No, the Fed Can't Fight This Kind of Inflation. Buy Crypto and Gold Before It's Too Late!

The U.S. Bureau of Labor Statistics revealed in its Tuesday report, that the most popular inflation gauge, the U.S. Consumer Price Index, or CPI, unexpectedly soared by 5.4% in June on an annual basis which is its highest rise for all semiannual periods observed since August 2008 and comparable to numbers normally communicated by emerging and frontier markets. Stripping out food and energy brings the annual rate to 4.5%, the quickest since 1991. On a monthly basis, the figure grew by 0.9%, which is the largest MoM change recorded since June 2008. Prices are rising everywhere, starting from used cars and family homes all the way down to foods and staples. Genie is out of the bottle, so the main question is whether our waiting for confirmation of its transitory nature (or otherwise) will be rewarded.
Meanwhile, as we anticipated in our previous articles, the number of countries embracing crypto, in general, and Bitcoin, in particular has been steadily growing and adding new members to the club. The hassle owes much to the ubiquitous sense of fiat currencies losing their buying power, which is what exactly is happening. Argentine MP Jose Luis Ramon recently introduced a bill that, if passed, would allow workers to receive wages in Bitcoin and other cryptocurrencies. This is what he said:

Presenté un proyecto de ley para que los trabajadores en relación de dependencia y exportadores de servicios tengan la opción de cobrar su sueldo entero o parcial en criptomonedas. La idea es que puedan fortalecer su autonomía y conservar el poder adquisitivo de su remuneración
- José Luis Ramón (@JoseLuisRamonOk) July 6, 2021

The lawmaker claims that his initiative will "preserve the purchasing power of employees and increase their financial autonomy". It's hard to pronounce this message clearer.

According to the proposal, employees will be able to choose the options of full or partial payment of labor compensation in cryptocurrency of their choice. "This initiative is related to the need to ensure greater autonomy and management of wages, which does not mean the loss of rights or possible abuse in labor relations," explained Jose Luis Ramon to media.

Interestingly, against the backdrop of the lingering economic crisis in Argentina, residents' interest in bitcoin in 2021 has reportedly doubled compared to the bull rally in 2017, according to several national polls.

Following these events, Argentina-based cryptocurrency exchange Buenbit raised $11 million in a Series A funding round. Buenbit plans to list such coins as USDC, USDT and Binance coin USDB, and include investment products focused on Bitcoin and Ether (ETH). According to Buenbit's chief executive, half of the funds will be used to start operations in Peru, Colombia and Brazil or Mexico before the end of 2021.

In the same fashion, Paraguayan congressman Carlitos Rejala tweeted "This week we start with an important project to innovate Paraguay in front of the world! The real one to the moon #btc & #paypal".

In his turn, Gabriel Silva, a congressman from Panama said his country "could not afford to be left behind" and a broader adoption of crypto was necessary for the country to attract technological innovation and entrepreneurship. Again, let's welcome new prospective members to the club!

The other half of Buenbit proceeds will go toward increasing Buenbit's staff to 190 from 130 this year, as the exchange will hire people for its product, technology and design teams.

Last, but not the least, Argentinian Bitfarms, a publicly traded bitcoin mining company, announced it was ramping up its operations in Argentina from 60 megawatts to 210, "sufficient to support approximately 55,000 new-generation miners, which could generate approximately US$650 million in revenue." In the same statement, Bitfarms indicated the breakeven cost of mining a bitcoin in Quebec, Canada — where they have operations — stood at US$7,500 in the fourth quarter of 2020, compared with an estimated US$4,125 in Argentina, if their facility was up and running at the time. Electricity makes up about 75 percent of mining costs, which helps to explain the math behind paying for subsidized energy in pesos, only to turn around and offload bitcoins and ether — the second-largest cryptocurrency — at a premium over the official dollar exchange rate. Argentina has over 20 crypto-farms already, with several taking advantage of cold weather in Patagonia to lower cooling costs.

Back to where we started. Federal Reserve Chairman Jerome Powell on Wednesday once again said that he thinks the sharp rise in inflation seen so far this year will eventually phase itself out. "Inflation has increased notably and will likely remain elevated in coming months before moderating," Powell said, in testimony prepared for delivery to the House Financial Services panel. "We will continue these discussions in coming meetings," Powell told the House panel.

As Powell had said at his press conference in June, the Fed would be prepared to shift policy "if we saw signs that the path of inflation or longer-term inflation expectations were moving materially and persistently beyond levels consistent with our goal." In yesterday's testimony, Powell noted that the "labor market has improved, but there is still a long way to go."

Powell cited three factors for higher inflation:
1. "Base effects" when weak readings of inflation last year drop out of the 12-month calculation
2. Manufacturing bottlenecks or supply constraints that caused sharp price increases after the pandemic
3. Surge in demand for services as the economy reopens.

Jay Powell is apparently painting himself to corner, and what he keeps telling is nothing more than simply his own bet on a particular scenario. If it doesn't materialize, the Fed simply starts tapering and, arguably, hiking percentage rates, but it would be too late for the "non-Feds" to protect their capitals.

Monetary policy tightening – whether sporadic or pre-planned – is very unlikely, however, for one mere reason: increase in the Fed Funds Rate by just 0.25 b.p. increases the government's interest payments on its debt by more than $200 billion a year. Given the fact how difficult it has been in recent years for the U.S. Presidents to get their similar size spending bills approved by Congress, it appears the Fed's rate decisions will become more and more political going forward.

This is why what we heard on Wednesday was NOTHING MORE than the same narrative being communicated, again and again, during Jerome Powell's press conferences linked to the scheduled FOMC meetings. Actually it DID FEEL like deja vu of just one extra FOMC meeting Q&A section!

All in all, under new circumstances, the Fed is not technically capable of increasing interest rates past 2% (necessary to fight a persistent 3.5% inflation under the worst-case scenario) without crashing the system, and with this inflation, like with former Fed chairman Volcker's 1970's style of inflation, the system will need 6%+ rates to stop it.

Since the Fed will not, and cannot fight this inflation, we should stop paying attention to all the pertinent official statements, while gambling with our future finances. We should stop drawing far-reaching conclusions from today's lackluster performances of gold and cryptocurrencies. We must stop spending much time reading social network posts of crypto influencers ostensibly knowing what they are saying – no, they don't – and start profoundly building our capital protection programs involving the above-mentioned capital protection tools following footsteps of young ambitious and prudent Latin American politicians.
Vladimir Rojankovski, MBA/LIFA
VRM Research
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