December 18, 2022
This newsletter outlines some of the surprisingly basic problems with the global financial system. It then examines to what extent the cryptocurrency industry has tried to address some of those problems, while mostly missing the mark so far.
The final section focuses on the macroeconomic picture, and provides an update on the US economic cycle.
The World’s Savings Problem
Last month, I asked a question on Twitter as a thought experiment and discussion starter:
Imagine you live in a developing country with an ongoing severe currency devaluation problem.
You want to sell your existing home, hold it in some stable liquid value, and then probably buy a different home in 2 years.
What do you hold it in?
The range of answers was surprising. Many people from developed countries didn’t understand the problem, said they would just hold dollars, and seemed to wonder why the question was even asked.
The problem, of course, is that many people in developing countries outside of the upper class have trouble opening foreign bank accounts. Many of them don’t even have domestic bank accounts.
In Egypt, for example, a country of 100 million people, 74% of them don’t have a bank account. In Nigeria it’s 55%, in Indonesia it’s 50%, and in India it’s 23%.
Those who do have bank accounts often don’t have easy access to foreign currencies at fair exchange rates. And those fortunate enough to have foreign bank accounts often pay rather high fees for that service; it’s not exactly fast or efficient to do business with a foreign bank.
Generally speaking, for those that are wealthier, there are more avenues available to preserve their savings, whereas for people in the working class or middle class, the options are fewer and more friction-filled.
Within nations that have ongoing severe currency devaluation problems, it’s often either 1) hard to get your hands on dollars or 2) only possible to get them at a worse exchange rate or 3) risky to store them in domestic banks because they could be confiscated and forcibly converted back to the local currency at the direction of the government or central bank.
Some people answered my question by saying they would hold physical cash dollars or gold. Imagine you’re in an apartment in a developing country, with a house-value worth of dollars or gold hidden somewhere. Every time you leave the home to work or go somewhere, there’s a small part of you that is aware of the possibility of losing your life savings due to a burglar, a fire, or similar problem.
I received a lot of responses from people in developing countries as well, and they were more knowledgeable about the challenges of the question since many of them deal with them on a regular basis. Many of them said they do simply hold large amounts of physical dollars for lack of a safer alternative, as risky as that is. Other ones said they would hold cars or other physical assets, which is inefficient. Still others said, “I just couldn’t ever do this; I can’t sell a home and hold the value in liquid form for any meaningful length of time.”
So, here in the year 2022, there are still vast percentages of the global population for which the basic concept of “savings” remains a challenge.
It should be trivial to sell something of significant value, and hold that in a liquid and safe form for a couple years until that value is ready to be redeployed.
The fact that it isn’t trivial, shows how problematic the global financial system is, especially for people in developing countries. Fiat currencies consist of printable/dilutive ledgers, each with local monopolies over a given jurisdiction, and most of them are managed very poorly or are pushed around by external forces. It’s really bad if you’re not in the top couple dozen jurisdictions in this regard, and even still not great even if you are in those top couple dozen jurisdictions.
For example, here in the US, bank accounts and T-bills have been paying interest rates that are below the prevailing inflation rate pretty much ever since the global financial crisis:
To hold physical cash dollars, or even to store those dollars into a liquid bank account or to hold Treasuries, is to gradually (or sometimes quickly) be debased. And this is the global reserve currency.
In a country like Nigeria, a country of over 200 million people, it’s worse. Their aggregate consumer price index has gone up nearly 5x just since 2010, and their interest rates are often below their inflation rate.
My friends and family in Egypt, as an example that hits closer to home, are dealing with a 35% currency devaluation relative to the dollar this year alone, and it’s probably not over yet. This is a currency that over 100 million people use:
For Egyptians that want dollars, the street conversion rate is lower than $0.033 as of this writing, meaning it takes significantly more Egyptian pounds to get dollars in practice than the official rate implies. Some of them hold physical cash dollars as savings, and pay high fees with bad exchange rates in order to do that.
This recent devaluation comes after the fact that the Egyptian pound was already cut in half relative to the dollar practically overnight back in late 2016. I have friends that suddenly had to delay a home purchase back then because the value of their savings was suddenly halved relative to the dollar (and the dollar, as the yardstick of measurement here, is also losing value each year).
In this chart, I zoom out and flip it around to look at how many Egyptian pounds it takes to buy one dollar. The more “bullish” this chart is, the worse it is for the Egyptian pound:
There are 180 circulating fiat currencies in the world across nearly 200 countries. Most of these are extremely fragile, and prone to recurring major devaluations. It’s hard for people in many developing countries to save liquid value over years.
