Original Author | Arthur Hayes

Compiled by Nan Zhi (@Assassin_Malvo)

Some people would say:

The bull run of encryption has ended.

"I need to issue my Token now because we are in the downturn phase of the bull market."

"Why didn't Bitcoin pump like the major US tech companies in the Nasdaq 100 Index?"

This comparison chart between the Nasdaq 100 Index (white) and Bitcoin (gold) shows that the two assets have followed a similar trend, but Bitcoin's rise has stalled since reaching a historical high earlier this year.

However, the same people have put forward the following points of view:

The world is transitioning from a unipolar world order dominated by the United States to a multipolar world order that includes leaders such as China, Brazil, Russia, etc.

“In order to fill the government deficit, savers must be suppressed by the financial system, and the central bank must print more money.”

"The Third World War has already begun, and the war will lead to inflation."

The opinions on the current stage of the bull market of Bitcoin and their views on geopolitics and the global currency situation confirm my point that we are at a turning point. We are transitioning from one geopolitical and international monetary order to another. While I don't know exactly which countries will rule at the end of the stable state, nor do I know the specifics of the trade and financial architecture, I do have a general idea of what it might look like.

I want to extract from the volatility of the current encrypted capital market and focus on the broader cyclical trend reversal we are in. I want to comb through the three major cycles from the Great Depression in the 1930s to today. This will focus on Pax Americana, which Arthur refers to as the United States throughout the article, as the entire global economy is a derivative of empire financial policies. Unlike Russia in 1917 and China in 1949, the United States did not undergo a political revolution as a result of two World Wars. Most importantly, for the purposes of this analysis, the United States is a relatively good capital holding ground. It has the deepest stock and bond markets and the largest consumer market. Everything the United States does will be imitated and responded to elsewhere in the world, which will result in good or bad results relative to the flag on your passport. Therefore, it is very important to understand and predict the next major cycle.

(Odaily Note: Pax Americana, also known as American Century, American Peace, refers to the peace established among major powers after the end of World War II, indicating the absolute advantage of the United States in terms of its economy and military position relative to other countries due to its infrastructure being unaffected by the war.)

There have been two types of periods in history: local and global. In local periods, authorities fund past and present wars by financially suppressing savers. In global periods, financial regulations are relaxed and global trade is promoted. Local periods are characterized by inflation, while global periods are characterized by deflation. Any macroeconomist you follow will use a similar classification to describe the major historical cycles of the 20th century and beyond.

The purpose of this history lesson is to invest wisely in the cycles. Assuming an average lifespan of 80 years, you can expect to experience two main cycles during this time. I categorize our investment choices into three types:

• If you believe in the system but not the people managing it, you invest in stocks.
• If you believe in the system and trust the people who manage it, you invest in government bonds.
• If you don't trust the system or the people who manage it, you invest in assets like gold or Bitcoin that don't require the existence of a country. Stocks are a legal fiction maintained by the courts, which can dispatch armed personnel to enforce it. Therefore, stocks require a strong country to exist and maintain value in the long term.

During periods of local inflation, I should hold gold and avoid stocks and bonds.

During a global deflationary period, I should hold stocks and avoid gold and bonds.

Government bonds generally do not hold their value in the long term unless I am allowed to leverage them at low or even zero cost, or unless regulators force me to hold them. This is mainly because politicians fund their political goals by printing money rather than resorting to unpopular direct taxes, which is a big temptation and can easily distort the government bond market.

Before dividing the cycles of the last century, I want to describe a few key dates.

• April 5, 1933 - On this day, U.S. President Franklin D. Roosevelt (FDR) signed an executive order prohibiting private ownership of gold. Subsequently, he devalued the U.S. dollar from $20 to $35 by breaking the U.S. commitment to the gold standard.
• December 31, 1974 - On this day, President Gerald Ford restored the right of Americans to privately own gold.
• In October 1979, Paul Volcker, the Chairman of the Federal Reserve, changed the United States' monetary policy, targeting the control of credit quantity rather than interest rate levels. He then fought inflation by limiting credit. In the third quarter of 1981, the yield on 10-year US Treasury Bonds reached 15%, which was the all-time high for yields and the all-time low for bond prices.
• January 20, 1980 - Ronald Reagan is sworn in as President of the United States. He subsequently relaxed regulations on the financial service industry. Some of his other notable financial regulatory changes include making the capital gains tax treatment of stock options more favorable and repealing the 1933 Banking Act.
• November 25, 2008 — The Fed began printing money under its quantitative easing (QE) program in response to the global financial crisis sparked by losses on subprime mortgages on financial institutions' balance sheets.
• January 3, 2009 — The Bitcoin blockchain of "Satoshi Nakamoto" released the Genesis Block. I believe that our Lord and Savior has saved humanity from the evil control of the state by creating a digital cryptocurrency that can compete with digital fiat currency.
• 1933 - 1980 The place where the United States rose
• 1980 - 2008 Global Cycle of U.S. Hegemony
• 2008 – Present the United States against the local cycle of other major economies

1933 – 1980 Rise of the United States

Compared to other parts of the world, the United States suffered little substantial damage during World War II. Considering the casualties and property losses in the United States, the death and destruction caused by World War II were much smaller than those of the 19th century civil war. While Europe and Asia were in ruins, the U.S. industrial reconstruction revitalized the world and reaped huge rewards.

