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Tesla CEO Elon Musk Warns a Major Fed Rate Hike Risks Deflation

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Tesla CEO Elon Musk Warns a Major Fed Rate Hike Risks Deflation

Tesla CEO Elon Musk Warns a Major Fed Rate Hike Risks Deflation

Tesla CEO Elon Musk has warned that a major rate hike by the Federal Reserve risks deflation in the U.S. economy. Musk’s warning followed an analysis by Ark Invest CEO Cathie Wood, who cautioned that “Leading inflation indicators like gold and copper are flagging the risk of deflation.”

Elon Musk, Fed Rate Hikes, and Deflation

Tesla and Spacex CEO Elon Musk tweeted Friday evening that “A major Fed rate hike risks deflation.” His tweet has attracted much attention. At the time of writing, it has been liked 80K times and retweeted almost 7K times.

Tesla CEO Elon Musk Warns a Major Fed Rate Hike Risks Deflation

Comments flooded in with some agreeing with the Tesla CEO while others insisted he was wrong about the U.S. economy. Real Vision CEO and crypto investor Raoul Pal agreed with Musk, tweeting: “Yup. Pretty much baked in the cake.”

Northmantrader founder and lead market strategist Sven Henrich stressed that the danger is the Federal Reserve being “obtuse to consequences.” He elaborated that the central bank was “Too slow to react in the first place” and is “now slamming the foot on the brakes,” emphasizing that the Fed is “too reliant on backward-looking data risking breaking things quickly.”

Gold bug and bitcoin skeptic Peter Schiff offered a different view, replying to Musk:

It risks hyperinflation. Higher debt service costs, a severe recession, exploding Federal budget deficits, and collapsing asset prices will produce a worse financial crisis than 2008. The Fed will respond with massive QE, tanking the dollar and sending consumer prices soaring.

Politicians also chimed in on the conversation. Congresswoman Nancy Mace (R-SC) opined: “If [U.S. President Joe] Biden and [House Speaker Nancy] Pelosi hadn’t spent trillions of dollars we don’t have, we wouldn’t be having this conversation…”

Federal Reserve Chairman Jerome Powell recently emphasized the central bank’s hawkish stance in his speech at Jackson Hole, Wyoming. He noted that the Fed’s fight against inflation will “bring some pain.” Many people are concerned about the Federal Reserve raising interest rates, including Senator Elizabeth Warren (D-MA), who stated that she is “very worried” that the central bank’s action will tip the U.S. economy into recession.

Musk’s tweet followed an analysis by Ark Invest CEO Cathie Wood who warned about deflation on Wednesday. “The Fed is basing monetary policy decisions on lagging indicators: employment and core inflation,” she detailed, elaborating:

Leading inflation indicators like gold and copper are flagging the risk of deflation. Even the oil price has dropped more than 35% from its peak, erasing most of the gain this year.

“One of the best inflation gauges, the gold price peaked more than two years ago in August 2020 at $2,075 and has dropped about 15%. Lumber prices have dropped more than 60%, copper -30%, iron ore -60%, DRAM -46%, and crude oil -35%,” Wood explained.

“Further downstream, retailers seem to be swimming in inventories which they could be forced to discount aggressively to clear the shelves for holiday merchandise. The surprise could be deflation in the CPI and PCE deflator by year-end,” the executive added. “In the pipeline, inflation is turning into deflation.”

Musk said in August that inflation has peaked and “is going to drop rapidly.” He also predicted that we will likely have a recession lasting about 18 months.

Do you agree with Elon Musk that a major Fed rate hike may lead to deflation? Let us know in the comments section below.

Kevin Helms

A student of Austrian Economics, Kevin found Bitcoin in 2011 and has been an evangelist ever since. His interests lie in Bitcoin security, open-source systems, network effects and the intersection between economics and cryptography.