The World’s Payments Problem
The vast majority of currencies are not salable outside of their local jurisdictions. In other words, aside from the fact that they have local monopolies on their use in their local jurisdictions, nobody in the rest of the world particularly wants to hold or accept these monies, either because they frequently devalue, or because they are small with low liquidity and low recognizability outside of their home jurisdiction.
The global monetary system is therefore ironically a big barter system. Rather than having one or two forms of money that we all use, there are 180 different monies, each with their local monopolies. Only a handful of them such as dollars and euros (and gold, more slowly) are globally salable to a decent degree.
For example, I have some Egyptian pounds, Norwegian kroner, Hong Kong dollars, and Thai baht in my desk drawer next to me, from various trips over the years. Here in suburban New Jersey, there’s basically nothing I can do with these. Nobody would accept them, including the kroner which is actually a very strong currency. The only way I can get rid of them with some semblance of fair value is to go to a local branch of a major bank chain, and see if they’ll initiate a process to take them off my hands in exchange for dollars as part of their foreign exchange service. Some of these currencies might not even be accepted at all at a small bank, which makes a holder of these really stuck. These are very unsalable monies.
And then there is the problem of financial censorship. The nonprofit organization Freedom House classifies countries as “Free” or “Partly Free” or “Not Free”. Only 20% of countries meet their definition of “Free”, which is down from 46% in 2005. In many countries, bank accounts are subject to rather arbitrary freezes, and as mentioned above, it can be challenging for working class people in developing countries to even access a bank account in many cases because it’s just not worth it for a bank to bother with such small balances. And for millions of people that find themselves as refugees at one point in their life, they generally have trouble bringing most or all of their wealth with them.
Many countries increasingly restrict access to physical cash, which can seem harmless at first but can have dire consequences if you are in a very unfree country. Governments can shut off bank accounts for individuals they don’t like, for any number of reasons.
So, there is a lot of work to be done in order to enhance the world’s relationship with money. Storing and transferring liquid value shouldn’t be rocket science in 2022.
Despite the multi-century head start that banks had, the percentage of people in the world with a smartphone has already exceeded the percentage of people with a bank account, and is rising at a faster rate. There’s no reason why everyone with a smart phone shouldn’t be able to access basic financial services including good money.
Velocity of Money vs Velocity of Commerce
For thousands of years, commerce and money moved at the same velocity: the velocity of foot, horse, and ship.
Peoples’ ability to do transactions, and the bearer assets they transacted with (mainly gold and silver), had no inherent difference in terms of velocity. All of it moved at the velocity of physical travel.
Even the invention of banking couldn’t get around this basic problem. The paper banknotes or various receipts for money, while easier to transport than gold, still couldn’t move faster than foot, horse, and ship. Ledger-based account systems, while convenient, still couldn’t send information over long distances any faster than the existing modes of physical travel.
However, with the invention of the telegraph, and then the telephone, the speed of commerce and transactions increased to nearly the speed of light.
Specifically, the first working telegraph was invented in the 1830s. Engineers then spent much of the 1840s and 1850s figuring out how to submerge cables under large bodies of water. After a couple failed attempts, the first long-lasting transatlantic telegraph cables were put in place in the 1860s, and the global banking system quickly became more interconnected in the decades that followed.
From that point, people could transact across the world by updating each others’ bank ledgers over telecommunication systems nearly at the speed of light. Meanwhile, gold and silver as bearer assets still moved slowly, and thus had to be increasingly abstracted in order to keep up.
Prior to this, gold and silver were already sometimes abstracted with paper claims due to divisibility limitations or convenience, but once telecommunications technology was invented, their slow velocity made it absolutely necessary to abstract them in order to deal with the mismatch in velocity between global commerce and global monetary settlement.
Eventually, governments dropped gold and silver backing from their bank ledger and physical paper abstractions entirely, and that’s how we eventually got to this world of 180 different fiat currencies, each with local monopolies, and with no viable alternatives. Basically, the difference in velocity between commerce and bearer asset money gave governments and banks a huge opportunity for custodial arbitrage.
Throughout the 20th century, the global banking system became even more connected, and by the 1990s, consumer internet commerce began to occur. Over the next few decades until the present, this vastly increased the amount of long-distance telecommunications-based payments.