Although the war was beneficial to the United States, it still needed to use financial repression to pay for the war. Starting in 1933, the United States prohibited private ownership of gold. In the late 1940s, the Federal Reserve collaborated with the U.S. Treasury, allowing the government to control the yield curve, enabling it to borrow at below-market interest rates by printing money to purchase bonds. To prevent depositors from escaping, the bank deposit interest rates were capped. The government used marginal savings to pay for World War II and the Cold War with the Soviet Union.

If products such as gold and fixed income securities with similar inflation rates are banned, what can depositors do to beat inflation? The stock market is the only choice.

The S&P 500 index (white) and gold (gold) were benchmarked from April 1, 1933, to December 30, 1974, with a benchmark value of 100.

Even with the rise in gold prices after President Nixon ended the gold standard in 1971, it still did not surpass the return on stocks.

But what happens when capital is once again free to bet against the system and government?

The Standard & Poor's 500 Index (in white) and gold (in gold) are benchmarked to 1974-12-31 to 1979-10-01, with an index value of 100.

Gold has outperformed stocks. I stopped the comparison in October 1979 when Volcker announced that the Fed would begin a major tightening of credit, restoring confidence in the dollar.

1980 - 2008 US Global Cycle Peak

As people's confidence in the United States' ability to and will defeat the Soviet Union increased, the political winds changed. Now is the time to transition from a wartime economy, lift the empire's financial and other regulatory constraints, and allow market vitality to play freely.

In the new oil-dollar currency system, the US dollar is supported by the surplus from the sale of oil by Middle Eastern oil-producing countries such as Saudi Arabia. In order to maintain the purchasing power of the US dollar, it is necessary to raise interest rates to curb economic activity and suppress inflation. Volcker did just that, causing interest rates to soar and the economy to decline.

The early 1980s marked the beginning of the next cycle, during which the United States, as the sole superpower, engaged in trade with the world and strengthened the US dollar due to monetary conservatism. As expected, gold performed less well than stocks.

The S&P 500 index (white) and gold (gold), with a benchmark value of 100 from October 1, 1979 to November 25, 2008

Apart from bombing some Middle Eastern countries back to the Stone Age, the United States has not faced any war with military power that is equivalent or close to equivalent. Even after spending over $10 trillion fighting and failing in Afghanistan, Syria, and Iraq, people's confidence in the system and government remains unshaken.

Local cycles of the United States' confrontation with other major economies since 2008

In the face of another deflationary economic collapse, the United States defaulted and devalued once again. This time, the Federal Reserve did not forbid private ownership of gold and then devalue the dollar against gold, but decided to print money to buy government bonds, which is euphemistically called quantitative easing. In both cases, credit based on the US dollar expanded rapidly to "save" the economy.

The proxy war between major political groups has officially begun again. An important turning point was the 2008 Russian invasion of Georgia, which was a response to NATO's intention to grant Georgia membership. Preventing NATO, armed with nuclear weapons, from advancing and surrounding Russia's homeland is a top priority for Russia's elite led by President Putin.

Currently, there is an intense proxy war between the West (the United States and its vassals) and the Eurasian continent (Russia, China, Iran) in Ukraine and the Levant (Israel, Jordan, Syria, and Lebanon). Any of these conflicts could escalate into a nuclear exchange between the two sides. In preparation for the seemingly inevitable war, nations are turning inward and ensuring that various aspects of the national economy are ready to support war efforts.

In this analysis, it means that depositors will be required to fund the country's wartime expenses. They will face financial repression. The banking system will allocate most of the credit to the state to achieve specific political objectives.

The United States defaulted on the dollar again to prevent a deflationary collapse similar to the Great Depression of 1930. Subsequently, protectionist trade barriers were erected, just like from 1930 to 1940. All national states are thinking for themselves, which can only mean experiencing financial repression while suffering from severe inflation.

S&P 500 Index (white) vs. Gold (gold) vs. Bitcoin (green), with November 25, 2008 as the benchmark, the index value is 100

This time, as the Fed depreciates the US dollar, capital can freely leave the system. The difference is that Bitcoin provides another currency without a national background at the beginning of the current local cycle. The key difference between Bitcoin and gold is that, in the words of Lynn Alden, Bitcoin's ledger is maintained through encrypted blockchain, and the speed of currency movement is as fast as the speed of light. In contrast, the ledger of gold is maintained naturally, and the speed of movement is limited to the speed at which humans can physically transfer gold. When compared to digital legal tender currency that can also move at the speed of light but can be infinitely printed by governments, Bitcoin is superior while gold is inferior. That's why from 2009 until now, Bitcoin has taken some of the limelight from gold.

