Bitcoin and the Pricing Mechanism | Parker Lewis

so again today the my talk is you know i refer to it as the end of the beginning it's on central banking bitcoin and the pricing mechanism ultimately you know really the way that i view the world is you know where the story of central banking ends is really where where bitcoin begins and that's that hence the title the end of the beginning um you know in the presentation i'm going to go over a few items i think we all recognize that the world changed in march uh it led to uh some really unprecedented actions from the fed and central bankers all over the world i'm going to provide some historical context of this round of qe or this episode of qe relative to 2000 aqe and then even before that and then talk about how really you know you know kind of how the central bankers think about what it is they're doing and they're not really experts and then i'll go into discussion of the pricing mechanism the impact of central banking actions on the pricing mechanism and then transitioning that into bitcoin and how bitcoin's pricing mechanism works um so you know before we get started though i want you know kind of throughout the presentation for everyone to have this this page in context and on the right side of the page i basically laid out the the amount of bitcoin that have been issued each week since the fed really turbocharged their quantitative easing action in this round and you can see that roughly there's about 10 to 10 to 13 000 bitcoin being created each week until may 20th which was after the happening and that got cut in half to about you know just over 5 000 about 5200 to 5500 and on the right side you can see that the fed has increased the mice five dollars from anywhere from 60 billion to 550 billion and that it varies quite significantly but on average um the fed has created 20 million dollars for each bitcoin that's been created and each week the fed has created 226 billion on average each week for a total of 2.9 trillion in in just 13 weeks which is pretty crazy when you when you think about um so you know i refer to this i don't know how many people are top gun fans but uh i refer to this as the the feds you're gonna do what moment and looking at that in perspective to pass qes so just to frame this episode you know 2.9 trillion since the beginning of march and you know looking and again that's over 13 weeks qe in the height of the financial crisis in 2008 was you know over eight weeks they printed one or digitally created 1.3 trillion uh qe2 was only 600 billion and then qe3 which was over 124 weeks was 1.7 billion so what the fed has done not only in speed but in magnitude is truly unprecedented but what i want to keep in context too is that you know coronavirus and coving the global economic shutdown it really is just a scapegoat and or another way to think about it it is the accelerant and i don't want anybody to leave the central banks off the hook and you know when i say that it's important to recognize that the fed's actions from 2017 to 2019 actually induced you know a crisis before the crisis and that the the economic system was already inherently unstable um going into then what was an accelerant in in the the economic shutdown so on the left-hand screen here this is a slide or a chart of the the repo market so the repo markets are short-term funding market you know several trillion dollars but you can see that in september of 2019 the rates nearly tripled or quadrupled overnight i really you know that was the signal of those those funding markets which are which are large and significant actually breaking so had nothing to do with coronavirus and then similarly before the you know people were aware of coronavirus but before the significant economic shutdown there was already a massive oil imbalance and and the saudis and the russians couldn't come together on cutting back supply all of that happened before um before the covid crisis in the global economic shutdown so the setup was all already there now everyone attributes what the fed's actions to just related to this but but it's important to have that context that the the system was already inherently unfragile or in uh was fragile and that what we're seeing now from the fed you know was already set up and it wasn't just about covet so this is just a slide to kind of articulate this so over the course of 20 the end of 2017 early 2018 the fed withdrew approximately 33 of all cash in the banking system and that ended in september when the repo markets broke and the fed had to come in quickly to provide emergency funding to those so i refer to that as the emergency or the pre-crisis crisis so before covet everything the fed had already had to add about 500 billion of cash into the system um and then also for context around the the oil crisis now you know again that that that announcement was one was on march 8 and then subsequent to that the fed took you know the action on march 12th to to add 1.5 trillion to their to their emergency repo funding then on march 15th they you know cut basis the the short-term interest rates by 100 basis points to 700 billion and then on march 22nd they announced unlimited qe what i refer to as qe plus plus and and one of the things that i highlight is that each time the fed takes these actions and and it shouldn't be missed that these these three actions were extreme and they all happened within a 10-day period and so there's always this view that the experts are in control but their their their actions are always incremental and it's it's this idea that if the fed was in control then