With trillions of dollars in economic stimulus, why do we still use pennies?
Dollars are flooding the world and bitcoin's lackluster performance as a hedge against it all.
|Apr 15, 2020||1||1|
With more than 16 million Americans on unemployment benefits, the Federal Reserve and U.S. Treasury continue to backstop the economy and the world with trillions of dollars of economic stimulus.
Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EDIL) loans are starting to go out to businesses.
Economic stimulus checks for households and consumers in the coming days and weeks.
Amazon even reached an all-time high given its services are more in demand than ever. The company hired 100,000 last month and plans to hire another 75,000!
The SBA and IRS are working as fast as possible—given that we are in the middle of a global health pandemic and teams are much more distributed and program details keep changing. A lot of pressure, but the money is coming.
Even non-banks, such as PayPal, Intuit, and Square, are qualifying to take applications!
However, in the coming days, the PPP will exhaust all its $349 billion dollars in funding. As of mid-day Tuesday, $246 billion has already been approved for distribution. Over 1.1 million applications!
There is a plan to request more funds—possibly even include local and state governments and hospitals. No details on when though.
If you apply and get this PPP loan, you must spend it as per the U.S. Treasury guidance within 8 weeks of receiving it. You can’t save it—unless you want to treat it as a loan.
Yesterday, I was a bit upset to hear a cheesecake biz in NYC is about to receive $5 million dollars, yet the owner will hold onto the money while the 600+ employees stay on unemployment benefits. The whole point of the economic stimulus is for businesses to keep their employees on their payroll.
Steven Mnuchin @stevenmnuchin1#PPPloan UPDATE $400,000,000 originated. Thank you #communitybank #largebanks @SBAgov @USTreasury #CARESAct #SmallBusinessRelief
With so much money flooding the U.S. economy and world, why do we still use pennies?
I see comments on Twitter that all this stimulus will create massive inflation. However, so much economic activity has evaporated. It’s gone. It’s not coming back. You can’t eat at a restaurant yesterday, or stay at a hotel last week. All that economic activity is gone. It won’t be recorded—as it doesn’t exist.
Once the pandemic subsides, consumers will start buying more from their local businesses. In the meanwhile, empty restaurants, empty hotels, and empty planes continue to operate with minimal crew. Billions of dollars are spent with little revenue from sales.
It may take a few years for meaningful inflation to appear given at how much positive economic activity won’t exist. The economic activity destruction by the the pandemic is cleverly called the “Great Lockdown” by the IMF.
Goldman Sachs says the economic situation is four times worse the financial crisis!
A month ago, Charmath Palihapitiya was already framing the current economic dilemma as the financial crisis and the dot-com bubble bust combined. I have witnessed both. No one is every prepared enough, but the Federal Reserve is way ahead of everyone else.
With a probable uptick in inflation in the coming years and multi-trillion dollar deficits, we won’t have much use for pennies any more—or nickels for that sake. They already cost more to make than they are worth! That’s been the case for almost 15 years!
How to reduce runaway inflation quite quickly? Stop printing and creating money. Definitely stop creating money that costs more money to make than it’s worth! Removing two or three digits from a currency doesn’t always do the trick when the government continues to add to the money supply. Zimbabwe and Venezuela tried that, yet continued to create money.
Bitcoin’s lackluster performance
With the economic fallout and trillions of dollars flooding the economy, isn’t this the type of environment that Bitcoin was created for?
“Bitcoin should be thriving, yet it crashed a few weeks ago,” my friend says.
I replied, “yes, so did the stock market. Both are up 30% from their lows.” Bitcoin is even up about 70% from its low.
“Yes, but I bought at $8,500,” my friend adds
I could feel the pain with bitcoin struggling around $6,875.
Bitcoin is right now in the middle of the road in terms of price action. There are several cases in the last 18 months where bitcoin has traded between $6,200 and $7,000 until a clear path was taken.
Counterintuitively, Bitcoin has had a high correlation rate with the S&P 500.
I replied to my friend, “people wanted cash, so they were selling everything to raise cash.”
Another friend responded, “I always want cash. Don’t people always want cash?”
They did when the lockdown started and things looked dire, but now that the economy will get a bazooka-like economic boost, there will be a reason to spend and not hold cash.
Nonetheless, the Bitcoin crash last month was quite rough. Over $665 million in bitcoin long positions were liquidated on BitMEX when Bitcoin fell about $1,400 dollars to $6,350. Only days and weeks earlier, Bitcoin enthusiasts thought falling under $10,000 wouldn’t be possible, yet it reached $3,867!
Looks like there is a backstory to this extreme downward movement. I’ll listen to the inside scoop from BlockFi’s Zac Prince.
Overall, with the markets rebounding and the economy still on lockdown, it’s safe to say the financial markets aren’t representative of the economy. The market is rising on future earning potential while the economy is focused on lockdown. Restarting an economy after a sudden stop will be quite a work of art in the coming months.
Depending how noticeable the economic stimulus impact is to inflation, I’ll be on the look out for Bitcoin’s price performance. Like Peter Brandt, I wouldn’t be surprised if the markets continue to rally along with Bitcoin.
In the back of my mind, I’m still stung by what Ray Dalio said at the World Economic Forum only a few months ago that “cash is trash.” He provides more insight into his call in this article.