off as people flock to cash.

That is great in theory, until your cash is being eroded by 10% or 20% or 50% each year through inflation.

Imagine getting a 50% tax on your cash savings every year. That’s what 50% inflation would do: so, why would you flock to cash, which in that situation isn’t “safe” at all?

This is a point made last week by legendary investor Ray Dalio.

And he’s right. So, if you want to de-risk from the TradFi system, and cash isn’t safe, where do you turn?

Perhaps gold is (still) the answer.

But now you also have a choice. The alternative is bitcoin, deflationary by nature, a form of digital “sound” money.

However, what if there are others, that like bitcoin can be sound… or perhaps what some are calling “ultrasound” money?

This is a term used more and more to describe Ethereum.

Now, originally Ethereum was a bit like bitcoin. It required miners to “mine” it on the basis of a proof-of-work consensus that was the backbone of its blockchain.

But Ethereum is changing. In fact, Ethereum is radically changing. Not only is it moving away from proof-of-work, but it’s also moving to proof-of-stake. This requires “stakers” and “validators” rewarded by staking their Ethereum holdings.

Watch that space…

This would indicate that Ethereum would become inflationary by nature as rewards forever continue to flow and the volume of Ethereum in circulation grows too.

However, there’s another huge change to Ethereum that’s going to blow everything out of the water. That could see if go from being the decentralised web, to being a more advanced and better form of global money.

It could become deflationary, like bitcoin, energy efficient, easy to access, use, transact with and become “ultrasound money”.

These changes could result in the best, most exciting, direct escape from the TradFi system into the decentralised finance (DeFi) system that we’ve ever seen.

You’ll be hearing more about this very soon. So keep an ear and eye out for it when it lands. But until then, look deeper into Ethereum.

It may well bring opportunity not just to you, but also to the global financial system.

Until next time,

Sam Volkering
Editor, Exponential Investor