when they announced the 5.1.5 trillion dollar repo program why didn't that fix the problem then subsequently when they did a 700 billion billion qe program why didn't that fix the problem and then subsequently with unlimited qe it was basically all bets are off and and so the takeaway i i would you know lay out here is when you see these events and looking at the market it's always reactive to the market and they're trying to ultimately stabilize the credit system now this is this this provides greater context so when you see this on a little bit of a zoomed out view you can see that that that that unwind of the fed's balance sheet that happened over the course of september or october of 2017 to september 2019 was initially almost all reversed in the pre-crisis episode but then you know now the fed has increased their balance sheet since that moment by 2.9 trillion and so it's like all of that that basically took you know two years to unwind was reversed and so there's a lot of discussion within the fed about monetizing debt and and what what what they were trying to do was unwind qe one two and three um over you know the past two years and and what they found out and what the market communicated to them was that wasn't possible and so when anybody ever tells you that um that the fed isn't monetizing the debt of the united states whether it's public debt or private debt uh that's a lie um and it's a lie because they can never unwind qe because as we'll see qe is only designed or can only work to increase uh the credit the size of the credit system um so but i do think that it's important always to go back and look at the historical context where if you look at qe1 you look at qe2 and you look at qe3 um qe1 was acute it happened over eight weeks it was 1.6 trillion but then qe2 happened over approximately a year and it was 600 billion and qe3 of 1.7 trillion happened um over you know approximately a year and a half uh what's often missed is you see this lead up to the financial crisis where there's this kind of very linear line that that's not as extreme and it and because of the scale of the past episodes of qe it's hard to uh to understand kind of the consequence of what happened leading up to the crisis and and so this is just zooming in on what happened before the crisis so you know you can't necessarily see it from from this screen but ultimately leading up to the crisis over the prior 30 years approx 30 to 40 years approximately the fed had increased uh the money supply by 700 which is massive you know seven you know increasing the money supply by seven times even over a 30-year period is significant and ultimately what we'll find out or my view at least i think i make a convincing case for is that it was this monetary debasement that actually led to the financial crisis that the credit system could not have expanded to the to the size and manner than it did had it not been for for for this and these activities of constantly increasing the money supply uh the consequence again on the credit system was from that same period of time to lead to the lead up to the crisis the credit system in the united states increased from 1.8 trillion to 52.5 trillion essentially an increase of 28 times um and you know another way to think about that is for every dollar that existed in the system uh there were 65 debt uh and if you were just looking at the banking system each dollar was leveraged 150 to one and so um you know one one one way that i put the context around because i think it's similar to kovid is that you know back in 2008 subprime what you kind of was blamed for the crisis really it was just the symptom and it was the accelerant it was the mass that lit the fire not the fire itself the fire was the leverage in the banking system so if there's one chart that i use to highlight this it's you know the credit system debt end of 2007 versus the base money supply uh yeah 52.5 trillion to zero to basically 800 billion and in the in the key takeaway for this is that this chart could not exist if each time the the market as a whole tried to correct the fed didn't increase the money supply in the decades leading up to the financial crisis and so that's why i think in my view qe's the problem not the solution this is essentially if i was to simplify qe it's too much debt not enough dollars through qe they add more dollars that can only work if it creates more debt because the fed is essentially trying to take a situation where current debt levels cannot be sustained and their solution to that is rather than allow the market to right size and to become healthier and reduce the amount of debt their solution is to add more dollars so those dollars are designed to stabilize the credit system to stabilize asset prices so existing debt levels can be sustained but ultimately that introduction of new new dollars then leads to credit expansion and that is actually the goal and so um you know one you know one way to think about that is that qe is more like heroin rather than an antibiotic the more that's applied to a financial system the more dependent the system becomes becomes on the need for kiwi and the worse off when it is removed and that's what we saw in september of 2018 that's also that what we see with with the covid crisis is that a lot of the instability is created from just the high degrees of leverage in the financial system so now when we think about going from the financial crisis to today again the fed increased the money supply by 3.6 trillion and that led you directly contributed to the credit system expanding by 23 trillion from approximately 