It’s hard to overstate how big of a deal the mismatch in velocity between transactions and bearer asset money has been. It’s arguably a foundational reason for the greater and greater levels of financialization that the world has seen over the past century and a half. Monetary ledgers became increasingly detached from any sort of constraint or scarce units of settlement, because the only scarce monetary alternatives such as gold were too slow to present an alternative.
In 2008 and 2009, an anonymous person or group named Satoshi Nakamoto shared a white paper and then released software that potentially solves this velocity mismatch that has existed since the 1800s.
Nakamoto’s creation, the Bitcoin network, is a globally distributed public ledger for which the ordering of transactions and the history of the ledger is backed up by energy from millions of different machines around the world (although it is increasingly energy efficient over time).
Its core ruleset is purposely hard to change, because it is enforced by tens of thousands of free open-source user-run nodes around the world. These rules include the fact that it has a finite cap of 2.1 quadrillion units (often presented as 21 million units that are each divisible down to eight decimal points). And in order to censor transactions on the network, it would require gaining (and maintaining) control over 50% of the network’s active processing power.
The network serves as an open protocol ledger. You can think of it as money in a decentralized cloud, with each user controlling a private key that allows them (and only them) to transfer units from their ledger address to someone else’s ledger address, domestically and internationally.
By memorizing twelve words that represent your private key, or writing them down somewhere, or encrypting them in a password-protected file and putting it on some cloud account that you have, you could travel with no belongings to another country and reconstruct your ability to access your funds on the ledger after you get there. People who run their own nodes (which can be done on a basic laptop) can send and receive value from others around the world with no ability for any particular entity to prevent those transactions from occurring.
When it was small, the network was only marginally useful. The bigger it gets, the more it represents something rather interesting- an international accounting ledger and settlement network, controlled by no individual entity, with a fixed number of its own bearer assets that can be sent around globally at the same speed with which electronic commerce occurs, without the need for separate abstraction or counterparties. A person can still use a custodian/counterparty if they wish too, for convenience or other reasons.
Prior to this, there wasn’t a way to send money from one country to another, or even across a country, without going through the banking system or using services that themselves run on the banking system. All long-range value transfers (other than stuffing cash in an envelope or something like that) went through banks and central banks, which are closed, permissioned networks. Now, individuals can send value to other individuals over the internet, quickly and at scale.
That is the “intrinsic value” of the Bitcoin network- it presents capabilities that bank deposits, physical cash, and gold can’t do: send permissionless payments globally, or maintain access to your self-custodial funds even if you move around the world, across borders, through airports and such. And in a way that is backed up by more energy and a wider node network than any other cryptocurrency, and with a greater amount of liquidity and salability.
A Canadian can pay a Nigerian for some graphic design work, and in such a way that goes around either country’s banking system. Vladimir Putin’s political opposition can raise donations even if Vladimir Putin’s government shuts them out of the Russian banking system. Venezuelans can self-custody bitcoin amid hyperinflation, and bring them with them if they leave as refugees.
Pandora’s Box has been opened for this capability now- it’s out in the wild. This technology cannot be un-learned. The ability to do this is open-source, widely distributed, and known now.
Even if a country’s government or central bank severs cryptocurrency exchanges from its banking system, therefore adding friction to the network on-ramps, this can still be bypassed with peer-to-peer inflows. Nigeria for example is ranked as the 11th country in terms of cryptocurrency adoption despite the fact that people there cannot send money to exchanges from their bank accounts. More Nigerians use bitcoin and stablecoins than use the country’s central bank digital currency, the eNaira, by a wide margin.
Meanwhile, China banned bitcoin mining in 2021, but around 20% of bitcoin’s mining is estimated to still occur in China. This technology is really hard to truly stamp out, even by authoritarian governments, although many of them will try. We’ll see if the network and its surrounding ecosystem is up to the global challenge or not.
Bull markets lead to leverage, and leverage leads to bear markets. But cycle after cycle, the value of the network has grinded higher.
Currently, the market capitalization (black line above) is beneath the aggregate on-chain cost basis (blue line above), which historically has resulted in 1) the media and pro-cyclical investors referring to the network as being dead and 2) it actually being a pretty good long-term buying opportunity (with careful position sizing).
Should people buy it? Not necessarily. They should learn about it, though.
Once someone has learned about it, whether it’s worth buying or not will be more clear to them. Learning about it can also give them insights into other areas of the economy, because the creation of new technology usually affects other industries over time.
A Period of Exploration
After the invention of the Bitcoin network, came a natural period of exploration.
People asked reasonable questions like:
- What is the best way to scale this technology?
- What if we put dollar tokens on a blockchain?
