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The Federal Reserve, Reverse Repo And Bitcoin

In this episode of “Fed Watch,” the hosts discussed the latest in the bitcoin market and macroeconomics.

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In this episode of Bitcoin Magazine’s “Fed Watch” podcast, we, your hosts Christian Keroles and Ansel Lindner, are back from a well-deserved break. We started out the show by reminiscing about the Bitcoin 2021 conference from a couple of weeks ago. It was the first time we met in person. Perhaps next time, we will record a podcast together live from the conference.

We also talked about current price action for bitcoin and the incredible last couple of weeks for bitcoin that is not yet represented in price. Of course, El Salvador and Taproot are very bullish for bitcoin, but we also gave a bullish spin to the crackdown on mining in China.

Our main topic for this episode is debriefing the reverse repo situation and the latest Federal Open Market Committee (FOMC) meeting. In the statement from last week by Chairman Powell, the Federal Reserve left its headline monetary policy stable. However, there were several changes, one minor and two major.

The minor change was the dot plots. At each meeting of the Fed’s FOMC, members place dots on a chart where they expect the Federal Funds Rate to be in the future. From that dot plot, seen below, market participants form their expectations about future Federal Reserve policy and also draw conclusions about current market conditions.

That is the basic stuff, and we cover that quickly in this episode, but then we get into the more meaty changes. First was a 5 basis point (BPS) (0.05%) increase in the interest on excess reserves (IOER). The move was likely to keep participating in quantitative easing (QE) attractive for primary dealers. When banks participate in QE, they sell treasuries to the Fed and receive reserves. These are inert reserves, as we’ve stated many times in the past.

They don’t do much of anything except sit at the Fed and collect IOER. These reserves, however, are counted against the banks’ balance sheets as an investment according to the international Basel III rules. Since the market is experiencing a collateral shortage which we’ll talk about next, QE doesn’t make sense for the banks. The banks need that collateral. Why would they sell it to the Fed? Well, because IOER. They raised it to make sure the banks have an incentive to continue participating in QE.

The next major announcement was the 5 BPS rise in reverse repo rates. We took our time and really covered this topic in depth, from explaining what repos are and why money market funds would want to participate in them. It was our intention to show how the money market funds, banks and the market in general has gotten into this mess. It’s too complex and lengthy to cover in this short write up, you must listen to get the full conversation.

Currently, the total amount of reverse repo from the Fed is a staggering all-time record of $791 billion. Without knowing anything about this market, you can tell something is wrong here. Market participants in this market include money market funds and banks, among other large entities. What they are doing is parking dollars at the Fed in exchange for collateral.

There are three main forces behind this dramatic rise: One, the market has been flooded by money through government stimulus, two, the U.S. Treasury itself has been spending down its $1.2 trillion account balance also flooding the market with dollars while not issuing as many T-bills as normal, and three, QE is draining collateral from the system. These things combine to create a tight collateral shortage.

The 5 BPS rise in the reverse repo rate is very significant because it leapfrogs the open market rates on T-bills (one- to three-month bills). Why would anyone who could buy a three-month T-bill to receive 4 BPS when they can repo with the Fed and receive 5 BPS? All of these T-bill rates should have risen to 5 BPS as a floor. But they did not. Even today, a week later, three-month and shorter bills are at 4 BPS and reverse repo volume is continuing to climb.

The Fed is trapped. It will be fascinating to see what is next. Stay tuned to “Fed Watch: Bitcoin And Macro” and we will keep you up to date on all the developments.

Source: Bitcoin magazine

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Interview: Bitcoin Supply Chains And Pricing Mechanisms With Parker Lewis

Parker Lewis of Unchained Capital joined “Fed Watch” to discuss supply chains and pricing mechanisms with Bitcoin.

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In this episode of Bitcoin Magazine’s “Fed Watch” podcast, hosts Christian Keroles and Ansel Lindner welcomed on to the show Parker Lewis, head of business development at Unchained Capital. The main topic of this episode was supply chains, the importance of a pricing mechanism within supply chains, and of course, bitcoin’s superior ability to act as that pricing mechanism.

