Imagine if your iced caramel macchiato at Starbucks cost $5 today, $15 tomorrow, $45 the day after and $135 the day after that. By the end of the month, your morning caffeine/sugar hit would set your back $53 million.
In 1923, German factory workers received their wages twice daily: They got one bundle of cash in the middle of the workday and another at the end.
Laborers’ wives would gather outside the factory gates at lunchtime to collect the half-day’s pay and then race to the stores to buy what they could before prices went up.
Twice-a-day shopping was necessary, because in October of that year prices were rising at a clip of 41% per day.
Hungary would later top that with a daily inflation rate of 300% in 1946 — imagine if your iced caramel macchiato at Starbucks cost $5 today, $15 tomorrow, $45 the day after and $135 the day after that.
By the end of the month, your morning caffeine/sugar hit would set your back $53 million.
Those inflation rates were fueled by governments printing money, more or less, as fast as they could: In 1989, with inflation at 100% per month, the Argentine central bank was printing money so quickly it ran out of paper to print it on.
In these extreme cases, governments increased the supply of money so exponentially that finance textbooks relate it in scientific notation:
During the German hyperinflation the number of German marks in circulation increased by a factor of 7.32 × 109. In Hungary, the money supply rose by 1.19 × 1025.
This is, of course, the reason many of us hold bitcoin: There should (if everything goes to plan) only ever be 21 million of them — no fancy notation required.
We bought bitcoin after the pandemic to protect against the inflation that would inevitably follow the government’s money printing response.
Inflation is up a lot and, yet, bitcoin is down a lot.
Were we wrong to think bitcoin is a hedge against inflation?
Yes … but let's call it a technicality: Bitcoin is not a hedge against inflation; it’s a hedge against hyperinflation.
In the case of garden-variety inflation, like we’re experiencing now, it hasn’t been much use at all.
And I don’t expect it ever will be.
The T Word
Why hasn't Bitcoin been a hedge against inflation? Because this inflation is transitory.
We've been laughing at the Fed for telling us that, but Bitcoin has been telling us the same thing. And it's almost certainly right.
Bitcoin's definition of transitory is different from yours, however. The OG crypto is a big thinker: It knows a year or three of inflation doesn't really matter.
A one-time demand shock and a once-a-century supply shock are not the stuff of which hyperinflation is made.
What does make for hyperinflation is sustained, out-of-control money printing coupled with skyrocketing velocity (twice-a-day paychecks, for example).
There is currently no sign of either: Rising tax receipts and lower spending has slowed the money printer to a crawl. And the velocity of money is at multi-decade lows.
(Reminder: It’s federal deficit spending that prints money. But if you think Fed bank reserves are money, too, that printer has gone in reverse with the Fed now unprinting $95 billion a month via quantitative tightening.)
Bitcoin has been telling us the money printing would stop. And it has.
Am I just retro-fitting a narrative to a price move? Possibly. There is a lot of that in finance.
But Bitcoin has been highly correlated to the M2 measure of money supply, which I think is a good-enough proxy for money printing.
All models are wrong, but this one, simple as it is, is useful.
It shows, tactically, if you think the money printer will be turned back on, you should be long Bitcoin.
That means, though, Bitcoin will be inversely correlated to inflation — because the money printer is only coming back on if inflation falls.
It’s all a bit counterintuitive. You want to be long bitcoin, the hedge against hyperinflation, mostly when people are worried about deflation.
Unless you think we get inflation AND money printing. In which case you should be very long bitcoin.
And maybe wheelbarrows to collect your wages at lunch time.