52 trillion to 75 trillion again that expansion of the credit system would not be possible if the fed hadn't supplied uh the amount of dollars that they did to the system and now this ultimately you know leads us where we are today and my right side chart got a little screwed up but what you can see is the fed's increased the money supply just since march by 2.9 trillion they've primarily done that by buying treasuries they've also issued about 450 billion of dollar swaps to central banks they've purchased 470 billion of mortgage-backed securities to prop up the housing market and uh they've issued 107 billion of direct loans so what we see on the right side and i apologize that the charges screwed up but today we have about 75.5 trillion of debt and only 4.9 trillion in dollars and that that those amount of dollars in the system have been increased by 2.7 trillion the one the slight difference between the 2.9 and the 2.7 trillion are that cash a significant amount of cash has actually left the banking system and when i think about the banking system is the dollars that exist in the banking system and within the treasury network can be used to satisfy debt obligations that exist in the system and that those dollars that leave are are are not available to search service debt so you know in one way you can think about it that the fed by adding dollars de-levers the system uh today there's approximately you know 15 of debt to every one dollar one actual dollar reserve in the system but but that system is still massively levered and so that's one of the things that when you think about um well how why aren't we seeing this massive you know inflation when the feds created 2.9 trillion it's because the 75.5 trillion is trying to de-lever um while the and and while the slide got screwed up a little bit the what's expanding massively is the public sector debt and what's trying to contract is the private sector debt and so everyone in the world is trying to shore up their balance sheets and trying to save more and that that ultimately leads to a contraction in the credit system so the fed through its quantitative easing program and through what congress is doing they're actually trying to to reverse that natural course um i think you know when i look at this in summary you know it the fed is never introspective or if they are they they're not introspective in in the in the right way um it's always viewed as you know looking to the fed to come in and create a solution and no one no one ever you know outside of the ron paul's in the world but but really no one in the mainstream ever questions the obvious are central banks part of if not central to the problem and in my view it's that the instability whether it's related to covet 19 or related to um you know the 2008 financial crisis both of those are identical to me it was always about an over levered financial system and the only way that leveraging the degree of leverage can exist is if the fed is consistently adding money to the system to be able to allow existing debt levels to be sustained and more debt to be created um so now i'm going to transition kind of the you know kind of what's happened both kind of in the lead up to the 2008 financial crisis to what's happening today it's just more of a of a fundamental discussion and and one one thing to note is that idea of why no one why the fed itself never questions it or why people in the mainstream never question it it's really that central banking is a mono culture there's i i think about it as there's mainstream economics and there's austrian economics and i'm i'm personally someone that just came around to austrian economics about five years ago but once you understand it once you see it it all makes sense and what these two views basically say is you know regardless of what is bucketed in mainstream economics there's an idea that active money active management of the money supply is that by the central bank is good and then the austrian side it's no that's bad and so on the left side it's it's not a matter of if it's let's do it and to what extent when on the right side it's don't do it whatever you do don't mess with the money supply and that really comes into to to what is that at play and it is the pricing mechanism and so i want to i think you know one one piece of literature that i would certainly recommend everybody read is the use of knowledge in society uh hayek particularly um writes on the subject you know in a way that helped me out significantly in my understanding but he describes the price system as a mechanism for communicating information um such that the only and the most most essential information is passed on and it's really a kind of you know kind of telecommunications machinery of really communicating communicating knowledge outside the world or around the world and one of the things that he that he talks about is how um that it really wasn't a deliberate design it was just a it was something that emerged on the market organically people's use of money and monetary mediums and and and he's described he says the problem you know as it relates to the pricing mechanism and the value that it that it adds is the problem is precisely how to expend the span of utilization of resources beyond the span of control of any one mine and therefore how to dispense with the need of conscious control and that's really what money does and that's really the function of money as we'll see and so when i think about price and the pricing mechanism you know we all you know whether it's dollars euros yen we all think of price in dollar