by Ivan Martchev

February 17, 2021

Central banks serve a countercyclical role. When the economy overheats, they try to calm it down; when it’s depressed, they try to prop it up, as they are doing at the moment. We are now experiencing the most aggressive intervention in the economy and financial markets by the “modern monetary theory” (MMT) practicing duo of the Federal Reserve and the US Treasury, which is why stocks are at all-time highs and average hourly earnings went up last year during a bad recession due to generous unemployment benefits.

A nation can grow without a central bank – the U.S. had no central bank between the time it declared independence on July 4, 1776 and the creation of the Federal Reserve December 23, 1913, even though some rudimentary form of central banking activities existed early on. The problem with having no central bank is that the volatility of GDP and inflation was so extreme that the powers-that-be had to intervene.

For example, if there were no Federal Reserve during the COVID shutdown of the economy last year, we would probably have seen a Second Great Depression. Extreme deficit spending from the Treasury jointly with Fed balance sheet operations acted to calm down the markets, so they get the credit for preventing it.

US Money Supply

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Jointly, the Fed and the U.S. Treasury Department have the biggest control over the money supply. The Fed via balance sheet operations creates excess reserves and supports asset prices (excess reserves are part of the monetary base but not part of M2). Via loan guarantees, the U.S. Treasury Department affects the flow of credit in the U.S. economy and pushes up broad measures of money supply. The coordination between the Fed and the Treasury caused a surge in lending in a bad recession, which has never happened before.

US Inflation Rate Govt Debt

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

What is going on here is very similar to the deficit spending that happened during World War II. Between 1940 and 1945, deficit spending surged yet inflation was still somewhat under control as the economy was not operating in normal fashion as many soldiers were away fighting in the war, but inflation reached 19.6% in 1947 as the economy began to normalize after the war and all that extra money was floating around. I think there will be a notable pickup in inflation after the COVID pandemic comes under control.

India is Banning Bitcoin – Who’s Next?

Having control over the money supply is very important to the U.S. government – and to any world government for that matter. This is why India is getting ready to ban Bitcoin at any moment as such legislation is moving through parliament now (see February 11, 2021 Bloomberg Quint, “Intent On Ban, India To Give Transition Time To Crypto Investors”). The Chinese already made it impossible for the largest Bitcoin exchange to operate in China, which is why it moved to Malta. What will the U.S. do?

I would not be surprised to see the U.S. do exactly what India is doing for the same reasons described in this post, namely, I don’t see the U.S. authorities allowing for any roundabout ways for circumventing the Fed or the U.S. Treasury Department, which is what Bitcoin currently allows.

BitStamp USDGraphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Also, many (perhaps most) Bitcoin investors are buying it because it is going up, not to transact with it. Buying an “asset” if it can be called that, just because it’s going up, is like buying an Internet stock in 1999. Internet stocks in 1999 went up on the Greater Fool theory, which posits that there are always more buyers to sell to. What happens if the U.S. government decides that there should be no more Bitcoin buyers coming in, when it comes to new regulations, similar to what the Indian government is doing?

Gold and Silver Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

If investors want to get protected against the coming above-average inflation, then gold and silver bullion can do a fine job. So can platinum and palladium, although it’s worthwhile noting that platinum, palladium and silver are primarily industrial metals, which is why they are outperforming gold of late, as the industrial metals are moving in anticipation of the global economy normalizing after COVID.

As an added benefit you can take physical delivery of precious metals. Try doing that with Bitcoin!

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
The Role of Central Banks

Sector Spotlight by Jason Bodner
Statistical Analysis for Smart Dummies

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Read Past Issues Here

About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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