Inflation Or Deflation? Here's How It Will All End

Highly-respected market researcher Luke Gromen concludes that we’re living in a unique period of history given that we currently facing three massive threats:

  • the first bursting global sovereign debt bubble in over 100 years
  • the first time in 50+ years that foreign central banks are no longer financing the US economy (i.e., they have stopped growing their holdings of US Treasurys)
  • the US' long-standing "petrodollar" advantage is eroding as other countries increasingly strike deals to trade key commodities in non-USD currencies
As these challenges mount, how will they resolve?

Will increasing weakness cause defaults on the debts that can’t be serviced? (“deflation”) Or will the central planners “do whatever it takes” to keep the economy alive, printing ever-more currency to nominally meet debt payments and support asset prices? (“inflation”)

Like other recent guest experts like Grant Williams, Jesse Felder, and Jim Bianco, Luke calculates inflation appears bar far to be the likelier outcome. Though he presents his own unique and compelling rationale for why.

That said, he remains very wary of today’s drastically deformed market (over)valuations, and doesn’t discount that one or a series of major downward market corrections – like the 65-85% correction predicted later this summer by recent guest expert David Hunter – may happen along the longer path of rising inflation.

Which is why Luke agrees that now, more than ever, is the time to partner with a financial advisor who understands the nature of the risks and opportunities in play, can craft an appropriate portfolio strategy for you given your needs, and apply sound risk management protection where appropriate:

Anyone interested in scheduling a free consultation and portfolio review with Mike Preston and John Llodra and their team at New Harbor Financial can do so by clicking here.

And if you’re one of the many readers brand new to Peak Prosperity over the past few months, we strongly urge you get your financial situation in order in parallel with your ongoing physical resilience preparations.

We recommend you do so in partnership with a professional financial advisor who understands the macro risks to the market that we discuss on this website. If you’ve already got one, great.

But if not, consider talking to the team at New Harbor. We’ve set up this ‘free consultation’ relationship with them to help folks exactly like you.

SCHEDULE YOUR FREE CONSULTATION

Prefer to listen offline?:

https://peakprosperity.com/inflation-or-deflation-heres-how-it-will-all-end/

The trouble I run into with the inflation scenario is that I just cant see inflation running very far. How much debt is out there? How many jobs are service jobs in nonessential industries?
So when prices go up people’s money doesnt go as far right? As the cost of living gets higher and higher, people will have to cut back on nonessentials. Thats means unemployment goes up, that means people default on their debts. How high can the price of a house go? There are real world limits and the amount of personal debt out there must tether the reach of inflation to some extent.
I really do feel like the number of variables make prediction impossible. Like Luke said , those in Weimar Germany who owned gold lost their wealth 5x. The tectonic shifts of the massive forces at play make investing for the little guy a crap shoot at BEST. The mark at a rigged table run by Don Corleone more like…although to be fair to Don Corleone he never proposed to have everybody “own nothing and be happy”.

Recommended several times by MM, Ammous is the author of the book, The Bitcoin Standard. A big name writer and thinker in the bitcoin community. Very easy to understand and interesting for me.
Starts at the 3 minute mark
https://www.youtube.com/watch?v=kxdLy-ByHpY
This is a very articulate explanation on the function of money and the way that bitcoin fills several of the roles of “money” better than anything else we have.