Parker told the story of how central banks distort price signals, which is very important because price signals are the root of all economic activity. It is the breakdown in a valid pricing mechanism that forms a competitive environment in which a new money can emerge.

Next, they got into the important topic of how a new money incentivizes convergence away from the existing money toward a new money. The show will have to have Lewis back on soon because they didn’t have time to fully explore these ideas. New money is volatile and will initially not act as a good pricing mechanism. So, if it is competing on that ground, it is not clear how the new money breaks into its role without a total collapse in the previous medium of exchange.

Also in this episode, Lewis commented quite a bit on the incompetence of the Federal Reserve. He eloquently pointed out how central bankers are wrong every step of the way and how the market will route around the damage with bitcoin. Lindner brought up the thought experiment that perhaps the Fed is always wrong because it has already been routed around and is not in control of anything. The only control it has is illusory and contained in mantras like, “don’t fight the Fed.” That idea didn’t get far with Lewis, but they had a nice conversation about it.

They ended the episode with getting Lewis’ thoughts on the bitcoin business climate. The fundamentals are extremely strong and they are all excited about coming price increases and growth in the bitcoin ecosystem. All that was well covered, so the hosts wanted to ask Lewis about any weaknesses he sees out there in bitcoin and where he thinks the bitcoin industry will improve the most in the coming 12 to 24 months. You’ll have to listen to get his insider’s take. 

Source: Bitcoin magazine

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Interview: The Current Macro Landscape With Jeff Snider

Economic researcher Jeff Snider joined “Fed Watch” to discuss the eurodollar, CBDCs and Bitcoin.

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In this episode of Bitcoin Magazine’s “Fed Watch” podcast, hosts Christian Keroles and Ansel Lindner welcomed back to the show Jeff Snider, head of global research at Alhambra Partners. Snider writes a great blog at Alhambra, is syndicated elsewhere and creates a very thought-provoking podcast with Emil Kalinowski called “Making Sense: Eurodollar University.”

Snider is the foremost expert on the eurodollar system, the large global financial system based around the off-shore dollar. The history and data he marshals to back his analysis of the monetary system is second to none. There is no other guest with his extensive and recallable knowledge of the Federal Reserve, so, he is the perfect guest for “Fed Watch.”

That being said, in this episode we started off by getting an update on the world of high-powered monetary plumbing, specifically we wanted to know if we are in a reflationary cycle. Other pundits out there in macro will use terms like “K-shaped” or “L-shaped recovery” when speaking about a reflationary cycle. Some things look K-shaped, meaning certain populations have recovered, while remaining very bad for others, namely the poorest among us. An L-shaped recovery means there has been no discernible bounce in the recovery at all. Snider navigates through these distinctions and gives a great breakdown of the situation out there.

Next, we moved right into a discussion on central bank digital currencies (CBDCs). These are new forms of digital currency provided by the central domestic regulator of each currency, the central bank. Snider has been covering these developments more in his content recently. It is a large topic and here we only scratched the surface. One aspect I bring up specifically is the fact that the dollar has a vibrant private issuance of a stablecoin digital dollar, while other currencies cannot claim the same. It is those other central banks, particularly the ECB and the euro, that are pursuing a CBDC the most aggressively. The market is providing roughly $100 billion in “digital dollars,” no one seems to want digital euros badly enough to produce them privately. We get Snider’s opinion on the fact that the central banks most scared about losing market share of their currency in the next five to 10 years to a private digital dollar, are those central banks pursuing CBDCs the most aggressively.

In the rest of our wide-ranging conversation, we covered the interest rate fallacy, which is very important to understanding the monetary system as it is, and we tried to dissect “asset price inflation.” It is currently the case that any increase in price will be called inflation by the inflationists while ignoring all of the hidden wealth destruction and deflation. You really have to listen to this one. It is short but very dense.

The common theme to much of Snider’s content emphasizes how little we know about the functioning of the dollar system, and claims of inflation versus deflation often gloss over the obvious reality that growth is nowhere to be found. We are trapped in a low-growth environment with pressures for further slow downs. Do not confuse high prices due to a shrinking economy with the inflationary effects of money printing.