The performance of Bitcoin is so outstanding that you can't distinguish the difference in returns between gold and stocks on this chart. Gold's performance lags behind stocks by nearly 300%.

The End of Quantitative Easing

Although I am confident in the background and description of the financial history of the past 100 years, this does not alleviate people's concerns about the current end of the bull market. We know that we are in a period of inflation, and Bitcoin has also shown its function: surpassing the devaluation of stocks and fiat currency. However, timing is crucial. If you bought Bitcoin at the recent historical high, you may feel like a loser because you are speculating past results into an uncertain future. That being said, if we believe that inflation will continue to exist, and a cold war, hot war, or proxy war is imminent, what can the past tell us about the future?

The government has been suppressing domestic depositors to finance wars, support winners in past cycles, and maintain system stability. In the era of modern nation-states and large integrated commercial bank systems, the main way for the government to finance itself and key industries is by controlling the allocation of credit by banks.

The problem with quantitative easing is that the market allocates free funds and credit investments to companies that do not produce physical goods needed for wartime economies. The United States is the best example of this phenomenon. Volcker ushered in the era of the all-powerful central banker. Central bankers create bank reserves by purchasing bonds, thereby reducing costs and increasing credit limits.

In the private capital market, credit is allocated to businesses that maximize shareholder returns. The simplest way to increase stock prices is to reduce the outstanding shares through buybacks. Companies that can access cheap credit borrow money to repurchase their own stocks instead of borrowing to increase production capacity or improve technology. Improving the business in hopes of generating more revenue is challenging and does not necessarily boost stock prices. However, through mathematical calculations, reducing outstanding shares will increase stock prices, which is exactly what large companies with cheap and abundant credit have been doing since 2008.

Another simple way is to increase profit margins. Therefore, stock prices are not used to build new capacity or invest in better technology, but to reduce labor input costs by transferring jobs to China and other low-cost countries. The US manufacturing industry is so weak that it cannot produce enough ammunition to defeat Russia in Ukraine. In addition, China is a better place to manufacture goods, and the US Department of Defense's supply chain is filled with key inputs produced by Chinese companies. These Chinese companies are mostly state-owned enterprises. Quantitative easing policies, combined with shareholder-driven capitalism, have made the US military dependent on the country's 'strategic competitors' (their words, not mine).

The way the United States and the collective West distribute credit will be similar to what China, Japan, and South Korea do. Either the state directly instructs banks to lend to a certain industry or company, or banks are forced to buy government bonds at below-market yields so that the state can issue subsidies and tax credits to "suitable" businesses. In either case, the rate of return on capital or savings will be lower than the nominal rate of growth or inflation. The only way to escape is (assuming there are no capital controls) to buy a store of value outside the system, such as Bitcoin. **

For those who are obsessed with observing the changes in the balance sheet of major central banks and concluding that the credit growth is not enough to drive further rise in cryptocurrency prices, it is now imperative to focus on the credit created by commercial banks. Banks achieve this by lending to non-financial enterprises. Fiscal deficits also release credit, as deficits must be financed through borrowing in the sovereign debt market, and banks will faithfully purchase these bonds.

In short, in the previous cycle, we focused on the size of the central bank's balance sheet. In this cycle, we must pay attention to the fiscal deficit and the total amount of non-financial bank credit.

Trading Strategies

Why am I confident that Bitcoin will regain its vitality?

Why am I convinced that we are in a new large-scale localization, state-led inflation cycle?

Take a look at this message:

According to data from a federal agency, the projected budget deficit for the U.S. fiscal year 2024 is expected to soar to $1.915 trillion, surpassing last year's $1.695 trillion and marking the highest level outside of the COVID-19 era. The agency attributed the 27% increase compared to its earlier forecast to increased spending.

For those worried that Biden will not pass more spending to sustain the economy before the election, this is undoubtedly good news.

The Atlanta Fed expects a stunning 2.7% real GDP growth rate in the third quarter of 2024.

For those worried about the United States falling into recession, it is extremely difficult mathematically for a recession to occur when government spending exceeds tax revenue by $2 trillion, which accounts for 7.3% of the GDP in 2023. As a point of reference, the U.S. GDP declined by 0.1% in 2008 and by 2.5% during the global financial crisis in 2009. Even if a similar global financial crisis were to occur this year, the decline in private economic growth would still not exceed the amount of government spending. Recession will not occur. This does not mean that a large number of ordinary people will not fall into financial difficulties, but the United States will continue to move forward.

I pointed out this because I believe that fiscal and monetary conditions are loose and will continue to be loose, so holding cryptocurrency is the best way to preserve value. I am convinced that today's situation is similar to the 1930s to the 1970s, which means that since I can still freely transfer from fiat currency to cryptocurrency, I should do so because the depreciation caused by the expansion and centralized credit allocation through the banking system is coming.