  1. Bitcoin is “the hardest money” we have ever had, in that nobody can create more of it at will. It cannot be inflated. This had a profound effect on the desire and capacity to save and be sure that one’s money in the future will hold value. Gold is a close second increasing at only 1.5%/year. The value of a hard money rises with time. (Money moves to the soundest form it can find. People are discovering bitcoin stores value better than their current “money” and are moving their stored value over to the “harder” money. Increasing numbers of people concerned with storing the value of their life work in a hard currency drives up the price of the harder money relative to the other.) Examples from Switzerland and history where citizen savings rates correlated with the hardness of their currency. More savings. Less debt.
  2. International and long distance transfer of value. BTC excels in the role as a means to transfer value across distance and borders. Settlement is completed within the hour, not in 7-10 days. This is the first, outside-the-banking-system way to send value internationally.
  3. Greatly limits the use of monetary policy as a tool for political power. It is not dependent on central banks, anywhere. It does not use or depend on any bank or institution.
  4. Bitcoin at this point is a better store of value than a payment system. Bitcoin transactions remain steady at 500,000/day. The value of the average transaction is growing larger with time. Small payments (like a latte at Starbucks) will not use the block chain primary layer. But secondary layers for small transactions will eventually be built.
  5. Austrian school: Easy money is simply central banks planning the economy. --something that always fails eventually. Easy money and interest rate manipulation are the reasons for the business cycles, recessions and inflations. Hard money is the solution to the business cycle. Example from Switzerland.
  6. Bitcoin offers a way out of the “tower of babel” that is the foreign exchange market. Fluctuations in currency prices are more important to companies than business fundamentals. Fx is about 1,800 Trillion, 25x global GDP! (lots of money changing going on!) Previously a gold standard offered a global neutral money. But this was un-invented in the 20th century. [SP example-A company in Argentina gets a loan in US dollars, builds a factory, makes widgets and sells them locally for Argentine pesos. Then it makes payments on its loan in US Dollars. A fluctuation in the ARS-USD exchange rate is a bigger deal for the company than optimizing production costs, boosting sales or other business fundamental considerations.]
    Summary:
    Bitcoin is a technological and apolitical solution to 2 problems
1. international value transfer 2. savings
His book is available in 24 languages.

Thank you Sand Puppy
Your summary reveals an important detail that addresses the biggest problem with bitcoin (it costs about 37$ in energy per transaction (divide the energy cost last year (not to mention computer infrastructure) by 500,000 transactions to get this figure), and this energy cost will only increase with time). I dont think that the brick and mortar old banks required this much overhead per transaction but would like to be informed by new info. Many people believe that energy is an extremely important factor in human civilization and that we need more energy efficient life, not higher energy consumption. How bitcoin will do this by evolving should be a major discussion. I am glad to see this in your summary.
”Small payments (like a latte at Starbucks) will not use the block chain primary layer. But secondary layers for small transactions will eventually be built.”
So, we can actually use the bitcoin system to efficiently replace money for all transactions and not just as an investment vehicle and economical transfer vehicle for large sums, while relying on new “investors” in bitcoin to pay the enormous energy costs.
I would love to see what shape those secondary layers will take. Many improved versions of cryptos have been invented since Bitcoin was first invented more than 12 years ago. This summary indicates that Bitcoin itself will evolve into something that uses less energy. I cant wait to read more about this. As much as we love and need Bitcoin, energy is still the most important driving force in civilization and sooner or later the bitcoin-energy issue will be tackled.

I have heard VTGothic and MM mention these. I would love to learn more about them too. Maybe we can elicit a treatise on the topic by VTGothic if we show our interest and ask very nicely. :slight_smile: His greenhouse is still buried under the Vermont Snow Drifts and he doesn’t have anything else to do today.
Jack Maller’s company Zap, has a beta release app called Strike, which uses a secondary layer to make frequent small transactions possible over the Bitcoin network. Strike can convert funds in a local currency to satoshis (BTC), transmit the satoshis across thousands of miles and national borders, and then sell the satoshis back into into the local currency for delivery. All for very little cost.
I would love to have our BTC Gurus explain this better. This system is getting ready to handle the many small transactions that “money” needs to be able to manage.