Source: Bitcoin magazine

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Petrodollar Deep Dive With Alex Gladstein

Alex Gladstein joined “Fed Watch” to discuss his recent article about the petrodollar and lessons for Bitcoin’s growing monetary role.

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In this episode of Bitcoin Magazine’s “Fed Watch” podcast, hosts Christian Keroles and Ansel Lindner sat down with Alex Gladstein, chief strategy officer at the Human Rights Foundation. They dove deeply into the petrodollar, its history, implications for the future and lessons that we can apply to thinking about bitcoin’s growing role in the global financial system. Read Gladstein’s great petrodollar post on Bitcoin Magazine, “Uncovering The Hidden Costs Of The Petrodollar.”

The petrodollar reentered the alternative financial discussion in 2003 with the invasion of Iraq. We were told the invasion was due to the presence of weapons of mass destruction (WMDs) and the funding of terrorism by Saddam Hussein. However, as it turned out, Hussein was also beginning to sell oil for euros. That was a major break of international protocol, since the U.S.-Saudi oil deal in 1974, where oil was to be priced in and sold for dollars.

This special U.S.-Saudi relationship became known as the petrodollar and replaced the gold dollar, which was ended a few years before in 1971 by President Nixon.

There is so much to unpack about this event and the era in which it happened. Gladstein walked through some of the basics also found in his piece, and then the hosts started to ask some more systemic questions. Instead of rehashing all the details, they focused on broad macroeconomic effects.

Of course, they covered the many negative impacts of the petrodollar system mainly through U.S. military involvement to maintain the agreement, but people rarely stop to think about it from a monetary angle. A single currency is extremely efficient for global trade, it is also extremely beneficial to emerging markets to be able to borrow in U.S. dollars which the international system can print.

Gladstein dug into some of those negatives and the hosts pushed back slightly, saying it wasn’t all negative. One question you won’t hear anywhere else is when Lindner asked about the very real threat at the time, in 1974, of the Soviets signing a similar deal with Saudi instead of the Americans. Saudi did not like the U.S. at all, a deal with the Soviets was more obvious. All of the evils of the petrodollar would have been magnified if the communists, who killed millions of their own people, would have been able to set up a “petro-ruble.” You have to listen to hear Gladstein’s response to that one. 

Source: Bitcoin magazine

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Interview: Bitcoin And The Long-Term Debt Cycle With Dylan LeClair

Bitcoin Magazine’s Dylan LeClair joined “Fed Watch” to discuss Bitcoin and the long-term debt cycle.

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In this episode of Bitcoin Magazine’s “Fed Watch” podcast, hosts Christian Keroles and Ansel Lindner sat down with Dylan LeClair from Bitcoin Magazine.

LeClair is the writer of “The Conclusion Of The Long-Term Debt Cycle And The Rise Of Bitcoin,” an article on Bitcoin Magazine using Ray Dalio’s long-term debt cycle to look at the current system and how bitcoin fits in. LeClair is a great example of the growing Bitcoin Magazine community; spreading valuable content to beginners, who in turn become the valuable content producers.

After some introductions, LeClair begun by walking through short-term versus long-term debt cycles. Most people will be familiar with the idea of business cycles. These are periods of seven to ten years, where the economy expands and contracts, recovery and recession. Those are the short-term cycles. We all live through several of them in our lifetimes.

However, the long-term debt cycles can be anywhere between 75 to 100 years in length. These cycles are due to each individual short-term cycle not completely clearing the bad debts and misallocations of capital out of the system. Every 75 to 100 years, a larger bust finally resets the economy more deeply. It happens so infrequently, no one personally remembers the last cycle, so no one other than economic historians are around to warn everyone.

LeClair and the co-hosts then discussed the tools at the disposal of the government and the Federal Reserve to delay or deal with short- and long-term debt cycles. These tools are typically used in order, because they vary in how politically difficult they are to get enacted. First is to adjust interest rates, next is quantitative easing (QE), lastly the government starts spending to boost the recovery. Whether or not these tools work as designed was the topic of conversation on this podcast. Do they or can they accomplish their goal? We tried to answer that.