- Can transactions be made even more private?
- Can we use this technology for things besides money?
And from those questions, came some good things.
Stablecoins have had particular utility. A business/fintech entity can custody dollar-denominated assets in a bank account, and issue tokens on a blockchain that represent redeemable claims for a dollar of those assets. These tokens are bearer assets that can be transferred around globally. Over time, stablecoin issuers have become better at making their collateral more transparent, although I think there is still work to be done to further improve collateral transparency and assurances.
One of the most popular answers to my question of where should someone in a country with a severe currency devaluation problem hold substantial value for two years was stablecoins. A lot of people said they would hold it in dollar stablecoins, which comes with foreign counterparty risk from their perspective, but presents a rather new and powerful method for them.
The reason stablecoins are useful is because they solve at least some of the currency problems for people in developing countries over the intermediate term. Suppose you’re an Argentinian, dealing with ever-devaluating peso. You don’t particularly trust holding dollars in an Argentinian bank, because there has been a history of confiscation of those dollars there. So, a lot of Argentinians have turned to stablecoins- they can self-custody stablecoins in any number of free software wallets (or use a foreign exchange custodian as many of them do), and although stablecoins have a centralized issuer, that issuer is not in Argentina, and can’t be controlled by Argentina. For the most part, stablecoin issuers can only be controlled by the US since they rely on banks that connect to the US financial system.
For that reason, stablecoins have found significant utility by the public in multiple countries that suffer from ongoing currency problems, along with bitcoins.
On Chainalysis’ crypto adoption index, 18 out of the 20 top countries are developing countries. A lot of people in the developed world think of this technology as a solution in search of a problem, but people in developing countries tend to be more familiar with the problem that these solutions are for.
Chart Source: Chainalysis
A Decade of Affinity Scams and Grift
Over the past decade, alongside the utilitarian developers of this technology, a rather negative industry has popped up: pump-and-dump schemes, hype cycles, altcoin casinos, and leverage. A lot of it is disguised as technical development.
When you read Satoshi’s writings, he was about as plain-spoken as possible. He was anything but hype. He wrote carefully about the problems he wanted to solve- namely currency dilution and transaction censorship. When he answered questions or explained his reasoning, he often sounded like a professor. His white paper reads like an academic study. He wanted to make decentralized peer-to-peer money, with no central issuer that can debase it, and no central entity who can censor it.
When Wikileaks turned to using it after they were de-platformed by major payment services, rather than being happy about this development Satoshi was concerned that it was too early for the fledgling network at the time and that it would bring too much negative attention.
Satoshi never gave himself coins as a reward for his invention. All coins, including his, had to be mined with computing power. An entity that is believed to be him (referred to by the community as “Patoshi”) mined in the first two years to keep the network functioning, and gradually tapered down, purposely slowing his own mining, as more miners spun up.
Source: Jameson Lopp, via Twitter
Satoshi then eventually disappeared with no fanfare, and the “Patoshi” coins that are believed to belong to him haven’t moved in 13 years, through wild bull and bear markets alike.
Many of the industry participants that followed in his wake have been anything but that. They create new coins out of thin air, purporting to decentralize some new application, get those coins listed on an exchange, hype them up, and then dump them on the retail public, without having built an actual, sustainable project. The founders and early investors get rich, the project doesn’t really go anywhere, and retail investors are left holding the bag.
Back in May, I wrote “Digital Alchemy” which explored several negative aspects of the industry.
The Problem of Arbitrary Seigniorage
When founders and early venture capitalists put together a tech startup, they generally tie their fortunes to the success or failure of that idea. They invest in rather illiquid equity, and the main way to unlock that equity and get successful exit liquidity involves either going public or being acquired.
To go public, they have to go through an expensive disclosures process, where they open up their books, reveal the major ownership, and discuss risks in detail. The median length of time for a startup to go public from its founding is over eight years.
To be acquired, they need to build something attractive enough for another business to want to buy them out. In other words, professionals with MBAs or other business experience/education review their business and decide to buy it.
Therefore, the fortunes of the founders and early investors of the startup are usually tied in a significant way to the underlying fundamentals of the business that they built and financed. The company needs some revenue, some use-case, and to go through some degree of due diligence. They have to spend years building a company that either another company wants to buy, or that gets big enough and sticks around long enough to go public, with all of the necessary disclosures.