i do not and have not used the lightning network. but in general it is a layer on top of the bitcoin blockchain. it is not a blockchain in and of itself. btw it functions on the litecoin blockchain as well. it is a network. my first go to for questions about bitcoin is andreas antonopolous. the following is a video of a simple explanation.
https://www.youtube.com/watch?v=XCSfoiD8wUA
for a technical explanation the following video takes a technical deep dive. this is good for dave and will keep him out of trouble for a few minutes.
https://www.youtube.com/watch?v=E1n3sKKPD_k
then there is this one where antonop explains some features
https://www.youtube.com/watch?v=W34RdzFwz8M

please provide data to back up your assertion that btc transactions cost $37.
that does not correspond to the latest data i have
https://ycharts.com/indicators/bitcoin_average_transaction_fee#:~:text=Average%20Bitcoin%20transaction%20fees%20can,from%200.6012%20one%20year%20ago.
transaction fees in btc are not static they change based on the congestion of the network and are determined in a free market process where someone can choose a regular fee or a custom fee which will process more quickly for a higher cost. one can also specify no fee. these will take longer because the bitcoin protocol is capitalism in action. miners make money by mining new blocks of btc . currently that is 6.25 btc every 10 minutes or 900 btc per day.
https://support.blockchain.com/hc/en-us/articles/360000939883-Explaining-bitcoin-transaction-fees
as there are fewer blocks being mined miners make more of their income from fees. miners provide the service of making the bitcoin blockchain the most secure network on the planet.
https://buyabitcoin.com.au/blog/bitcoin-transaction-fees/#:~:text=With%20Bitcoin%2C%20however%2C%20the%20ideal,that%20makes%20up%20a%20transaction.&text=Another%20user%20on%20the%20platform,every%201000%20bytes%20of%20data.
of course the big fud that the media loves is the amount of energy the bitcoin network uses. of course it gets regurgitated here on pp ad infinitum.
the following are two articles which present a more accurate picture of electric usage. there is an estimate that bitcoin miners use 74% renewable energy. electricity of course is the largest portion of a miners overhead. for that reason miners are constantly searching for the cheapest electricity available. there are large plants that produce more than can be consumed, this is called orphan energy. miners negotiate with producers to buy this electricity that would other wise be wasted. no one is being deprived of electricity and no one is paying more for electricity because of btc. miners are now utilizing gas that is being flared.
clearly there are some people here who are very knowledgeable about electricity. perhaps instead of railing against btc they could do something productive to help provide electricity for the only sound money on the planet, that is uncensorable, democratic , decentralized, immutable and brings financial stability to many people around the world. i guess it’s just me but it seems more worthwhile than trying to tear it down w/o providing something near as good.
https://blog.trezor.io/three-myths-about-bitcoins-energy-consumption-ef613a1f3d5
nic carter with the last word on btc energy consumption
https://www.coindesk.com/the-last-word-on-bitcoins-energy-consumption
 

I’m so impressed you landed Gromen! Very very impressive.
Every time I have been wrong economically (and that’s…ahem…a lot!), Gromen has been right. But I don’t feel bad, because even Hugh Hendry has said the same. I haven’t yet listened to the podcast but it’s next up for me, and I’ll hang on every word, and will sure have a lot to say afterwards! In the meantime Adam. thank you very much for pulling this guest.

@MKI,
Hendry is wrong about a lot of things. About most things, actually, which is why his hedge fund died after some early success. His incarnation of “even a broken clock is right twice a day” occurred very early in his hedge fund career. The rest was almost all wrong. I don’t listen to him at all - even his interviews since Raoul Pal resurrected him a year or so ago trend toward incoherent abstraction as if he likes playing with ideas more than putting his candle down. And when he does put his candle down he places it incorrectly. I’ve come away thinking he really doesn’t understand first principles at all; that he’s so open-minded he’s finally empty.
Luke Gromen, on the other hand, is well worth listening to, and not just because he’s bullish Bitcoin. He’s bullish Bitcoin because he does understand first principles.

