Social Unrest!
In a very thought-provoking article that recently appeared in Seeking Alpha, the author, Logan Kane, makes the case that social unrest and all that goes with it sets the stage for increasing value of Bitcoin (and precious metals). He observed that recent rioting and looting targeted wealthy areas. He makes the case that the massive unemployment that is presently occurring due to COVID-19, along with the excessive printing if paper money to “relieve” the financial crisis, will lead to devaluation of the dollar. This, in turn, could lead to more hardship for lower-income areas which could trigger even more social unrest than is presently the case — a sort of multiplying effect. His solution is to acquire Bitcoin and Gold, two forms of wealth that are more of less insulated from the uncertainties associated with fiat currencies.
The question he doesn’t address is where these unfortunate low-income people will obtain the funds required to acquire Bitcoin and gold…
In any case, Kane’s article is worth reading as it takes a somewhat unusual point of view concerning current events and their relationship to cryptos — something that many HYIP investors have more than a passing interest in. The article follows…
Why Recent Social Unrest Has Changed My Mind On Bitcoin
Summary
On Saturday night, looters targeted the white-collar neighborhood of Uptown Dallas, where I have friends and family.
Record high unemployment rates and public rage are fueling conditions for class conflict and social upheaval.
The bureaucrats running America are using police to collect revenue and enforce laws the population doesn’t support.
There is a strong historical connection between social upheaval and redistribution of wealth, most commonly through the printing of money. This has warmed me up to Bitcoin.
While this isn’t a dealbreaker for stocks the way it is for standards of living, the US dollar may devalue by 25-30 percent. Protect yourself accordingly.
The Bonfire of The Vanities in Uptown Dallas
On Saturday night, Dallas descended into chaos as rioters looted Uptown Dallas, a neighborhood popular with TCU, SMU, and University of Texas graduates in their 20s and 30s, including my friends and family. The neighborhood was targeted by looters because it’s the safest neighborhood in Dallas proper, so police attention was initially focused elsewhere.
What’s different about these riots compared with past riots, such as the 1968 riots after the assassination of Martin Luther King, the 1980 Miami riots, the 1992 Rodney King riots, or the 2014/2015 Ferguson riots, is that looters specifically chose an affluent neighborhood to terrorize that had zero connection to the grievances of the main group of protesters. I looked at 20 famous riots over the last 100 years, and not one I found targeted ordinary middle and upper-middle-class neighborhoods the way these ones have. To this point, rioters also looted stores in Beverly Hills and Atlanta, while chanting “f*** the rich.” The whole string of events had the feel of the classic 1980s novel The Bonfire of the Vanities by Tom Wolfe, as various groups of society have brought out the worst in each other. There are profound social, political, and economic implications to the rising class conflict in America, which the looting in Uptown puts a spotlight on. Chiefly among them is a probable redistribution of wealth in America amidst double-digit unemployment via ramped-up printing of money. This will negatively affect standards of living for the middle and upper-middle classes but will somewhat reduce inequality. I believe diversifying into gold (GLD) and Bitcoin (BTC-USD) over time can help protect from this. Importantly, the currency devaluation is unlikely to show up fully in the official inflation rate, which mostly ignores crucial costs that are borrowed for or indirectly paid for such as housing prices, health insurance, education, and state and local taxes.
The main groups of protesters are justified- the bureaucrats running America write laws that the population doesn’t support and are unequally enforced and moreover use the police and the use of force as a revenue collection tool of state and local governments. This leads to police-citizen conflict, which can rapidly escalate to violence along racial lines. However, what happened in Uptown on Saturday night was really about social and economic conflict, unless you think Whole Foods is an extension of the government.
The question now-what will happen next?
In the short and medium term, conditions are ripe for more riots with millions of unemployed people in the United States of all races with nothing to lose. Tax hikes will further hurt the economy and are politically impossible with the recession, so they’re out of the question. The answer is that the government will continue to print money at a record pace. Supply and demand dictate that if you print more money and add supply, the value of the dollar goes down. And make no mistake, the Federal government will be all-but-forced to continue paying increased unemployment payouts or risk making the Uptown riots look a warm-up. Stock markets tend to shrug off riots in the short term, but the underlying social dynamics shouldn’t be ignored for their long-term effects.
If you look at history, there is an exceedingly strong correlation between widespread social unrest and currency devaluation against neutral stores of value, such as gold (and now Bitcoin). According to Ray Dalio, who has called for a 25-30 percent devaluation of the US dollar.
In comparison to the others, printing money is the most expedient, least well-understood, and most common big way of restructuring debts. In fact it seems good rather than bad to most people because it helps to relieve debt squeezes, it’s tough to identify any harmed parties that the wealth was taken away from to provide this financial wealth (though they are the holders of money and debt assets), and in most cases it causes assets to go up in the depreciating currency that people use to measure their wealth in so that it appears that people are getting richer.
In Hong Kong, which also has been wracked by unrest, there has been a substantial increase in demand for bets that would pay off if the government chooses to break its currency peg. The bottom line is that the US government (along with other first world governments) is redistributing wealth by printing money that isn’t paid for by taxes and giving the money away so people can pay their bills. Printing money is slightly negative for stocks (they benefit from their debt being easier to pay but usually struggle to raise prices fast enough to cover devaluations). However, printing money is awful for savers and creditors, and is bad for workers, which see their wages stagnant while the prices of neutral stores of value such as real estate, gold, and bitcoin rise.
What makes Bitcoin the most interesting of the bunch is that it likely can’t be redistributed without drastic and coordinated government action between dozens of countries. What’s clear to me from studying past currency devaluations is that the middle classes bear the brunt of the redistribution of wealth. The risk for the US government is that if they continue printing money the way they are, the US dollar could lose much of its reserve currency status over the next 10 years. If this is the case, we will be stuck with money borrowed and mal-invested (like student loans), no longer will be able to import goods for cheaper than their purchasing power parity, and American standards of living will fall to similar levels of the United Kingdom, which was the wealthiest economy/reserve currency 100 years ago. GDP will grow due to improvements in technology, but the average American family is in trouble.
Conclusion
In past years, I was negative on Bitcoin, especially during the craze in 2017. Between then and now, the world has changed in ways that I did not account for originally, while Bitcoin has matured and cooled off from the bubble. I intend to buy some Bitcoin and gold each month from here on out, with a 50/50 ratio, which I intend to rebalance. I don’t see how the US can make it out of the current combined coronavirus crisis and social unrest without printing a ton more money. For what it’s worth, I’m reasonably positive about stocks over the next 1-3 years, especially since advances in technology are leading GDP growth and the government seems to understand that they can’t keep everyone locked down forever. However, the outlook for standards of living for the median family and the US dollar is not as rosy. Unfortunately, there’s not much you or I can do about it. I hope my readers stay safe and be optimistic where warranted, but realistic about the state of the world as we move into a new decade.
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