In the crypto world, it has been different. Founders and early investors can create a project, sell the coins publicly (generally to accredited investors or overseas to avoid public securities laws now, ever since there was a crackdown in domestic public initial coin offerings), work on it for a year or two or three, market it heavily, get it listed on a crypto exchange, and then dump the hyped-up coins (which likely are unregistered securities) on public retail speculators with exaggerated or outright false claims about the project’s level of decentralization and utility.
In other words, the founders and early investors can separate their own profits from the actual success of the project’s fundamentals. They don’t need to spend the better part of a decade building a business that is good enough for another business to want to acquire it, or that can go through the SEC’s process for entering public markets. They can just create hype and dump their coins on the retail public, for the sake of fast exit liquidity.
“Seigniorage” is the profit that a government makes by issuing its own currency, especially as it relates to the difference between production cost (near zero) and its market value. Blockchain technology has enabled private entities to benefit from seigniorage as well. They can create a crypto semi-liquid/fungible asset for very little cost, hype it up, and try to profit from it. Because very little value is being created in the process, it’s mostly a zero sum game where the creators and promoters of the coins make the money, and retail speculators lose the money.
Bitcoin doesn’t meet the definition of a security, because it never raised capital. Instead, the open source software was created and then just put out there. Based on on-chain analysis, it’s pretty clear that Satoshi Nakamoto didn’t sell his coins either; he walked away from the network back in 2010 without any clear financial benefit, and the network has continued without him in a rather decentralized way.
However, the technology that Satoshi Nakamoto created to enable peer-to-peer payments and savings, has also been repurposed by others for peer-to-peer scams, frauds, and what is basically digital penny stock pumping-and-dumping in the broader cryptocurrency industry.
As this keeps happening, I think one of two things will happen.
For one, regulators in more countries may clamp down on this practice even more than they already have. The US has already limited the ability to sell unregistered initial coin offerings to the onshore public, and they may further limit the ability of onshore exchanges to sell them to the public post-offering as well.
Secondly, regardless of whether that regulatory risk materializes or not, people will be burned by the crypto industry over and over until they start associating cryptocurrencies with scams. This has already occurred to some degree, and it’s a mostly accurate heuristic.
“Does it Need a Token?”
The problem with the crypto industry has nothing to do with cryptography. Nobody would blame any developers for researching interesting technologies and building interesting projects.
The ethical problems only arise if they try to make millions of dollars from that work, prior to the fundamental success of that work.
When evaluating any cryptocurrency or adjacent project, if it has its own coin or token, always ask, “does it really need a token?” Usually the answer is no. And the reason why it has a token anyway, is to benefit the creators/founders in terms of fast exit liquidity regardless of whether the underlying project offers any real value in the long run.
As an example, suppose someone invents a ride-sharing app called Rebu, except this one is branded as a “Web3” project that is “decentralized”. The founding team and early investors create their own Rebu coins, give themselves most of it, and sell some to raise capital. They spend two years working on the app and hyping it up, and get Rebu coins listed on some crypto exchanges, a lot of retail speculators buy the coins (which are likely unregistered securities, despite being sold to the public now), and the Rebu developers and early investors use that opportunity to exit their Rebu coin positions with huge multi-million dollar gains. And then people realize, “Wait, wouldn’t it be easier to buy Rebu rides with dollars rather than having to convert dollars to Rebu coins first? Doesn’t this just add unnecessary friction?” And then of course the project goes nowhere and eventually falls apart, Rebu coins collapse in value, but the developers and early investors already exited and got rich.
Web3 is an industry marketing term for a subset of cryptocurrencies to try to offer a more decentralized internet experience than the Web2 that we’ve become accustomed to, with its large and centralized social media companies (Facebook, Youtube, Twitter, and so forth). While the goal is admirable, the problem is that of course most of these projects want to issue their own token, most of them are not really decentralized, and most of them will fail (although many of the creators will get rich anyway, thanks to fast exit liquidity).
Swan.com did some market research this year and found that out of the 20,000+ crypto assets, only three of them have ever managed to reach a higher-high in bitcoin-denominated terms in their second growth cycle, compared to their initial hype cycle.
Back to Basics
As most of the crypto industry blows up from speculation and leverage, it’s a good time for researchers, developers, institutions, and investors to go back to basics and focus on the actual utility of this technology: storing and transmitting value globally as seamlessly and as permissionlessly as possible.
Most of my investments and research are focused on public equities. But for private investments, I put some time and capital to work in venture opportunities to scale and improve the Bitcoin ecosystem with a 7-10 year growth timeframe. It’s not something I view as an asset to trade- it’s a network and surrounding ecosystem that I see great opportunity in, and to keep improving. It’s not without risks, however.
