Bitcoin’s recent wobble? It wasn’t necessarily about fearing higher prices. Funny how things work. For weeks, the market braced for inflation, a good old-fashioned price surge. The Federal Reserve even hinted at it, painting a picture of slow growth and rising costs – a nasty combination. Bitcoin, naturally, took a hit. Risk goes down when things look shaky, and crypto is, well, risky.
- Recent market behavior suggests that tariffs might be cooling down the economy, contrary to expectations of inflation. This is indicated by dropping breakeven rates, which reflect the market’s inflation expectations.
- Economist Jim Paulsen argues that tariffs have historically been deflationary and stimulative, potentially encouraging the Federal Reserve to ease monetary policy. This could lead to lower interest rates.
- Lower interest rates could make investors more willing to take risks, potentially benefiting Bitcoin as a high-risk asset. The recent market jitters were likely due to fears of an economic slowdown rather than inflation.
But now? The numbers are whispering a different story. It turns out those tariffs President Trump slapped on everything from Chinese steel to Canadian lumber might actually be *cooling* things down. Not heating them up. It’s a bit counterintuitive, isn’t it? You’d think making imports more expensive would mean higher prices across the board. But the market, it seems, is saying otherwise.
Breakevens Tell a Tale
The key is something called “breakevens.” Think of it as a market’s guess about future inflation. These breakevens, which compare the yield on regular Treasury bonds to inflation-protected ones, have been dropping. The five-year breakeven rate peaked in February above 2.6%, now it’s hovering around 2.32%, according to the St. Louis Fed. The ten-year? Down from 2.5% to 2.19%. It’s a subtle shift, but a significant one. It suggests the Fed might have jumped the gun on the inflation worry.
Jim Paulsen, a Wall Street veteran with four decades under his belt, put it succinctly on X: “Since the days of Smoot-Hawley, Tariffs have never been inflationary. Rather they are Deflationary and “stimulative themselves”. Moreover, the disinflation shown in these charts will help encourage the Fed to soon ease as well. The Calvary is coming!”
Since the days of Smoot-Hawley, Tariffs have never been inflationary. Rather they are Deflationary and “stimulative themselves”. Moreover, the disinflation shown in these charts will help encourage the Fed to soon ease as well. The Calvary is coming! https://t.co/wJq9w9qJ9q
It’s a one-time cost adjustment, some observers say. Tariffs initially push up prices, sure. But if people don’t get a corresponding raise, they buy less. Less buying means stuff piles up, and eventually, prices come down. It’s basic economics, really. Ravi Batra, an economist who wrote about this back in 2001, found that tariffs in the US haven’t historically been linked to rising prices. In fact, he argued, they’ve often been followed by *drops* in the cost of living.
So, what does this mean for Bitcoin? Well, if the Fed realizes it overreacted to the inflation threat, they might start cutting interest rates. Lower rates generally mean investors are more willing to take risks. And Bitcoin? It’s the riskiest asset of them all. The recent market jitters, it seems, were more about fearing a slowdown in the economy than runaway inflation. The bull, as they say, might be about to charge again. It’s a strange world, this market. A very strange world indeed.
The whole thing feels a bit like overreacting to a slightly burnt toast. Everyone panicked, assuming the whole kitchen was on fire, when really, it just needed a little scraping. The Fed, perhaps, was the one holding the scraper, a little too eager to intervene. Now, they might just put it down and let things cool naturally. And Bitcoin, well, it might just get a little bit of breathing room.
