Exciting things are happening! Bitcoin traded over $700 on Monday. The Dow shot over 16,000. And China decided to go even further down the capitalist road.
Don’t know about Bitcoin? “The Department of Justice recognises that many virtual currency systems offer legitimate financial services and have the potential to promote more efficient global commerce,” a Justice Department official told the US Senate. Bitcoin may “hold long-term promise”, said Federal Reserve chief Ben Bernanke. “If properly regulated,” added an unnamed official.
Publicly, the feds are playing it cool. Privately, they must be sweating. The new virtual money has the potential to destroy the dollar, the Fed, the banks… and the whole world’s monetary system. It could also make gold obsolete. This new money is easier to use and costs nothing to store. Regulate it? That may not be possible. Bitcoin is the most disruptive technology yet invented. It could be the biggest financial story since gold. Nothing like it has happened in 6,000 years – an entirely new kind of money – and better! In fact, it could help bring in a whole new phase of economic development. Watch this space for more details.
Meanwhile, the Dow rose over the 16,000 mark on Monday. But while US stocks could go much higher, there is much more risk on the downside than there is reward on the upside. Corporate profits are largely a mirage – a reflection of the Fed’s red-hot quantitative easing (QE) policy on the barren sand of real revenue growth. The economy is still not recovering. And the Fed’s low rates keep debt growing, which increases the risk to the whole system.
So out of stocks and into Bitcoin? Not so fast. Chinese officials have said they would like to ‘de-Americanise’ the world’s monetary system. Bitcoin may be their best bet. Last week the Middle Kingdom’s rulers met. They decided to lighten up on the ‘one child’ policy. We’re not sure of the details (see pages 10 and 24 for more). But the important thing is that the leadership seems to be turning the whole economy, from capital formation to consumption, and from exports to domestic markets... and from the dollar to alternatives.
We don’t approve of central planning. It always makes things worse. How much worse? It depends. If the central planners fight the markets, things will get very bad. But if they go along with what the markets want to do anyway, they will do less damage. That’s what Paul Volcker did in the early 1980s. Back then inflation rates were headed up over 10%. Bond yields, too, were over 15%. The markets were correcting inflation, with bond yields vaulting ahead of the consumer prices index (CPI). The markets were tightening credit so as to squeeze the CPI. Volcker had a choice. Fight the markets with more cheap credit to maintain full employment, or join them? He declared for the markets. He drove yields higher, over 18%. Inflation rates quickly corrected down to 5% and continued to sink for the next 30 years. America enjoyed its longest period of growth in history.
But things were very different after the crisis of 2008-2009. After almost 30 years of falling yields, the markets were ready for a correction. Too much debt had built up in the private sector. A ‘day of reckoning’ was at hand. First, Bear Stearns. Then Lehman. General Motors. Fannie Mae. Freddie Mac. Like dominoes, big institutions fell into default and bankruptcy. But the feds stepped in. They fought the liquidation. And they succeeded in halting the process of de-leveraging. Bravo? Good work? Ben Bernanke got his mug on the cover of Time magazine. They called him a hero. Not only did he fight the market, he won – at least for a while. We have more debt now than we had then. And the day of reckoning is still ahead.
Meanwhile, the Chinese are loosening up. They’re letting people have more children. Already, retailers are getting ready to sell diapers and strollers when the babies show up, roughly nine months from now. This will boost demand for bigger houses, too. And bigger cars. And more debt! In fact, commentators are talking about a new baby boom – which, like America’s baby boom of the 1946- 1962 period, could transform the whole economy from an export powerhouse into a consumer colossus.
Chinese stocks trade at 15 times earnings. Not super cheap. But if the growth rate of 7% a year continues, they could look like great bargains a few years from now. Chinese stocks? Bitcoin? US stocks? What to do with your money now? Stay tuned.
To read Bill’s daily thoughts, sign up to the Daily Reckoning free email at www.morefrombill.co.uk. These guys are a great evidence based finance magazine, they were advising people to buy gold in 1999. A bit liberal. Been trying to get them into Bitcoin for ages with little effect.
Occasionally they reply by email and ask a few questions but not often. MoneyWeek has a fairly widely readership in the UK.
