Bivalves Go BRRR
Vol #70 - February 18th, 2022
The world is your oyster. Especially if you control the money supply.
The great debate over inflation continues to rage. Google searches for “transitory” are far from short lived. Unsurprisingly (and perhaps disconcerting) they’re 50% more popular in the District of Columbia than in the #2 region.
Every month when the CPI numbers print, there is much punditry over what the value of inflation is. When the February numbers were released last week they annualized at 7.5%, the highest since 1982.
These measures are always a lagging indicator of the actual temperature on the ground, but now more than ever we’re hearing arguments about how this underestimates true inflation. The temporary camp suggests it’s supply chain constraints driving up new car prices (+40%), or remote workers ballooning the cost of housing across the country(+28% in two years).
The non-transitory camp simply points to the trillions of dollars that have been pumped into the economy. They’re both probably correct.
One of the greatest economists of the 20th century is famously quoted as saying that “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output”. Milton Friedman’s hypothesis is being tested unlike ever before.
This is not an entirely new effect, as history rhymes and repeats. Money supply has long been understood by clever bankers. If you control the quantity of money in circulation, you can manipulate the price of goods and services. Even better, if you can print your own money, everything becomes cheaper.
America has a colorful history of price and money supply management. Jerome Powell and his cash crazy congressional cohorts are but the latest in a long line of politicians who have succumbed to the temptation of making the money printer go brr.
When the Dutch arrived in the early 17th century, they landed in an environment rich with flora and fauna. The Hudson and East Rivers were lined with bountiful oyster beds and the hills of Brooklyn and northern Manhattan provided ample hunting grounds. These were fertile lands for wealth creation.
The Dutch West India company had come for one thing - trading profits. Fur hats were wildly popular in Europe and Russia, but the local beaver population had been hunted to extinction. The only thing better than being able to sell into a scarce market, is also being able to source from a cheap one.
The North American beaver population was tremendous, and access to these valuable pelts was made commercially successful through wampum. While originally used for sacred ceremonies and symbolic gift giving, the mercantilist Dutch leveraged these beads produced from clam shells into a currency and placed themselves at the center of the Wampum Trade Triangle.
Working with coastal tribes to produce wampum and trade for even more quantities with offered European goods, the Dutch then brought their wampum inland to gain access to the valuable pelts. These were exchanged back in Continental Europe for goods desirable and inaccessible to the North Americans, and the cycle continued.
With their metal awls and drills, they became far more efficient at creating these beads. They further optimized their operations with abundant and cheap labor from prison inmates. There’s even speculation their debt and law enforcement helped fuel this virtuous circle.
Being a natural product, the traders couldn’t actually control the supply, but they could control the pricing. The exchange rate of wampum to Dutch gilder was regularly adjusted and the price of pelts were fixed in wampum.
This dynamic meant that the local suppliers were continually incentivized to supply pelts knowing they got a fixed value, while the pelts could then be offered at a more favorable price to the European markets, where demand further boosted margins.
All good things must come to an end, particularly experiments in money printing and currency pegging. Whether you’re the government of Zimbabwe printing $100 Billion notes, or a crypto protocol emitting endless supplies of tokens, the party only lasts so long.
Inflation sounds like it’s going up, but it’s closer to a force of gravity.
Algonquin and Pequot tribes began spending increasingly large parts of their lives dedicated to the production of wampum. As the English replaced the Dutch in the fur trade, what had become generally accepted as money soon became actual legal tender. This institutionalization meant those tribes had vast wealth, which was a threat to the crown and a precipitating cause of several bloody seizures of colonial power.
If history tells us anything, manipulating currency values and supply is a dangerous game, filled with collateral damage. While it may not always lead to war or violence, asset bubbles fueled by inflation and loose money supply create both economic instability and inequality.
Financial markets continue to chop around these weeks, and there are heightened risks and emerging opportunities. Lacking a crystal ball, it's difficult to say which assets will be best for the ongoing inflationary environment. Hard assets like Bitcoin, gold, or land are one option, while optimists might point to the incredible deflationary effects of the scaling power of technology as a countervailing force.
Either way, we’re watching an old movie once again. The power and temptation of the money printer is a siren’s rhyme as old as time.