I’m also interested in technologies and solutions that make dollars or gold more digitally accessible to anyone with a smartphone globally. These solutions have counterparty risks and are not perfect, but they serve a useful intermediate role.
Billions of people in the world, to varying degrees, have problems with storing and transmitting value, as shocking as that is here in 2022. In my opinion, that’s the signal to focus on, once you look through all of the offshore leveraged crypto casino noise.
I have several investment accounts, and I provide updates on my asset allocation and investment selections for some of the portfolios in each newsletter issue every six weeks.
These portfolios include the model portfolio account specifically for this newsletter and my relatively passive indexed retirement account. Members of my premium research service also have access to three additional model portfolios and my other holdings, with more frequent updates.
I use a free account at Personal Capital to easily keep track of all my accounts and monitor my net worth.
M1 Finance Newsletter Portfolio
I started this account in September 2018 with $10k of new capital, and I put new money in regularly. Currently I put in $1,000 per month.
It’s one of my smallest accounts, but the goal is for the portfolio to be accessible and to show newsletter readers my best representation of where I think value is in the market. It’s a low-turnover multi-asset globally diversified portfolio that focuses on liquid investments and is scalable to virtually any size.
I chose M1 Finance because their platform is commission-free and allows for a combo of ETF and individual stock selection with automatic and/or manual rebalancing. It makes for a great model portfolio with high flexibility, and it’s the investment platform I recommend to most people. (See my disclosure policy here regarding my affiliation with M1.)
And here’s the breakdown of the holdings in those slices:
Changes since the previous issue:
- Consolidating the growth stock section towards fewer, higher-quality names.
I use small allocations to bitcoin price proxies such as MSTR and GBTC in some of my portfolios for lack of better alternatives in a brokerage environment, but compared to those types of securities, the real thing is better.
To any extent that is possible, I recommend holding actual bitcoin for those that want exposure to it, and learning how to self-custody it. I buy mine through Swan.com.
Other Model Portfolios and Accounts
I have three other real-money model portfolios that I share within my premium research service, including:
- Fortress Income Portfolio
- ETF-Only Portfolio
- No Limits Portfolio
Plus I have larger personal accounts at Fidelity and Schwab, and I share those within the service as well.
Final Thoughts: The Economic Cycle
The US economy continues to point towards economic deceleration with a real possibility of a recession in 2023.
The interest rate spread between the 10-year Treasury note and the 3-month Treasury bill is inverted, which was a precursor to the past eight recessions stretching back to the 1960s, with no misses or false-positives so far. This chart stretches back to the 1980s:
The ISM manufacturing purchasing manager’s index has rolled below 50, which will become indicative of a recession if it doesn’t start turning up soon:
Chart Source: YCharts
The Federal Reserve and other central banks around the world have focused on restraining demand and economic growth in order to quell inflation. And for a time, that is working. We’re in a disinflationary cycle, in what could easily turn out to be a period of structural inflation.
When we look back at prior periods of structural inflation, such as the 1940s or the 1970s, inflation tended to come in several waves:
This is because governments and central banks don’t just sit back and do nothing. They attempt periods of monetary tightening, or they attempt price and wage controls, in order to suppress prices. Those policies work for a time, until they don’t.
The 1940s inflation was very much fiscal-driven, and ended when governments went back to a period of fiscal austerity. The 1970s inflation was very much loan-driven and oil-shock driven, and ended partially when monetary policy was tightened, but also because the oil supply shock ended and domestic wages were pressured by offshoring. Here in the 2020s, fiscal deficits are still large, and the energy supply situation remains structurally unresolved.
When people say they want lower inflation, what they really want is disinflationary growth. They want the supply side to get more developed and more efficient, so that they can get more of the things they want.
Only through improving the supply side can the global economy enjoy another good cycle of disinflationary growth. Otherwise, the global economy will get either 1) inflationary growth via currency devaluation or 2) disinflationary stagnation or recession via demand suppression or even 3) a stagflationary situation with a combination of weak growth and sticky inflation.
My base case, unless or until I see evidence to the contrary, is for worsening economic conditions in the first half of 2023, continuing the trend of disinflation via demand suppression. US corporate profit margins are likely to go sideways or down, and economic activity is likely to be sluggish and potentially recessionary.
Looking out to 2024 or 2025 is where I see potential for the next growth wave, and since the supply side constraints (especially for energy production and distribution) haven’t been solved, another wave of inflation could easily come with it.