The USA is doomed (Hyperinflation, QE & Bitcoin)

Investors have been worrying about the USA’s inflation rate and money supply. While this has been ongoing since the dawn of money, concerns have been growing in the last 6 months. And for good reason too.

Let’s look at the measures of money supply data. We will focus on the USA’s M3 data from FRED as that is the most accurate representation of the money supply:

DateM3 ($)M3 ($ 000,000,000)
(adjusted for easy reading)
Jan 1960$298,200,000,000$298
Jan 1970$589,600,000,000$589
Jan 1980$1,482,700,000,000$1,482
Jan 1990$3,166,800,000,000$3,166
Jan 2000$4,666,200,000,000$4,666
Jan 2010$8,455,400,000,000$8,455
Jan 2020$15,406,800,000,000$15,406
Sep 2021$20,982,900,000,000$20,982

The data is shocking. As you can see, the amount of money supply has been doubled every decade from 2000 to 2010. However, the money supply increased by 50% in just 1 year and 9 months!

This means that the money supply will be well over a 300% increase by Jan 2030.

A small increase in money supply is fine. But increasing the money supply continuously to “stimulate the economy” is bad for obvious reasons. According to this inflation calculator, what would cost you $10 in 2000 would now cost you $16. This means that your money will be worth less.

But quantitative easing has been going on since 2008. Why should I worry about hyperinflation?

The USA’s central bank (Federal Reserve) started launching rounds of quantitative easing in December 2008. When quantitative easing was first implemented, many were afraid of the hyperinflation that would be caused. Hyperinflation is when prices rise by more than 50% per month. Examples of hyperinflation include Argentina, Hungary and Germany after WW1.

After the 2008 financial crisis, many financial institutions and banks had “toxic assets”. This included bad risky loans. Typically, when the money supply increases, the M0 and the M2 money supply both increase too. The M0 money supply increases because that includes the reserves of a bank. The M2 money supply increases due to the money being in regular people’s bank accounts as the new money is lent out.

However, this is not what happened after the 2008 quantitative easing. Banks and financial institutions did not lend out the newly “printed’ money. Instead, they hoarded the cash. This is because they needed to “shore up their own balance sheets”. For the money supply, this meant:

  • (M0 + MB) increased as there were more bank reserves
  • M2 remained the same as the newly printed money was not lent out to people

Should I be worried about quantitative easing in 2021

In short, yes. Banks and financial institutions hoarded the newly “printed” cash in 2008 because they needed to do so to stay afloat. That can’t be said today. When new cash is injected into the economy, banks are lending that money out. This means that the M2 money supply won’t stay constant this time round.

Instead, we’re likely going to see an increase in the M4 money supply and will feel the consequences in the form of inflation.

Okay so hyperinflation is going to happen. What can I do to protect myself?

As a Singaporean, do I even need to be worried?

The Singapore Dollar (SGD) isn’t the USD. But there will likely be some sort of negative impact on the SGD if the USD were to collapse or experience hyperinflation. The only question is the magnitude of that impact.

Because this relates to macroeconomics and the correlation between currencies, it is nearly impossible to say. But here are a few facts to consider:

  • Looking at Singapore’s Oct 2021 official foreign reserves statistics, Singapore only has $419,032M in “Total Official Foreign Reserves” compared to its total foreign reserve of 1,135,596.77 M SGD. (This is calculated by $565,000.9 M SGD + $419,032 M USD using today’s exchange rate of 1USD = 1.36 SGD.)
  • This means that foreign currencies only make up 37% of Singapore’s total foreign reserves ($419,032 M / $1,135,596.77 M).
  • And since the USA isn’t even Singapore biggest trading partner, we know that the USD will definitely make up less than 37% of the total foreign reserves. To remain conservative, let’s say 20%.

Therefore, chances are, you will likely feel an impact from the devaluation or collapse of the USD, but not as much as other countries who are more reliant on the USA would. The SGD will likely experience hyperinflation though the Singapore economy may fall into an economic downturn. (But the global economy would be in a downturn too.)

I want to protect myself anyway. What can I do? (Hint: Bitcoin & Gold)

Gold has always been used as a hedge against fiat currency. It’s why countries store gold as reserves to back their currencies.

Bitcoin is essentially gold in the form of a cryptocurrency. While Bitcoin may not be used in day-to-day transactions for many reasons (block size, high gas fees etc.), Bitcoin will probably retain its value because:

  • Bitcoin’s supply is capped at 21 million. There is no “printing” of new Bitcoin and you won’t have to worry about dilution of purchasing power.
  • The only way to gain control of Bitcoin is to do a 51% attack. In short, to take over control of Bitcoin, you would need to control more than 50% of all Bitcoin nodes (i.e the network’s computer power). That’s basically impossible for a popular blockchain like Bitcoin.
  • The blockchain ledger can be changed if a large portion of the community (i.e. 51% of the nodes) decide to create a fork. (This happened to Ethereum when $64M worth of ether were stolen from investors – this is why there’s Ethereum and Ethereum Classic.)

Disclaimer: Why Bitcoin many not be guaranteed to work