Toward the end of the show, talk turned to bitcoin. For bitcoin, as an asset with no counterparty risk, in other words, there’s no direct risk to bitcoin from these long-term debt cycles. It could happen fast, over the next couple of years, or slowly, taking another decade or two. The question they ended the episode on was, “Where does the dam break?” Which central bank will fall first, or which one will adopt bitcoin first? It’s quite possible that the Federal Reserve is the first major central bank to have bitcoin reserves.

Source: Bitcoin magazine

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Analysis: Jerome Powell On “60 Minutes”

In this episode of “Fed Watch,” the hosts listened and reacted to several clips from the Jerome Powell “60 Minutes” interview.

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In this episode of Bitcoin Magazine’s “Fed Watch” podcast, hosts Christian Keroles and Ansel Lindner listened and reacted to several clips from the Jerome Powell “60 Minutes” interview. All audio is used under fair use and they added their commentary to it. You can get the full interview here and the YouTube playlist of clips here.

Powell, the chairman of the Federal Reserve, appeared on “60 Minutes” this week. The interview seemed to be a public relations attempt by the Fed. It fell one year after the Corona Crash of 2020.

Lindner and Keroles took three clips and broke them down in unapologetic fashion. The first clip is amazing because Powell said that the Fed sees the same persistent issues today which were present back during the Great Financial Crisis (GFC), and if they keep coming up they might as well fix them. This comment got the hosts’ blood boiling. It was not as if they did not try their best to fix it back after the GFC. What makes them think they’ll be able to fix it this time?

The second clip they tackled is one where Powell addressed the U.S.’s unsustainable debt. He drew a distinction between an unsustainable “path” and an unsustainable “level” by saying the U.S. is on an unsustainable path, but is currently not at an unsustainable level of debt. He’s really splitting hairs because the path has not changed for 40 years. There’s one way out of the debt and that is default.

The last clip they looked at was about the digital dollar. They feel this was a topic they must cover on “Fed Watch” because it is a very large topic when people discuss the future direction of central banking in regards to central bank digital currencies (CBDC). Powell’s comments here are no surprise, pouring cold water on the idea of digital dollar. The Fed has no intention of being first in the CBDC race and Powell offered a skeptical approach that is missing from many other central banks.

The last few minutes of this episode consisted of a discussion on the Coinbase direct offering happening today and a whirlwind macro summary. Overall, this was a very fun and informative episode once again from “Fed Watch.”

Source: Bitcoin magazine

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Central Banks Update: Q1 2021

The hosts of “Fed Watch” reflected on bitcoin and macro-economic news from the first part of 2021.

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In this episode of Bitcoin Magazine’s “Fed Watch” podcast, hosts Christian Keroles and Ansel Lindner reminisce about the year on the podcast so far and cover recent developments from the major central banks of the world.

There have been so many great guests on “Fed Watch” this year so far that span a unique swath of bitcoin and macro economics. If you haven’t listened to these past episodes, subscribe and check out the back catalog. This year’s list of guests has included Max Keiser, Nik Bhatia, Michael Lebowitz, Elliot Johnson, Mark Moss, Greg Foss and Daniel Prince.

“Fed Watch” has established itself as the bitcoin podcast that goes past the surface arguments about the monetary system, uncovering uncomfortable topics and diving deeply into how bitcoin will reshape that system. The main part of this episode is summarizing central bank-related news for the last month, particularly from the People’s Bank of China (PBOC), the European Central Bank (ECB) and the Federal Reserve.

The PBOC has responded to some criticism about its own digital yuan central bank digital currency (CBDC) efforts. As of now, it says it will try to preserve privacy and it will not be a replacement for Alipay or WeChat pay. On the monetary policy front, China is attempting to slow stimulus for the rest of 2021. It perceives a growing risk of a bubble and is addressing it in Chinese Communist Party (CCP) fashion with targeted intervention. Lindner and Keroles discussed the complexity of the global economy and how despite China slowing stimulus, other countries’ stimulus can leak into China and pump up the bubble anyway.