Mohammed, I think Mots is factoring in what he has read is the cost of the energy used to run the computer network overall (miners and node operators), not the tariff on each transaction. Problem is, the energy consumption touted by mainstream media and arrived at by “consensus” of mainstream analysts is wrong in at least 2 directions: (1) it uses the average global market rate for commercial energy produced by carbon-centric energy plants; and, (2) it usually includes a comparison to the global fiat system in which only a minor portion of the fiat monetary system’s energy use is recognized or accounted for - because most of the energy consumption required to mine, purify, shape, and distribute a fiat coin, or source a fiat dollar is hidden. No one knows how much we spend in that endeavor, either in dollars or in carbon footprint. Nor do we know how much in dollars or carbon is spent on the digital side of fiat coinage; and no one thinks about the fact that bitcoin isn’t just competing against one nation’s fiat coinage cost, but against the entire globe’s fiat regimes, including people and their costs to get to work each day and occupy buildings and plants and mines or lumber mills. It really isn’t necessary to add all of that up to realize - when we pause and think about it - that a single wholly-electronic money for the world is far, far less costly in both dollar terms and carbon footprint than what we have embedded into the global monetary networks’ fiat system.
@Mots,
I have addressed the energy issue more than once. Most recently just this past week when I took exception to the Bloomberg hit piece in the March 1 Daily Digest. I’ll quote myself:

We know a great deal about the energy bitcoin uses. We know, for example, that the bitcoin system's energy usage is typically compared to a only a segment of the energy used to run the fiat system of any one government (let alone the entire global, interconnected system of fiat monetary systems). That's a false comparison that underestimates what it costs to run just the US financial system - which necessarily includes the cost of the tens of thousands of local banks we all depend upon, and which are obviated by bitcoin, plus the mining, manufacturing, printing, and distribution of coinage, the operating of credit card networks and underlying companies, the SWIFT and ACH systems, and on and on. I doubt you need to add it all up to grok the real comparison (reference). We also know that bitcoin mining operations are mobile, now often set up in cargo containers so that they can be moved seasonally to take advantage of the cheapest sources of energy. Increasingly, bitcoin mining is taking place at the sources of energy production, where it can take advantage of what would otherwise be wasted energy production. For example, gasses that are otherwise flared into the atmosphere at a complete waste to the economy are now being captured at their sources and deployed into producing bitcoin. Similarly, excess energy produced by hydro power plants is being diverted to bitcoin mining (in China, rigs are moved seasonally to take advantage of the seasonal changes in hydro waste energy availability on the one hand, and either conventional energy, or renewable energy like solar on the other). In reality, such projects don't consume additional energy, but better utilize stranded energy and convert wastage into income for energy companies, local economies, and the national treasuries that tax energy companies. The development is still uneven, but the trend is clear: some operations are 76% clean energy, and the overall global mining community is now sourcing about 39% of its energy from renewables (source). See also, “Green Innovation in Bitcoin Mining.” To the extent bitcoin mining utilizes stranded energy it actually doesn't add anything to the energy consumption of the planet; it just virtuously improves on humankind's use of energy we're already producing at a cost to the environment. No fiat banking system has even thought about employing similar strategies because fiat banking is ultimately underwritten by taxes extracted from citizens' pockets. Bitcoin mining, on the other hand, is a fully and truly free market competition; therefore, miners are motivated to find the most inexpensive and most efficient means of mining. That leads them to innovate in resource utilization; they negotiate lower than market fees to use up stranded resources; but also can be idled when mainline energy needs spike. Competition also leads miners to pursue and drive innovation in computer chip design. As a result of that, recent generation ASICs oriented toward bitcoin mining are operating at higher speeds on lower energy and with less heat loss (thus less direct energy loss, and less demand for ancillary cooling systems with their energy demands). As a side benefit, those targeted improvements will find their way into our computers, driving our energy demand down as performance rises - in the same way that race car innovation has provided many improvements to street vehicles, and the space race gave us ballpoint pens and Tang.
Comment #12, here.

