 They're going to tighten until they break something or until they cause recessionary enough conditions. The Federal Reserve's fight against inflation is far from over. In his latest speech, the Fed's chair, Jerome Powell, vowed to continue tightening monetary policies in order to kill demand and tame rising prices. But how effective are these policies? If you don't fix the supply side, it's hard to have disinflationary growth. I don't think the Fed's going to be able to normalize interest rates. In this video, we set down with macroanalyst Lin Alden to understand the shortcomings of the Fed's monetary policies and their impact on the crypto markets. We also try to identify the assets that are likely to come out ahead of this economic cycle. Before we start, don't forget to smash the like button and subscribe to our channel. I'm Giovanni, your host, and this is a Coin Telegraph interview. So in his latest speech, the Fed's chair, Jerome Powell, expressed his determination to continue fighting inflation no matter what. So no loosening of monetary policies anytime soon, apparently. What is your take of Powell's speech and its significance for the markets in the coming weeks and months? So the Federal Reserve can't do much about the supply side of inflation, and so their main tools are about modulating the demand side. And so what they're essentially trying to do is reduce demand, basically try to engineer something akin to a mild recession in order to quell that inflation. The challenge with that, of course, is that if you don't fix the supply side, it's hard to have disinflationary growth. And a lot of the inflationary problems we're seeing today are global, not just a single country phenomenon. And so it's really challenging proposition for them to do, especially considering how much debt is in the system. And so with Powell's speech, he actually didn't really say anything new. There's not really anything new said there, no new information. But it reaffirmed his commitment to continue tightening. And so in the prior couple of months, some of his recent language, talking about basically being data dependent and things like that, gave the market the idea that he might be considering slowing down or easing some of his tightening stance. But this speech kind of reaffirmed that no, he's still sticking to that tightening approach. And so I think the general assumption to go with is that they're going to tighten until they break something or until they cause recessionary enough conditions, and at that point, they might pivot. And I think the biggest challenge under the surface is that until they actually fix the supply side of certain things, like energy especially, but commodities broadly and logistics infrastructure, until that is improved, it's hard to have a more persistent fix to the inflationary problem. Okay, now let's talk about crypto. So there is a common expectation that the next bull run will happen as soon as the Fed will pivot its monetary policy and stop rising interest rates. So is that the catalyst that we are all looking forward to? So I think longer term, the way I would phrase it, is that I don't think the Fed is going to be able to normalize interest rates. And what I mean by normalize is, you know, if we look back at history, more often than not, interest rates were higher than the prevailing inflation rate. Basically, you'd earn interest on your treasuries or your bank deposits at a rate that was higher than a headline CPI. And for the most of the past decade, that's not been true. Only for very brief periods of time has that been true. And mostly we've been in a negative interest rate environment. And of course, with inflation this high and interest rates still this low, that hit pretty extreme levels here in 2022. And so, you know, they're going to tighten policy. But I think the biggest challenge is that they're going to be unable to quote unquote normalize policy, which means to get back to a period of structural positive rates. And that's because of how much debt is in the system. So if you look at public debt and private debt in the United States, it's about 370% of GDP. And you have similarly high numbers in Europe and Japan, right? So a lot of the major developed countries have an inability to get to positive real rates and hold it there. And if that's true, and I think it is, then that is bullish for more scarce assets in the long term, which would include certain types of equities and things like that, but also includes Bitcoin and any other project that is going to stick around and grow for a long period of time. And so, but if you look in the near term, for example, if you look at broad money supply in the United States this year or bank deposits this year, they're actually flat all year to date here in 2022. So ironically, the dollar has been less inflationary than Bitcoin with an eight month snapshot. And of course, that's significantly deviated from the normal trend. Usually money supply growth is maybe 7% per year on average. It's spiked over 25% during the height of the 2020 and 2021 stimulus. But now it's basically running at 0%. And so that's a tough environment for Bitcoin and other assets in the ecosystem. Anything is considered a risk on or speculative in any way. But I think that eventually when you get to a part where the Fed is unable to keep tightening and you have that shift in liquidity, then I think the space and Bitcoin especially, and we'll see what happens with other projects, I think that gives them another opportunity for another leg up. But that could take quite some time to get to. So is the Fed's interest rate policy the only catalyst that could spark the next bull run? Or there are other macro factors or indicators that would also play a role in that. So I think so. There's a couple of things to look for together. And so one thing I like to point out is that if you look at at the purchasing managers index, the PMI, that is a kind of a measure of whether an economy is accelerating or decelerating. And so if it's above 50, it means it's growing. And if it's 55 or 60, then it's growing quite quickly. And if it's below 50, it means it's shrinking. And if it's below 45, it means it's shrinking pretty severely. And