Inflation, Tariffs, and Bitcoin
- Jia Han
- Dec 9, 2024
- 6 min read
Of the three topics, each deserves extensive studies and explanation, maybe even a few books (the last one maybe less). However, I do not have time. Below I give a concise explanation. Refer to references if needed.
As mentioned in my earlier write-ups [1-4], I have developed my way of research. (Only Plato had mentioned something similar.) I mention it here so that you might have some idea of my logic below. I start with the 0-th order estimate, 1st order, then 2nd order, and so on. If the 0th order solves my problem, I would not bother higher orders. The 0th order is pretty much all we need below.
Money and Inflation
What is money? Niall Ferguson’s classical book, The Ascent of Money [5], is excellent. The book is not technical so it is easy to read. Today’s monies are all fiat monies, i.e. whose values are guaranteed by sovereigns. If a sovereign doubles the amount of money, then the value of that money is halved. This is the root of the current inflation. A short video, Why Your Money Is Losing Value [6], is good and easy to understand.
During the pandemic, the US government printed out extra money, adding it to circulation. Everything else being equal, you get inflation. Somewhere I read during the pandemic the US government added anywhere between 25-40% money supply. The VALUE of a dollar SHOULD be reduced by 25-40%. The above consideration is at the 0th order. The next step would be the 1st order. You need to know Economics 101 well before proceeding further. You also need to find M1, M2 and other parameters. Of course if all consumers change their behavior, for example, if ALL put the extra dollars under the mattress, then there will be no inflation. But this is impossible. Another possibility is somehow goods and services are increased greatly and quickly. Then, inflation would not be a problem. By now you probably know 20% inflation in the US should be expected and not bad considering the circumstances. Furthermore, you probably can understand why the subject of inflation has many books and papers published. But you should be satisfied with the 0th order for such a preliminary discussion.
Why Print Money During the Pandemic?
You might say why did the US government print extra money? This has to do with the cause of the Great Depression in the 1930s. Before the1960s, it was widely considered the Great Depression was due to stock market speculation, trade, etc. In 1946-49 Milton Friedman (with a co-author) published his study on monetary policies during the Great Depression. Milton Friedman’s papers explained that it was the Federal Reserve’s mistakes that caused the Great Depression (cf. [7]). Friedman’s theory has helped us to avoid depression during GFC and the pandemic. Milton Friedman is truly the greatest economist in the last 100 years.
There were three tranches of money supplies during the pandemic. My opinion is that the first one during the Trump Adm. was necessary. The two under the Biden Adm. were unnecessary and they caused big inflation. My initial interpretation was that Biden wanted the nation to be grateful to him, not the first tranche by the Trump Adm. Recently, WSJ had one report which gives some details on considerations behind the Biden Adm. policies. Regardless of the details, the high inflation was Biden and Janet Yellen’s fault. It is widely recognized in the last election inflation was the #1 reason that voters rejected K Harris and the Democrats.
Tariffs?
Donald Trump mentioned many times that he will put tariffs on imported goods. They are from both allies and foes. If you ask ten economists, nine will be against tariffs, including John Cochrane of GoodFellows (he is a good economist). Most classical economists are strongly against tariffs because it will make all economies less efficient and reduce the total outputs (I think Ricardo was the first to articulate this point but I could be wrong). However, why are there tariffs in the first place? Because one has to consider politics together with economics. I support Trump’s tariff proposal because if used wisely, tariffs can be good. I will explain it below..
The reason that Trump was elected President in 2016 was due to the negative effects of globalization [8-9]. Globalization does bring good things but it also brings negativities with it. (There are additional references on this. Victor Davis Hanson of Hoover had books as well as videos on this topic.) Bad behavior of China during the pandemic teaches many nations that strategic goods cannot rely on from one nation, especially China. Even if they are easy and cheap to manufacture, such as masks.
In order to reclaim social cohesion and reliable supply chains, it is essential to reverse globalization somewhat [10]. One of better ways to do this is to add tariffs so that globalization is moderated. Two points here. Niall Ferguson commented that politics is greater than economics. He referred to something else but the principle is valid. One cannot apply economics without limitations. My second point is that Trump’s intuition is good, both politics and economics. He does not have a theory or strategy but ….
Will Trump New Tariffs Cause Inflation?
Not necessarily. First, Trump might not put tariffs into real practice. Anything he says one should take it with a grain of salt. For example, he said that he will add 25% tariffs on Mexico and Canada goods. If applied, they will destroy Mexico’s and Canada’s economy. Both, especially Canada, are allies of the US. It makes no sense to destroy their economies and at the same time significantly increase costs of some products, for example autos, in the US. Basically, what Trump said was to put the US market on the negotiation table and he wants the two countries to make some return on other things.
Will tariffs increase inflation significantly? Probably slightly on some but little on others. But for several reasons it will not be as bad as 20% as in the Biden Adm. First, printing money will make the inflation unbearable to the poor because they have no way to escape. The middle class also may be squeezed. But the rich probably do not feel it at all. For example, my stock portfolio has doubled. Why would I be concerned about 20% inflation?
Because it is necessary to reverse some globalization, managed tariffs are probably better than most other methods. So again Donald Trump probably is correct. But he relies on intuition rather than well-thought strategies. Thus, he is not a statesman.
Most did not pay much attention when Trump chose two key economics positions. Trump took much time and deliberation before choosing these two. One is the treasurer Scott Bessent and another is Kevin Hassett, director of the National Economic Council. You may google to find out what they are thinking about tariffs. I think that they are very good.
Bitcoin
I use bitcoin to represent crypto currencies and related ETF and so on. Trump is good because he learns. He also has many talents around him. I mentioned before that anyone on his team is better than anyone in the Democrats. Apparently he learned crypto currencies from the young people in his inner circle.
Bitcoin is based on blockchain. Blockchain technology is better than book keeping (I believe) invented in Holland in the16th century. It is better than the old technology. It makes sense for the US to integrate blockchain / bitcoin into the monetary system. The US dollar is the reserved currency. If the US does not integrate this technology while another sovereign does, it may cause problems.
The question is whether you should own bitcoin. I think several reputed investors said that bitcoin is an asset class not an invest vehicle. This pretty much says it all. I warn you that do not extrapolate bitcoin’s past gain to the future. Bitcoin is considered digital gold. From an investment perspective, gold is a pretty poor investment [11]. Digital gold would not do much better. Some may say that if I bought bitcoin years ago, I would be rich. Any good investor would know that past performance does not guarantee the future. Future value of bitcoin will depend on many things. In fact, it is extremely difficult to forecast/predict it.
Since inflation is the focus of this writeup, it is interesting to note that runaway inflation is certain in the future, bitcoin might be considered since it has a fixed value (macroscopically speaking).
References:
Niall Ferguson, "The Ascent of Money: A Financial History of the World," Penguin Books, 2009.
Why Your Money Is Losing Value (11-15)
I have written for Friedman’s theory on GFC (in Chinese) 废除社会科学！？
Jeffrey Rubin, The expendables : how the middle class got screwed by globalisation, Random House Canada.
Jeremy J. Siegel, "Stocks for the Long Run," 4th Ed. 2007.
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