This is an opinion editorial by Tom Luongo, a former research chemist and financial/political commentator specializing in the intersection of geopolitics, financial markets, gold and cryptocurrencies.
The Federal Reserve is on the attack, but not against inflation. Oh, they say their shift in monetary policy is about inflation, but that’s a cover story for what’s really going on. There is a titanic fight for the future of not just money, but for humanity itself, and the Fed is in one corner of the ring.
Newly reconfirmed Federal Open Market Committee (FOMC) chair Jerome Powell and the Fed have a much bigger target in mind than any of its “usual suspects,” i.e., the “outside money” group of safe-haven assets: gold, silver, bitcoin.
If you are familiar with my work, you’ll know the answer to who that target is. If you aren’t, keep reading, and keep an open mind.
For now, bitcoin is caught in the middle.
The world is all a-Twitter (literally) over the Fed’s recent move to raise rates by 75 basis points (or 0.75%) across the board. I wasn’t. In fact, I’d suspected for a while that Powell wanted to go “75” but couldn’t politically.
Then he was “summoned” by President Joe Biden to discuss monetary policy. Now, we all know what this meeting was about. It was Biden, thinking he was still the Godfather, telling the Fed to back off before the midterm elections.
Going into that meeting I placed a 25% probability of 75 bps. So did the rest of the market.
Biden’s remarks afterwards about respecting the Fed’s independence while looking beaten raised that probability to 75%. The May consumer price index coming in hotter than expectations at 8.6% raised that to near certainty.
Not only did the Fed go through with the 75-basis point raise, it is talking about doing it again at the next meeting in late July. Sorry Biden, the real Godfather resides at the Marriner S. Eccles building, not the White House.
Powell has not only resumed his pre-COVID-19 hawkishness, but he’s taken it up a notch.
The stated reason was accelerating inflation. The May U.S. CPI number gave everyone quite a jolt. No one was likely happier with that number, however, than Powell. It gave him all the cover he needed to do what he wanted to do anyway.
The markets immediately reacted badly to the report: It was a “sell everything Friday.” Blue-light specials in capital markets that day were as common as bots lamely defending Biden on Twitter.
This selling included, of course, bitcoin. Simply put, falling U.S. dollar liquidity worldwide means falling bitcoin liquidity and then, by extension, seizure of one cryptocurrency market after another. With the insane amount of leverage existent within the DeFi space, it’s not hard to see what happened here and what’s just over the horizon.
If you still don’t understand the inverse relationship between HODLing and bitcoin volatility, then I suggest you review a basic course in supply and demand.
A lot of people finally woke up from their slumber and realized that for the first time since Alan Greenspan was in charge, the Fed may not be there to bail everyone out this time. Maybe, just maybe, Powell is serious about normalizing rates and letting the chips fall where they may.
This process is slow. There are a lot of psychological barriers to overcome to change people’s thinking. Too many people stick to their investment thesis well past its use-by date. This leaves them and markets very vulnerable to the kinds of shocks we’ve seen in recent months as the Fed has now raised interest rates by 50 basis points more than most contrarian analysts thought was feasible.
Go read the thoughts of the average goldbug and you’ll see what I’m talking about.
Powell had a lot of inertia to overcome, and that inertia was well founded in the minds of investors and market analysts.
Inflation Coordination
For 13 years since the fall of Lehman Brothers, the markets got used to the coordinated monetary policy between the world’s major central banks. The Gang of Five: The Fed, The Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank, engaged in what I’ve called “round robin quantitative easing (QE).” In effect, these five central banks took turns inflating their money supplies while swap lines, carry trades and expanding global trade kept the system relatively liquid.
The Bank of Japan is currently trashing the yen to play wingman to Powell’s Maverick, if I may buy a cheesy “Top Gun” reference here, putting serious pressure on the Hong Kong dollar’s peg to the U.S. dollar. Long story short, Powell’s aggressiveness has aftershocks and knock-on effects far bigger than what’s happening in the cryptocurrency corner of the world.
The Chinese played along with this charade to their benefit anytime the system began to teeter off-center, employing countercyclical monetary policy to keep the U.S. economy from collapsing. They happily converted their U.S. dollar trade surplus into infrastructure projects all over Asia and Africa. This is known as China’s Belt and Road Initiative.
Exchange rates were essentially pegged and there was high confidence that the central banks had saved the world. This is why gold languished through a brutal bear market through the end of 2015 and is still languishing below even the 2011 high 11 years later.
Bitcoin was born because of this mess and simply attracted enough capital fleeing the insanity to establish itself as a real alternative asset class for people looking for optionality.
It’s got a long way to go to overcome the existent inertia of the current system, however. Because of this, its dollar price will be the plaything of these same central bankers, prop desk traders and power brokers trying to preserve their place in the monetary dominance hierarchy.
The petrodollar standard as the global reserve currency which was established by Richard Nixon in 1971 and given its sea legs by Paul Volcker, ended in 2008. In 2011, the “coordinated central bank” standard with the U.S. dollar at the center was established by announcing central bank swap lines and a $500 billion slush fund, which was what finally broke gold’s bull market in September of that year.
Powell, in my read of him and history, has been trying to extricate the Fed from this situation since he took over as FOMC chair. They raised rates aggressively in 2018 only to be forced back down a bit in 2019. He and John Williams at the Atlanta Fed pushed through the creation and implementation of SOFR (the Secured Overnight Funding Rate), which was a replacement for LIBOR (the London Interbank Overnight Rate). SOFR is the key, I believe, to the Fed’s endgame, which I’ve written about previously.