@Sand_puppy,
Regarding “secondary layers” on Bitcoin. You’re comment is actually indicating tertiary layers, per this brief explanation: Beginner’s Guide to Blockchain Layers.
By that etiology, the Lightning Network is a secondary layer. It is an application built on the bitcoin blockchain that can be used by tertiary programs directed at providing solutions to particular problems.
The Strike app is an example of a tertiary solution. Its purpose is to facilitate instant, free micro-payments. Strike is a program that connects banks, payment rails (Visa is their team partner), and crypto exchanges across the globe to allow payments from one country to another, and from any one currency (including bitcoin) to any other while in instant transit.
Strike operates on the Lightning Network; the Lightning Network is an application that aggregates many small payments into one larger bundle and then inserts that bundle into the bitcoin blockchain as one transaction. As a result, many micro transactions (many Strike micro-payments, for example) can be conducted each second and be accumulated into one Lightning bundle. The final resolution of those payments takes place when that bundle of transactions is entered into a bitcoin block at the next 10-minute interval. It then becomes a part of the immutable permanent record that can be reverse traced (audited or validated) from the block location back into the bundle of micro transactions to any original transaction. This 10-minute settlement is much faster than your typical SWIFT 3-5 day, or even Visa Card 30-90 day settlement. (The blockchain settlement is actually closer to an hour on average because a blockchain entry is not considered absolutely settled until it has been locked into place by at least 6 subsequent 10-minute-interval block validations.)
What the Strike app actually does is to take any input fiat payment (from a bank account, credit or debit card, or even an ATM machine), instantly translate it into bitcoin, shoot the bitcoin to the destination, convert it to the chosen output currency’s valuation of that bitcoin (through a regional exchange partner), and deposit it into the destination wallet or bank account. Similarly, any fiat can be input into Strike, get converted to bitcoin (via a partner exchange), and be deposited into a destination wallet. Strike’s founder/developer, Jack Mallers, anticipates soon being able to convert any cryptocurrency into any other, too, by passing them through their BTC valuations.
Strike is a first-of-kind, and demonstrates that anything can be done on the bitcoin protocol that is proposed for Ethereum and other solutions-oriented cryptocurrency or blockchain projects. It’s brand new; in a short while it will expand upon its own success, and other entrepreneurs will follow with their own solution-level projects.

A couple of questions.
would Strike be an application that would let a user make multiple small micropayments—say on a shopping trip to the mall?
We have heard a great deal about the security of the base layer, Bitcoin. Can the Strike/Lightening network be secured well, also.
 

The Luke Gromen interview was amazing. I liked his facts and reasoning. I definitely didn’t take that he said to be out of the market. He said to be solvent longer than the government, about 3 months! Very unsettling to have to worry about political/economic actions which we can’t control and a future of high inflation. His stock sector picks were commodity companies, industrials, technology, etc. There are still some fairly valued and undervalued (sometimes I would go for only slightly overvalued) companies out there. There are good REITs without much debt paying 4-7%. I definitely wouldn’t go all in but I wouldn’t be 100% cash. Too much chance of seeing it all inflate away. Pick companies that aren’t too highly levered so that they can withstand a downturn.
I agree that the Fed can’t prevent all crashes but I have never seen the Fed act like it has now. So I am going to look at a 30% allocation (of liquid assets) to stocks as a hedge against inflation also.
Stephanie Pomboy was great also. She had good facts and figures to support her arguments.

you can add as many layers as you like to the btc blockchain. i will not spend it in my lifetime. a $5 latte today purchased with $5 worth of btc is spending what in 4 years be worth $50.
however i would gladly spend my dogecoin for a latte
btc will be a store of value and a settlement system for the very long foreseeable future if the stock to flow model doesn’t have holes in it

Look at DBC.

I’ve listened to every Gromen interview out there, and Adam, this was like squeezing an orange dry! I’m going to listen to it even once more before I comment on details, but wow, what a tour de force. I thought I knew every shade and turn of Groman’s philosophy, but it’s pretty clear he thinks we are very near the end. Time to tighten up stop losses and increase the gold %.
One of Gromen’s classic lines is how he prefers gold to silver (or BTC). Why? Central banks don’t buy silver (or BTC). This is gonna be a wild ride…

cript?

I believe he said that those who were leveraged gold lost their money, not those who owned gold.

I think you are right about that garvantitis. Though the point being that gold went up and down quite a bit for ten long years until it finally ended high.

This was good.  Thank you Adam.