terms but realistically they're or or we think about cpi and general inflation levels but realistically when you think about price um there is no price there's there's only exchange ratios between every you know various different goods you know hundreds of millions of people and and billions of goods and so what we're actually learning through price and money is that money gives us the medium to communicate value but as we think about value and recognizing that all value is subjective is that what the information that we're really trying to learn is how much is a house you know worth relative to a car how much how many you know how long do i have to work and what how much of my time has to be invested to be able to buy a car and really those things are constantly changing um so when i think about it on the micro level it's here you basically have good a and good b and then you have money which should be a relative constant in the case of bitcoin it will ultimately be a pure constant and so the goal is for the supply of money to be constant such the demand of money can be variable and the supply and demand of all other goods is variable but that by having that constant in the supply of money you can then know the relative price of good a and good b and so if you look on the right side it's like that that that information that is valuable is looking at you know two goods that are otherwise very comparable seeing an apple iphone and a samsung galaxy and seeing that one's 1.3 times more expensive than the other and then being able to evaluate and do the economic calculus on your side as to which one you want and what the trade-offs are um and so when i think again about the pricing mechanism it's you know either everyone is contributing their preferences through it which looking at the at the left side the the mall outside the capitol or outside the washington monument think about all the hundreds of millions of people that have knowledge of how to how to build things what they're seeing in the market and then how they react to the pricing mechanism and that and that millions of people or the hundreds of millions if not billions of people that make up an economy they're actually the ones that are communicating price and that actually have the knowledge and what you actually have happen when the central bank does qe is that you have a few people co-op that entire process and it really destroys the value of money in terms of what it's trying to communicate and that being price and so there's an idea and i'll talk about this at a high level but there's an idea that when you manipulate price you're essentially you know you're you're not creating more workers you're not creating more products you're basically just shifting the allocation of who is pricing risk and who's getting to to allocate the monetary capital you know in in the economy and and one of the consequences of that is that it actually leads to longer term uh unemployment because the the because and i'll explain this on the next slide but when you're manipulating price levels you're ultimately causing the supply and demand structures in the economy to shift and those those those levels of supply and demand can only exist so long as the money remains manipulated but as soon as it starts to either not be increased at the same rate or or or the accommodation is not added then everyone figures out that it's unsustainable and then the market collapses and this is really kind of to contextualize that idea this is this is the u.s market and housing prices you had um you know basically the housing markets you know was a bubble in 2007 prices declined about 17 and then what did the fed do the fed stepped in and bought 1.8 trillion dollars of mortgage-backed securities to prop up housing values uh so we look at a world where the home ownership rate in the united states the labor participation rate and even mortgages are below where they were in 2007 but if we think about 2007 as a bubble prices now for you for homes in the united states on average are 20 percent higher and that only happens if the fed goes and buys mortgages what does that do that draws in labor and skills over the course of the last 10 years to train themselves to build more houses uh and and and really the long-term consequence of that is when everyone figures out that those prices can't be sustained uh it's not just that the price of houses come down is that there's a massive piece of the workforce that was allocated the housing that should have probably been allocated somewhere else and once the market figures that out those skills can't just immediately transition to some other equilibrium to produce other goods because they're purpose-trained for for building housing construction and so that's really like you know when i summarize this is if you really think about it in a common sense world when the fed creates money and this is the chart on the bottom it doesn't change the amount of people in the in the labor force it doesn't create jobs it just increases the money supply and all that does is shift the balance of power of who's setting the you know basically being able to to communicate preferences in the world and so really at the core when you're manipulating the pricing mechanism through qe now you're you're essentially distorting all of the information that's being communicated through the economy and ultimately and what we find in the times of covid and after the financial crisis we only see in very acute periods after volatility has been muted for a long time as a function of the fed that that volatility ultimately