Inflation, Debt, MMT, and Bitcoin

We can't possibly exhaust our thoughts on all these topics in one Monday Morning Outlook, but we thought we'd give it the old college try.

This year, 2020, has been exceptionally interesting for investors. Not only have stocks soared to new highs and mortgage rates fallen to new lows, but Bitcoin, after languishing since 2017, has surged. Since bottoming near $5,000 in mid-March, when COVID shutdowns started, it has more than quintupled to above $27,000. By the time you read that last sentence, who knows?

Bitcoin backers view it as protection against fiscal ineptitude and policy mistakes, which could lead to the devaluation of sovereign currencies. In other words, inflation! And if you followed government policies this year, you understand where they are coming from. But, it's not just crypto-currency investors that fret about inflation.

Gold bottomed at $1,471 in March and is now hovering near $1,900. Copper, silver, lumber, wheat, and soybeans have all soared this year, many to more than 5-year highs.

A Federal Reserve calculation of future inflation expectations, which is teased out of a comparison between regular Treasury securities and inflation-indexed securities, projects CPI inflation to be 2.0% annualized in the five-year period starting five years from now (so, roughly, 2026 – 2030). That's an increase from the 1.8% expected a year ago, and much higher than the 0.8% projected back in mid-March.

This is all understandable. The monetary base has expanded by $1.6 trillion since February, the M2 measure of money has grown 25% in the past year, and the Fed says it doesn't plan on lifting interest rates until at least 2024.

Meanwhile, the federal budget deficit soared last year, hitting $3.1 trillion in the Fiscal Year 2020, which ended in September, and looks likely to remain very large in FY 2021, as well. The United States, and other governments around the world, face huge fiscal issues in the years ahead.