In Europe, there are some major political problems arising. The vaccine rollout has forced a further divide, as countries defect from European plans to get the Sputnik V vaccine from Russia. It is a very interesting development considering the growing tensions in Crimea and Ukraine involving Russia. Things in Europe are changing rapidly.

As for the ECB and central banking news out of Europe, it too is struggling to explain and justify its CBDC efforts. ECB board member Fabio Panetta attempted to allay fears that a digital euro will abolish cash and be a conduit for more tyrannical monetary policy. He also tried to minimize the effect that a digital euro will have on the existing banking and financial system.

Comments from ECB President Christine Lagarde show an increasingly confrontational attitude toward the market. She has dared the bond vigilantes to bring it on, saying the ECB has extraordinary tools to deal with extraordinary circumstances.

Next, the podcast turned to the U.S. and the Federal Reserve. Lindner spent some time talking about the supplementary leverage ratio (SLR) exemption that just ended in the US. This is a ratio of assets to liabilities that was temporarily waived for one year, expiring on March 31. For central bank pundits, much of March was spent worrying about this situation. People were worried that banks had taken advantage of the exemption to boost their leverage in the markets, and would be forced to deleverage and crash the market. However, it ended with a whimper. It turns out that people overestimated bank activity.

Next, the podcast tackled the U.S. Treasury general account. It ballooned to $1.8 trillion in 2020 and as soon as Janet Yellen stepped in as Treasury Secretary, she promised to draw that balance down quickly. To do that, the Treasury has to spend the money raising fears of higher inflation. There are a myriad of other ill effects from this policy, which the hosts went through.

Lastly, the podcast ended with a discussion of the nature of money printing and why the global economy is stuck in a deflationary environment. This is not a popular opinion in bitcoin or sound money circles, but it has to be part of any comprehensive discussion of macro and especially central bank monetary policy.

Articles Mentioned In This Episode

Source: Bitcoin magazine

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A Bitcoin Maximalist On Central Banks With Daniel Prince

In this episode of “Fed Watch,” the hosts are joined by Daniel Prince, host of the “Once Bitten” podcast.

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In this episode of Bitcoin Magazine’s “Fed Watch” podcast, Christian Keroles and Ansel Lindner sat down with Daniel Prince, host of the “Once Bitten” podcast. Prince offered a perspective from his unique experience, starting from a successful career in global forex and trading, to traveling the world for years with four kids and now as the host of a bitcoin maximalist podcast interviewing many great bitcoiners.

This episode covered a wide range of macroeconomic topics at a high level using bitcoin as the central force. Prince represents the demographic of people entering bitcoin, professionals with experience with money markets and a concern about the current system and its effects.

Fifteen years of living in Singapore enabled Prince to meet influential macro experts and become exposed to a sound money culture, being that gold is more respected in the Far East. He related his experience of getting red pilled about fiat money, fiat education and fiat food. It seems that fiat delusions are infecting all aspects of society and culture. The conversation took a dark turn when discussing what a collapse of the fiat Ponzi looks like when the topic of depopulation came up, but the hosts quickly turned this back to the positive by discussing how bitcoin will help the world.

Prince brought up central bank digital currencies (CBDCs) in the latter half of the episode and that brought them back to “Fed Watch’s” bread and butter. They all agreed that CBDCs are a central bank attack on banks, and in that event, banks will win. They have the opportunity to wield the new weapon of bitcoin against the central banks. This is a much different way to answer the fear, uncertainty and doubt (FUD) spread by nocoiners about bitcoin being attacked by governments.

“Fed Watch” has established itself as the bitcoin podcast which goes past the surface arguments about the monetary system, uncovering uncomfortable topics and diving deeply into how bitcoin will reshape that system. It brings on exciting guests from all corners of macro to discuss the most important topic in finance today.

Source: Bitcoin magazine

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Valuing Bitcoin Using Credit Default Swaps With Greg Foss

In this episode of “Fed Watch,” Greg Foss discussed credit default swaps, central banks and the futures of debt and bitcoin.

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In this episode of Bitcoin Magazine’s “Fed Watch” podcast, Christian Keroles and Ansel Lindner spoke with ​Greg Foss, who “has a 30-year history in banks, bonds and the credit markets as a whole. His insights around Bitcoin and the state of the banking industry and the global economy are amazing,” according to an online biography.

