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In this newsletter I've talked about inflation and how, depending on where you live, your money has lost at least 1/5 of its value in the last 4 years. Keep in mind that the most widely used measure of inflation, the Consumer Price Index (CPI), a representative basket of goods and services, doesn't include the cost of borrowing money.

This means that if you have had to make mortgage payments, car loan payments, and other credit payments needed to finance everyday purchases over the past four years, your money has lost MUCH more than just 1/5 of its value.

Lawrence Summers, former President of Harvard University and Treasury Secretary under US President Bill Clinton, published a research paper in February showing that if the CPI included borrowing costs, inflation in the US would have been around 18% last year. Don't expect the numbers to be any different in any of the world's major economies.

So inflation has been a huge problem, and the pain that many people have felt has not been accurately reflected in the official CPI figures.

However, the silver lining for most people has been that inflation will eventually cool down and interest rates will start to ease. This expectation has sent stock markets soaring. Stock markets in the US, Australia, and Europe have all recently hit new all-time highs. These all-time highs weren't fueled by profit growth, but merely by the expectation that financial conditions would ease.

But financial conditions may not be easing.

DISCLAIMER: This newsletter is not financial advice. It does not take into account your financial situation, is general in nature, and is for educational purposes only.

Also, this newsletter contains affiliate links. This means that I may receive a commission from them. But for Crypto Down Under, I only choose products I use myself and can recommend wholeheartedly. Never forget to do your own research.

What's wrong with inflation?

The CPI rose 3.5% in March from a year earlier, the US Labor Department reported Wednesday. That's up from 3.2% in February. So the first problem is that the CPI is going up, not down.

The second problem is that so-called supercore inflation is even higher.

Supercore inflation strips out volatile items from the CPI to find the underlying trend that drives the CPI. Supercore accelerated to 4.8% year-over-year in March, the highest in 11 months.

If you take the supercore readings for the last three months and annualize them, you're looking at a supercore inflation rate of more than 8%. That's a far cry from the Fed's goal of bringing inflation down to the 2-3% range.

What does this mean for interest rates?

In the US, the market priced in 6 interest rate cuts at the beginning of the year. They have now gone up in smoke.

CME Group's FedWatch tool now expects the first rate cut in September. Just a few days ago, traders were still betting on June.

If the supercore inflation trend turns out to be sticky, we may not get any rate cuts this year.

The same goes for Australia. The cash rate, Australia's official interest rate, is currently held at 4.35% by the Reserve Bank of Australia (RBA). But even though interest rates are high (compared to recent levels), the Australian housing market has boomed over the past year.

Home values nationwide climbed to a new all-time high after rising 0.6% in March, the 14th consecutive month of growth, according to data from CoreLogic. This is likely to make the RBA reluctant to cut rates this year, as it doesn't want to spark the next housing boom.

When commentators explain the problems with the Australian housing market, they usually point to the supply/demand imbalance as the main driver of rising house prices, which is certainly true.

But what's usually forgotten in the debate is that interest rate hikes tend to lose their effectiveness in a soft money environment. When money is constantly being debased, it leads to asset inflation as people tend to put their money into hard assets like houses.

The bottom line is: If you want to play it safe, don't expect rate cuts anytime soon.

What does this mean for bitcoin?

There are two conflicting narratives surrounding bitcoin.

One sees bitcoin as a speculative risk-on asset that only thrives in a low interest rate environment. I don't think this camp is entirely wrong. Of course, bitcoin is a speculative asset because it's only 15 years old and the world is still figuring out its utility and value.

However, if bitcoin was purely a risk-on asset, it should have tanked after the hotter-than-expected CPI numbers came out on Wednesday. Instead, bitcoin rose on the day, while gold, which is usually seen as a safe-haven asset, fell along with equity indices such as the S&P500. At the time of writing, bitcoin was trading above the USD70000 level.

This confirms the second narrative surrounding bitcoin. This narrative is that bitcoin is an emerging store of value and a hedge against inflation.

I tend to agree more with the second camp. However, as I pointed out in this newsletter, I believe that it might be more accurate to think of bitcoin as a hedge against the US national debt.

As a reminder, the US national debt currently stands at more than USD34 trillion, the debt-to-GDP ratio is 123%, and interest payments are rising so fast that Washington will spend more money on interest payments than on defense this year.

As Will Clemente argues, tracking the CPI could be a distraction from America's debt problem. And given this huge debt pile, the US has only three options. The most likely scenario is one in which inflation is high (because inflation erodes America's debt pile) and interest rates are quite low (because the government needs to refinance its debt at a low interest rate).

I tend to agree and see bitcoin as a hedge against everything that causes inflation: overspending, borrowing, and printing money.

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