The reverse repo crisis of September 2019 was a direct result of U.S. banks, particularly JP Morgan Chase, refusing to accept European debt as collateral, creating a dollar liquidity event which saw SOFR blow out to over 10% as banks scrambled for scarce dollars, which the Fed had to provide by opening its repo facility back up.
I’m not sure if this was the end of the “coordinated central bank” standard, but September 2019 is definitely a candidate for monetary historians to discuss. Then Powell was forced — via our first flirtation with Modern Monetary Theory (MMT) with the CARES Act — to abandon his hawkishness during COVID in 2020.
Once COVID was essentially over, Powell was free to begin removing the Fed from the Davos-inspired orthodoxy as expressed by the European Central Bank’s Christine Lagarde’s comments that the central banks would all now have to coordinate policy to combat climate change.
Powell publicly dissented in June of 2021, just two weeks before he would begin stealthily tightening by raising the payout rate on reverse repo (RRP) contracts by 0.05% or 5 bps.
Powell insisted “we are not, and we do not seek to be, climate policy makers as such. We have a very specific mandate, and precious independence … which has served the public well…that’s not up to us … but nonetheless I do think our work can indirectly educate the public and also I would think inform other parts of the government in the actions they are assigned to assess.”
A recent interview with former Fed insider Danielle Dimartino Booth is worth your 20 minutes to get a sense of what’s really going on. She intimated (because she can’t say the quiet parts out loud) that the Fed is raising rates for reasons other than “fighting inflation.”
I identified Powell’s use of the RRP facility to drain overseas markets nearly immediately and began forming the core thesis around which this article and a lot of my other commentary is based:
- The Fed isn’t raising rates to fight inflation.
- The Fed is raising rates to break the European Central Bank and the offshore or eurodollar markets.
At the next FOMC meeting in July 2021, Powell announced a new foreign repo facility, to give offshore banks access to dollars which were denied them by the U.S. commercial banks.
By doing this, the Fed now had far more control over U.S. dollar inflow and outflow through the so-called shadow banking system than it had previously. It had taken a massive amount of money out of the system through reverse repos and could use its immense stock of U.S. Treasurys to set the price of collateral for offshore markets once it began raising rates.
And that’s where we are today.
Powell Versus Bitcoin
With this architecture in place, the argument against transitory inflation in the rearview of the overton window and an energy-based war raging in Eastern Europe, the Fed is now uniquely positioned to put an end to the ruinous fiscal and monetary policy of globalist institutions which are the bane of most of our existences.
Make no mistake, however, I do not think the Fed is doing any of this for our benefit. They are acting this way on behalf of their benefactors, the U.S. commercial banking interests. Davos is the sworn enemy of the last vestiges of capitalism left in Western markets. That begins and ends with basic commercial banking.
Our worries over central bank digital currencies (CBDCs) and the social credit system they imply are real, but they are more than real to the banking sector.
And while I understand this is an article for a Bitcoiner audience, it’s important for you to understand the dynamics at play in the traditional finance world. They are still very powerful and their fight for dominance may be futile in the face of bitcoin in your opinion, fair cop. However, I have enough experience as a gold guy to know that that traditional finance world can hang on for a lot longer than anyone ever expected.
So forewarned is forearmed, as it were.
We’re here today at the inflection point in monetary history similar to September 2008 when Lehman Brothers imploded overnight. Back then, I was convinced the system had, at most, five years left. I was wrong.
This time, it will take down a continent’s worth of banks and potentially a major central bank. The ECB’s emergency meeting the day of the Fed’s rate announcement left the markets seriously underwhelmed.
We have no idea how long it will take for this period of monetary history to work itself out, but the pace of events is accelerating.
Today, the Fed is on the attack to save itself from its enemies. It has shored up its defenses, built a war chest of assets and is now deploying financial weapons of mass destruction.
The first phase of this fight is a mass flight into the U.S. dollar. Overleveraged cryptocurrency markets have been beaten down. Bitcoin dropped below $20,000 from highs of $68,000 per coin a few months ago.
Gold is incapable of rallying at this point in time as access to dollars dominates everyone’s thinking because inflation for real goods — food, energy, health care, rent — rages. This doesn’t diminish the long-term thesis for bitcoin and/or other safe-haven assets, but it does mean that the short term will be very rocky, like it has been for the past three months,. Very scary.
The Fed may be the biggest Ponzi scheme in the world, but everyone else’s valuations are based on it, including bitcoin’s. If the Fed decides to shrink its balance sheet, it can and will collapse all the others. Powell is betting the farm on this, while simultaneously understanding that to get rid of inflation and restore sustainable economic growth, it first means liquidating all the uneconomic projects and overpriced assets.
It means relinking global liquidity and the value of money with the real costs associated with building real wealth. I don’t think Bitcoin fears the Fed because Bitcoin is just code. Bitcoiners, on the other hand, who are tied to the price and not just stacking sats, need to realize the immense power that the Fed still has, and when faced with an existential threat to its future, the lengths it will go to preserve itself and those banks whose interests it represents.
Once you accept this, only then can you see the immense opportunity in front of you to make the right decisions at the right times and navigate your way through this pivotal period of history.
This is a guest post by Tom Luongo. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.