ends up coming up and and comes to form in longer term and more acute and more significant unemployment i'm going to go ahead just based on time to skip this slide but but really when i think about this you know there's there's the there's the economic debate which is what leads to a more sound and stable economy a currency that can be manipulated and that the government can play an active role in in facilitating the the ease of you know trying to smooth out business cycles or is it is it better to take that hands out of the government and realistically take the hand take it out of the hands of everybody um and just let the market function and in my world the way that i think about it is if you have hundreds hundreds of millions of people communicating that information from a pricing mechanism that can't be manipulated you're not going to get into these large business cycles or these large debt cycles that ultimately cause greater uh instability in the long run and so when i think about the you know the the four schools of thought you have the austrian school that says don't f with the money you have the keynesian school that says government spending smooths out business cycles and then you have the monetary school that says the money supply management smooths out business cycles kind of less so on government bank debt creation and then you have the mma mmt school modern monetary theory that really doesn't exist it's just been been made up in the last two years to to be an excuse for for government deficits so the positive about bitcoin is that we now have a market test there's a lot of economists you know i don't consider myself an economist but there's a lot of people that views and they'll talk about you know theoretical or economic intellectual debates but but what we have in bitcoin is now two competing economic systems and two competing monetary systems and this is a chart of bitcoin on the right that demonstrates that the consensus is forming around bitcoin the price of bitcoin rising is more people looking to bitcoin and saying this monetary system is better than the legacy monetary system and they're doing that you know whether you look at it you see you know rampant speculation the fundamentals of that chart continuing to go up over time are because people are assessing the monetary properties of bitcoin and and viewing it as a better monetary medium for them individually and if more and more individuals are doing that then you know the the consensus only continues to accelerate from there so i just have two slides left so when i take this slide which is the price it's really if i was to simplify it into two simple charts it is the fed manipulating the money supply and i refer to this chart as fool me one shame on you fool me four times shame on me because this isn't just a one-time event it will continue to happen and will continue to happen because of the leverage profiling the system and because qe can only quote work if it's helping to expand the credit system which is the problem and so did this i just pulled a quote from paul tudor jones in his explanation as to why he began to allocate to bitcoin he said you know referring to what's happened in the last three months it has happened globally with such speed that even a market veteran like myself was left speechless we are witnessing the great monetary inflation on an unprecedented expansion of every form of money unlike anything the developed world has ever seen and that's really the core of it that the the size scope and speed um has has really ripped the band-aid off for a lot of people and and it's going to lead more people to bitcoin and then this is the the the last slide it's the reverse of that point which is the supply of bitcoin is fixed and when an average individual you know not not necessarily average intelligence just an average individual is posed with a question which one of these two charts do you want to buy in terms of your money do you want a currency with a fixed supply or you do you want a currency that has been manipulated time and time again and debased time and time again and so paul tutors jones quote was i also made the case for owning bitcoin the quintus quintessence of a scarcity premium it is literally the only tradable asset in the world that has a known fixed maximum supply bias design the total quantity of bitcoin uh including those not yet mine cannot exceed 21 million these are the two charts that matter and these are the two charts that are people are going to continue to figure out and come back to and the end result will be you know ultimately a pricing mechanism that you may look at bitcoin today that is that is volatile but really the central banking model trades short-term stability for long-term volatility um and and and we see that time and again that is the financial crisis that is cobit 19. uh it is a function of monetary manipulation and bitcoin really trades short-term volatility for long-term stability um and at the end of the day it's a currency whose supply and derivatives pricing system can't be manipulated and that's compared to systemic and persistent manipulation um and that that you know over the long term when you're when you're exposing bitcoin to these stressors and allowing it to be volatile but keeping the the supply constant that over time there will increasingly be in convergence on that and and the output of that will be uh long-term stability no massive debt cycles you know an economy that is that is far more stable anti-fragile and that's compared to an inherently fragile financial system that exists today