generally, when you look at PMI cycles for most countries, you'll see something like a three year cycle. It looks like it looks like a sine wave going across. And if you map Bitcoin's price onto the US PMI, you have a pretty strong correlation. Generally, rising PMI environments, busy periods of economic growth, that's when you're getting a positive Bitcoin price. When you have a declining PMI, you generally have weaker or outright falling Bitcoin prices. And of course, there's high correlation across the whole digital asset space. So if you look at, for example, the 2017 bull run, the Fed was tightening policy throughout that entire time. They were raising rates throughout the entire 2017 bull run. But they were doing so at a time when PMIs were going straight up. So you had fiscal stimulus happening from unfunded tax cuts. And then you had the Fed trying to tighten policy. And that was a very risk on environment. So emerging markets did well, Bitcoin did well, cryptos did well, stock market in general did well, pretty much risk assets across the board did well, despite the fact that the Fed was tightening, because they were tightening in a way that made sense relative to that economic cycle. The challenge that they ran into by, say late 2018, was that the economy rolled over and they were still tightening. And that's when they started to run into turbulence and they eventually had to pause. And what we're seeing now is kind of similar, where, except even more shifted back, where they didn't even start tightening until we already got the rollover in the PMI. And so now they're tightening policy into a declining economic environment. And I think that's the toxic combination, that until that ends, it's pretty challenging to get a significant and sustained rally in Bitcoin and the rest of the space. So let's talk a bit more about inflation, and specifically about Bitcoin's relationship to inflation. There is a common perception of Bitcoin being a hedge against inflation. But this year, we see Bitcoin down and inflation up. So is that narrative still valid according to you? So generally speaking over the past three cycles, if you map Bitcoin price relative to broad money supply growth, it's actually a very strong correlation. Bitcoin does exactly what you'd expect it to. If dollars are being expanded at a higher than normal pace, Bitcoin is usually doing quite well as a scarce asset. What we saw is that during 2020 and 2021, we had the fastest money supply growth in decades. And Bitcoin did amazing along with most other risk assets. And this year to date, we've had complete cessation of money supply growth in the United States. And so it's not surprising that we had a rollover in assets that are basically marked themselves as these scarce and inflation resistant assets. And the challenges that the actual price increases we're seeing, especially around energy, are happening with a lag from that money supply growth. So a lot of financial assets felt the effects of that money supply growth before all these price impacts happened. And now these price impacts are happening and people are saying, well, why didn't Bitcoin protect me from inflation? And the main two ones are one that it already did. It's just that in the core, what triggered inflation happened a year or two ago and Bitcoin was responding to that. Another issue I think is that the word hedge normally describes paying off in a specific moment that something happens. So if you short a stock and then the stock market goes down, it's paying off in that moment. So when it comes to inflation, normally the things that pay off the best in the moment are ownership stakes in the things that are driving that inflation, which in most cases is energy and energy related types of assets. So those are generally the best types of hedges you're going to get against inflation because they're going to go up specifically at the time where that inflation is happening. The way I would describe Bitcoin is that it's more like long-term protection from inflation because you're basically buying into a long-term scarce asset against an asset that is historically growing and talking about the dollar here, talking growing at 7% a year or more. So in a recent article that I found quite fascinating, you explained that Bitcoin has a good chance is to establish itself as a successful payment system, specifically because it already established itself as a trustless, decentralized, audible store of value. So can you explain what is the connection between these two very common narratives around Bitcoin? Sure, so Bitcoin and cryptocurrency is that they try to fill a couple different roles. And so Bitcoin focuses on the monetary aspect and so you have minimum exchange and store of value aspects. And it's the narrative around that has fluctuated over time. And so early on the minimum exchange aspect was emphasized, but also store of value. I mean, the whole quote about buy some in case it catches on, for example, that's more about the store of value aspect, whereas the idea of e-cash and peer-to-peer payments is emphasizing the medium of exchange elements. And so I think Satoshi realized early on in his comparisons to gold and talking about a supply cap that he had to make an attractive asset that someone might want to hold for the long term. Because if you have a situation where something is optimized to be a medium of exchange, but not a store of value, that lowers the attractiveness or merchants to want to accept it. You know, if you're just getting something and then quickly convert it away, especially if it historically loses value over time, then it becomes just the incentive to accept it as low and then people don't want to hold it. And if people aren't holding it, there's not a strong reason for merchants to want to accept it. And so it's a negative loop. Whereas on the other hand, if you have something that appreciates over time and more and more people are holding it, and then because it appreciates, it becomes a large and larger share of their net worth, then there starts to become pressure on merchants to accept it. Awesome. Thanks a lot for the great discussion, Lin. I hope to see you soon again on our show. Thanks for having me. Happy to be here.