CPI is not news anymore. It was going to be high, and price action on the market reflects that. 

We’ve already talked about it earlier. It’s not bad news that makes markets tumble but uncertainty. Since there was a high probability that CPI would come out high, the reaction to it was rather shallow, and markets quickly bounced.

The more interesting thing is the devaluing of sovereign currencies. It’s not necessarily unexpected but definitely surreal to see EUR reaching parity with USD. 

You may have heard about the “dollar milkshake” theory. However, I think there’s a high probability that you haven’t. Let me quickly explain.

Global debt and business deals are denominated in USD. Countries and organizations need USD to repay debts, make deals and lend the U.S. money by buying bonds. The demand for the greenback is still high.

Demand for USD vs. assumed annual debt service (USD required to pay interest). Sources: Santiago Capital, TreasuryDirect, BIS.

Meanwhile, the U.S. is forced to raise rates to battle inflation. This makes USD less accessible, and its price grows, even after massive printing that occurred during the pandemic. The dollar becomes stronger.

DXY. Source: Bloomberg.

Since USD is the global reserve currency, countries can’t opt out of it. Therefore, they have to inflate away their own currencies to be able to buy USD. This makes it so the Fed “drinks” the “milkshake” of liquidity that other countries create by keeping their printing presses on.

Central banks of the world are injecting liquidity. The Fed is sucking it. Source.

This is an outrageous scenario for the rest of the world. No sane country would want this, especially after seeing Russia’s assets being frozen. The cause for freezing assets is justified, but it just shows the rest of the world how easy a country can lose a lot of money by not seeing eye to eye with the U.S. That’s why countries have been trying to de-dollarize and get rid of the U.S. bonds.

The question for fans of the “dollar milkshake” theory is: where does the liquidity go out of USD. A popular opinion is gold, but can it be BTC? I don’t think so, but there might be a short-term obsession with crypto sometime in the future.  

It will likely be a great speculative play and potentially will trigger a crypto bull market of unprecedented magnitude. But I’d rather not have it this way. 

Crypto is still largely a speculative asset class. There’s no global system around it for payments and financial services. After the fear of missing out subsides, the world will have to get back to some working system. I doubt either Bitcoin or Ethereum has a chance of becoming this system. Hence, those who, out of fear of losing it all, make a bet on crypto will suffer. And these will be the most unprotected people.

I’d rather see the world weather the storm out and maintain some familiar form. Crypto will regain the spotlight in one way even if the USD remains the world’s reserve currency and inflation is no longer a pressing issue.

Disclosure: The author of this newsletter holds ETH. Crypto Briefing and members of the research team hold some of the Pick of the Month coins mentioned in the table above. Read our trading policy to see how SIMETRI protects its members against insider trading.