Foss is the second Canadian guest in the last three episodes, and “Fed Watch” is bringing great North American bitcoiners with unique perspectives on to discuss all aspects of how bitcoin is meeting the challenges of entering the central-bank-dominated financial world.

In this conversation, the hosts learned a little bit about Foss’ background in banking. He began his career in 1988 working for the Royal Bank of Canada (RBC) where he quickly realized it was insolvent due to its exposure to the Latin American financial crisis. He went on to work for and found many influential financial firms in Canada over the next 30 years, until he found bitcoin in 2016.

The reason “Fed Watch” wanted to host Foss is due to his interesting valuation thesis for bitcoin, which you can find on the website linked above. It centers around bitcoin as portfolio insurance for fixed income investors. From this episode, the listener will get a master class on credit default swap (CDS) spreads and pricing.

Today, the CDS market is the way that the financial industry prices risk in the credit market in the attempt to make homogeneous investable products for fixed-income investors. The problem is when financial conditions change, which they very often do, these prices move, forcing investors to react and kicking off a downward spiral in prices. It is a very unstable framework. Foss highlighted that bitcoin is a perfect fit in this market to reduce risk and act as a hedge during the inevitable periods of market instability.

Another aspect Foss concentrated on was the unworkable mathematics of global debt. He used an example that the global economy, which has stayed under 5 percent per year since 1976, must get to levels approaching growth of 12 percent simply to service the current debt. In this world, there will be defaults, the system will have to readjust and that readjustment will be painful.

In the second half of this episode, they touched on central bank digital currencies (CBDC), the global nature of the credit markets and what the central banks are doing to fight this deflationary environment before moving onto Foss’ current business venture. Validus Power Corp is involved with converting stranded energy from oil field flares into usable energy to mine bitcoin. This is a booming business all over North America. Naturally, the conversation turned to a North American renaissance powered by on-shoring industrial bases, global capital and the booming energy sector.

“Fed Watch” has established itself as the bitcoin podcast which goes past the surface arguments about the monetary system, diving deeply into how bitcoin will reshape that system. It brings on exciting guests from all corners of macro to discuss the most important topic in finance today.

Source: Bitcoin magazine

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Interview: The Great Wealth Transfer With Mark Moss

The hosts of “Fed Watch” picked the brain of entrepreneur Mark Moss about bitcoin as an asset class, fiscal policy in the U.S. and what the future has in store.

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In this episode of Bitcoin Magazine’s “Fed Watch” podcast, Christian Keroles and Ansel Lindner spoke with ​Mark Moss who is a serial entrepreneur with a specialty in real estate and investing. They picked his brain about bitcoin as an asset class, monetary and fiscal policy in the U.S. and what the future in 12 to 24 months has in store.

“Fed Watch” has established itself as the bitcoin podcast that goes past the surface arguments about the monetary system and always dives deeply into how bitcoin integrates into that system. Moss is the perfect guest to give a cohesive view and back it up. His videos on YouTube are full of detailed analysis of relevant concepts and the history to go along with them. Here, Moss showed his displeasure of the current system. He thinks there is a coming great wealth transfer that will benefit bitcoin dramatically.

Moss said that he sees high inflation and a systemic breakdown coming soon due to several factors. Lindner and Keroles pressed him for more clarity. Is there a tipping point we will unmistakably notice in the future? What if velocity never picks up and inflation in most of the economy is muted for an extended period?

Lindner, Keroles and Moss spent the next 15 minutes going back and forth, trying to get to a more concrete view of just how the next 12 to 24 months will proceed.

Of course, it wouldn’t be “Fed Watch” if they didn’t talk about central banks and their plans for central bank digital currencies (CBDCs). “Fed Watch” has been outspoken that these schemes do not offer the benefits that central bankers think they do, but Moss is not so sure. Surveillance and stripping of monetary rights is too tempting of a target for central banks in his mind.

Overall, this is an interesting bitcoin podcast with high-level macro conversation. 

Source: Bitcoin magazine