Permanent Money-Printing By Central Banks F*cks Us

Cyril Cox
6 min readAug 16, 2021

Disclaimer: I want to keep this post as fact-based as I can and let YOU make up your own mind, your own view.

What does worldwide money-printing have to do with crypto? Everything.

This next fragment is fully quoted by a the QCP Capital Telegram Broadcast (link) will help us understand why. It just boggled my mind to a crisp, to be honest.

QCP Macro Deep-Dive Series: Fiat & Crypto — 16 Aug 21

50 years ago, on Sunday 15 August 1971, Nixon took the US off Gold convertibility. This was arguably the single most important economic shift in modern economic history, the first step in a complete shift to a Fiat-based monetary world.

With this shift, money supply became unencumbered. Central banks could now expand their monetary base without fear of claims on their reserves. Without the Gold-backed limit on money supply, the floodgates were opened.

Chart 1

Since then, there has been an unprecedented rise in central bank printing. Money supply has grown in a parabolic fashion and has seen an even more exponential rise in the wake of Covid (Chart 1). Central banks have treated this as a free pass to print whatever they need to keep the economy juiced up (Chart 1 — M2 from $710 billion to $20.4 trillion in 50 years).

In the Fiat-based world, the core weapon of the central banks is their currency. More specifically, the devaluation of currency (through monetary policy tools like interest rates or Quantitative Easing) gives the country an edge in global trade, effectively benefitting from the economic growth in other countries. Also, the management of inflation expectations through money supply ensures the increasing demand required for economic growth.

This major shift by the US soon led to a global free-floating exchange rate regime which in turn led to a global currency war that is being fought to this day. No country was going to give the US a free ride devaluing unilaterally and stealing growth at their expense.

Chart 2

The result was a Fiat “race to the bottom” where global central banks embarked on a decades-long tit-for-tat devaluation of their own currencies, driving global money supply through the roof (Chart 2–12 major countries M2 at US$100 trillion).

Because these currency devaluations happened across the board, one might be tempted to believe that Fiat cash has held its value. After all £1 bought $2.40 in 1971, not too different from the $1.40 today. To see the impact of the shift, we need to look at a ‘neutral’ asset. Gold for example.

Chart 3

The results are damning for Fiat cash — Against Gold, the USD has lost 98%, the GBP 99% and the JPY 93% since 1971 (Chart 3).

And it’s not just Gold that grossly outperformed cash. Almost all other major asset classes have seen significant price appreciation against cash. If for no other reason, just because of the fact that asset values are typically measured against (or denominated in) currency which constantly loses value by design!

This means that asset prices are largely a function of the currency, which is itself a function of central bank action.

Chart 4

A good example is seen in the Nikkei Index denominated in JPY (white line) vs. USD (blue line) vs. Gold (orange line) from 1971 to now (Chart 4). Against Gold, Nikkei has had practically zero price appreciation. Against Fiat cash, it only experienced price appreciation from 2012 after the Bank of Japan embarked on Abenomics, a monetary expansion policy that effectively devalued the currency and boosted inflation expectations.

Chart 5

And with the USD being the de facto global reserve currency, we can actually see how the price movements of all assets are strongly tied to the Federal Reserve’s money printing (of course with varying sensitivities due to factors particular to each asset). [Chart 5 — Yellow line (US money supply), Orange line (Global liquidity proxy), Purple line (Bonds), Blue line (Gold), White line (S&P 500) all normalised to USD Index (DXY)].

So we know that, in the long-term:

1. Asset prices are largely a function of currency value and central bank action

2. Central banks are caught in an intractable spiral of currency devaluation and money printing to sustain economic growth

Wow. I had to wrap my head around that, what a mind-fuck. If you’re not quite there, re-read it.

Here’s some illustrations to make better sense of the percentages.

GOLD (vs. U.S. DOLLAR) since 1971

5400% increase would make 1$’s worth of gold in 1971 into 54$ of gold at the all-time high in 2020. That is a 54x increase in a 50-year time period. That is how much the dollar has deflated vs. Gold. You were averaging over 108% profit per year (incrementally, when looking from your initial investment) if you were a skeptic of banks and had your money stored in Gold all-the-while.

So hey, remember March 2020, the crypto, stocks and more crashed -50%-ish?

Money Supply 1(very liquid cash: chequings, traveler’s cheques, coin, etc.)
U.S. Money Supply 1 (liquid cash: chequing account, traveler’s cheques, coin, cash etc.) & U.S. Money Supply 2 (M1 + savings, somewhat liquid assets)

Above is a shot of the M1 and M2.

Take a look at 2008 ‘till now. 2008 ring any bells? Naturally, the COVID money-printing and stimulus cheques can be observed in the year 2020, impressively so. That is an astounding increase, overall (note that not all increase in the liquid money supply of a country is due to printing, there can be other causes, of course).

Even without the March 2020 COVID black-swan, the increase post-2008 has been much more than previous years. I’ve marked the past three 13-year time ranges to illustrate that is it more than the norm.

What can this mean? Here’s a quote from Concoda (full article)

Since every major economy has adopted this flawed system, when America falls into chaos, the world falls along with it. Events such as the unwind of hot money during the 1997 Asian Debt Crisis and the collapse of subprime securities in the 2008 financial crisis prove the system has yet to be fixed, and the only force preventing its collapse is governments and central banks injecting trillions of liquidity into the system, keeping the system stable and the cheap money narrative in play.

What I am reading from this: non-stop money printing creates false economic growth.

While many small businesses were lost in 2020, the markets have been massively upward since March 2020, the start of COVID. How can we experience massive economic growth when un-employment and businesses throughout the world are on the verge of (or in) bankruptcy?

So.. how is this bad for us? Well, I’ll leave that one to float since I don’t want to draw conclusions for you.

DYOR, what do you think?

Quoting QCP Capital Broadcast:

Our natural conclusion is that:

1. Cash is trash in the long-term

2. Successful investing is essentially about picking the optimal store of value (against cash) at any particular point in time

3. Owning crypto is a no-brainer as it remains an under-owned asset class globally (i.e. crypto will be the biggest beneficiary of continued central bank printing)

I hope you found the read inspiring!

‘Till next time,

Cyril

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Cyril Cox

crypto trades — coffee & markets — risk management