Oh, bitcoin isn’t a hedge against inflation?

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Understanding Bitcoin requires a proper frame of reference. (Rick Bowmer/AP)

Oh, bitcoin isn’t a hedge against inflation?

While inflation careened out of control throughout last year, the financial class celebrated the precipitous decline of bitcoin’s price. Those wacky libertarians who had replaced their dreams of abolishing the Federal Reserve with creating a viable alternate currency to bypass the inflationary tendencies of the federal government altogether were lumped in with the celebrities sued for advertising the scam of FTX and the dummies who lost their savings on stablecoins such as terraUSD.

But contrary to the hopes of the financial establishment, crypto isn’t a monolith. And while other digital currencies have died for good, bitcoin is bouncing back, not as a hedge against inflation itself, but rather against the credit of the U.S. government.

INFLATION BILL COMES DUE

Consider that when the inflation situation worsened but the Federal Reserve seemed able to pull off a soft landing without the rest of Wall Street or Washington going apoplectic, bitcoin sunk, and the dollar rose. But since the start of this year, the New York Stock Exchange has virtually flatlined, and the Nasdaq composite rose 20% while bitcoin has rebounded by 80%. For the first time since June, the cryptocurrency hit $30,000. Meanwhile, the dollar continues to strengthen even as inflation stagnates and the collapse of Silicon Valley Bank remains a recent memory.

So, what gives? Is this just another bubble blowing up, or does bitcoin’s growth reflect a real value?

The answer to this question can be found in what differentiates last year and this. For starters, the Fed’s (weakening) war on inflation has brought the central bank losses for the first time in nearly two decades, and by backstopping SVB depositors, it sent the massive signal to markets that not only was a bank like SVB systemically important, but also that taxpayers will be brought back on the hook for non-FDIC-insured deposits. More important is investor fright of our fiscal situation. President Joe Biden has no interest in negotiating either to avoid a government shutdown later this year or the 20% across-the-board Social Security cut triggered when the program becomes insolvent within a decade.

Then, we see it is not that bitcoin is a hedge against price level increases themselves, but rather when the only thing backing the U.S. dollar, the full faith and credit of our cretinous government, comes into question.

Last year, the Fed seemed unusually poised to kill inflation without changing Washington’s spending forecasts, but now we know that necessary rate hikes have increased our interest payments on the national debt by 40%. At this rate, the incentives of the Fed and the rest of the federal government (at least under Democratic control) are diametrically opposed, as the Fed pursues disinflation, while the government, as a debtor, directly benefits from its liabilities losing real value.

Around the world, we are seeing the practical use of bitcoin, from its status as legal tender in El Salvador to global donations to Ukraine’s defense. But in America, bitcoin joining the ranks of gold is reason enough to bet on its longevity.

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