Image Credits: Shutterstock, Pixabay, Wiki Commons

Disclaimer: This article is for informational purposes only. It is not a direct offer or solicitation of an offer to buy or sell, or a recommendation or endorsement of any products, services, or companies. Bitcoin.com does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.

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Grayscale Launches New Investment Product While Bitcoin Trust Crashes to 35%

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Grayscale Launches New Investment Product While Bitcoin Trust Crashes to 35%

Grayscale Investments is offering investors an opportunity to invest in Bitcoin mining hardware in the bear market.

The new investment opportunity, called the Grayscale Digital Infrastructure Opportunities LLC (GDIO), is now open to qualified individual and institutional investors, even as the asset manager allows ETF-related court proceedings to run their course.

Grayscale putting capital to work

Grayscale will use investor capital from the GDIO to buy mining hardware for a minimum of three years. It will use the hardware to mine and subsequently sell bitcoin. Mining is the energy-intensive process undertaken by a computer network to create a new transaction block and verify it. The node in the network that creates the block is known as a miner. A miner is rewarded in bitcoin for his effort, which typically requires large amounts of cheap electricity and computing power.

Part of the proceeds Grayscale will earn from its efforts will be paid out quarterly to GDIO investors.

“Grayscale’s unique position at the center of the crypto ecosystem enables us to create offerings that allow investors to put capital to work through differing market cycles,” stated Michael Sonnenshein, Grayscale’s chief executive.

GDIO represents another way the company has sought to provide investors with exposure to bitcoin without directly holding the asset.

Investors can also purchase shares from its GBTC trust and gain exposure to bitcoin through Grayscale’s legally regulated business in the U.S.

But Grayscale has a problem. Because investors cannot redeem shares in the trust for bitcoin, the price per share has dropped drastically, trading at a discount of 35% to its Net Asset Value. 

At the close of the trading day on Oct. 5, shares were trading at a shade over $12, despite being backed by $18.45 worth of bitcoin.

To mitigate this discount, Grayscale has pursued the conversion of GBTC into a spot bitcoin exchange-traded fund, which has so far been unsuccessful. The U.S. Securities and Exchange Commission denied the company’s latest application in June 2022, prompting Grayscale to pursue legal action against the federal agency. 

Nic Carter of Castle Island Ventures, a venture capital firm focused on early-stage public blockchain startups, said that Grayscale could wind down the ETF:

watching the GBTC discount. looks like ATL at -35%. on top of discounted spot BTC. paths to breaking open the piggy bank: SEC can approve ETF conversion, or Grayscale can wind down the trust themselves if they so choose.

— nic carter (@nic__carter) June 17, 2022

The SEC maintains that spot bitcoin ETFs are prone to underlying market manipulation.

Grayscale undeterred by SEC rejection

Despite consistent resistance from U.S. regulators, Grayscale launched its first European ETF in May 2022, which tracks the Bloomberg Grayscale Future of Finance Index, offering customers exposure to institutions at the crossroads of finance, technology, and cryptocurrencies.

Grayscale raised investors’ eyebrows recently when it announced that it had applied with the SEC to distribute 3 million ETHPoW tokens that were distributed to all Ethereum (ETH) holders after the controversial proof-of-work fork went live. 

At the time, Grayscale said it was seeking the rights to sell the tokens and pay out shareholders. 

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All the information contained on our website is published in good faith and for general information purposes only. Any action the reader takes upon the information found on our website is strictly at their own risk.

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Colorado is accepting crypto for tax payments — it could be a mess or a shining example

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Colorado is accepting crypto for tax payments —  it could be a mess or a shining example

Colorado is now accepting crypto for tax payments — but if you choose to use that option, it could change the amount you owe…
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BNB Chain confirms BSC halt due to ‘potential exploit’

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BNB Chain confirms BSC halt due to ‘potential exploit’

Rumors of a significant hack on the BNB Chain were confirmed by the blockchain’s team, with all deposits and withdrawals suspended on the network…
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