In her latest analysis, Lynn Alden of Lynn Alden Investment Strategy has put the question of fiscal dominance and how AI is affecting inflation front and center. The firm’s founder offers a view on the forces at play in the current investment climate, from new technologies to the constraints facing central banks and unbridled government expenditure.
Fiscal Dominance: Limits of Central Bank Power
Alden sees fiscal dominance as the root cause of both the public debt buildup and the persistence of inflation. When government spending is left unchecked, it erodes the Federal Reserve’s capacity to rein in prices with the usual levers such as interest rate changes. High levels of debt render monetary policy less potent, relegating the central bank to something of a backseat. As she has noted in an article for Bitcoin Magazine, the Fed’s sway over credit and lending is limited when it is fiscal policy that is dictating the economy. It is a dynamic that makes taming inflation nearly impossible, and one that has both investors and policymakers worried.
AI’s Limited Role in Reshaping Inflation
There is no question in Lynn Alden’s mind that AI has the potential to drive down the cost of white-collar services. Yet she would be the first to point out that one should not expect it to curb monetary expansion or do much to reduce the price of scarce resources and physical commodities. The technology might well improve productivity in certain areas, but its influence on the main forces behind inflation is limited, particularly in an environment of fiscal dominance. As she makes clear in her piece for Bitcoin Magazine, no amount of technological advancement can counteract the kind of inflationary pressure that comes from excessive government spending.
Asset Strategies: Gold, Bitcoin, and Stablecoins
Alden is unshaken by the fact that gold has pulled back some 25 percent from its peak; she maintains a long-term bullish stance on both it and Bitcoin and would include them in any well-constructed portfolio. In her view, they are the proper hedges to have when considering the monetary debasement and fiscal dominance at play. As for stablecoins, Alden concedes they put a little incremental demand on the US dollar, but nothing compared with what is seen globally. All in all, she is cautiously optimistic about alternative assets as an element of a diversified strategy.
Central Bank Interventions and International Risks
There is a risk that the Federal Reserve will be put in a position where it has to backstop the Treasury bond market when liquidity becomes acutely strained, Alden cautions. She makes a comparison with the 2022 UK gilt crisis as an example of what can happen and says these kinds of moves are evidence of how vulnerable sovereign debt markets are under fiscal dominance. Looking abroad, she notes Japan’s considerable reserves and the way pension funds have been deployed to protect the yen; for anyone considering a speculative play against the currency, that makes for hazardous ground. In the end, it is all part of the intricate relationship at work between central banks, fiscal policy, and global investment.
This article reflects the channel author’s opinion and is not investment advice.
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Source — Bitcoin Magazine: https://www.youtube.com/watch?v=g7ZRC7Bhc3I
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