Elon Musk Dons a Bitcoin Mining Hat, and Fed Downplays Inflation Risk

Bitcoin seems to have pulled out of its steep nosedive, and behold! The Oracle of SpaceX may be preparing to give his blessing to Bitcoin mining.

Bitcoin plunged below $32,000 Sunday following Elon Musk's announcement that Tesla wouldn't accept the cryptocurrency as payment for its electric cars. Then, in a tweet that many misinterpreted, Musk appeared to say that Tesla had sold some of its Bitcoin holdings. It hadn't.

Earlier, Musk's announcement that Tesla had invested $1.5 billion in Bitcoin sent the crypto higher.

Next, Musk expressed doubts about the energy used in Bitcoin mining, the computer-driven solving of complex hexadecimal puzzles to keep the blockchain fresh and earn new Bitcoins as reward.

Elon Musk said Tesla won't accept Bitcoin
On the heels of tweets from Elon Musk indicating he was moving away from Bitcoin due to environmental concerns over mining practices for the crypto, Musk appeared to soften his stance, tweeting out, "Spoke with North American Bitcoin miners. They committed to publish current & planned renewable usage & to ask miners WW (worldwide) to do so. Potentially promising." Pool / Pool/Getty

But on Monday, Musk tweeted: "Spoke with North American Bitcoin miners. They committed to publish current & planned renewable usage & to ask miners WW (worldwide) to do so. Potentially promising."

Bitcoin's price rose.

Next, Michael Saylor, CEO of Microstrategy and often credited with igniting the recent bull market by investing heavily in the crypto, said he had gotten Musk and some Bitcoin miners together to form the Bitcoin Mining Council to promote sustainability.

On the strength of two recent tweets, Bitcoin Armageddon has been avoided—at least for now.

So, what's the fuss?

In part, the answer may be China's decision to wrap its unwillingness to give up its monopoly in issuing currency by clamping down on Bitcoin citing environmental concerns guaranteed to play in the West.

But China's environmental concerns should not be taken at face value.

China generates the majority of its electricity at coal-fired plants and continues to build new facilities fueled by what were called black diamonds in the industrial age.

"In 2019, coal made up 57.7% of China's energy use," ChinaPower, a division of Washington-based Center for Strategic and International Studies, said in a report. "China has consumed more coal than the rest of the world combined. China's industrial sector is by far the largest consumer of coal."

China's economic progress is stunning—it's now the world's second-largest economy—and it has lifted millions out of poverty.

But millions of its citizens may have paid for that progress with their lives.

Air pollution in China and Taiwan is believed to have resulted in as many as 30.8 million premature deaths since 2000, New Scientist magazine reported.

Research published in Nature Energy suggested that thick air pollution blocks the sun's rays and prevents solar panels from operating efficiently in much of China, undercutting efforts to go green.

Beijing began efforts to clean up the air in preparation for the 2008 Olympics, but the nation's export economy is heavily dependent on manufacturing—and that often requires huge quantities of cheap electricity. Coal-fired generating plants are cheap and reliable.

But why fret too much about smog when you can earn kudos worldwide for cracking down on the small amount of power used in Bitcoin mining?

So China and Elon Musk share something in common—both have raised environmental concerns over Bitcoin.

So which argument holds more sway over the world crypto market—one of the world's superpowers, or one of the world's richest men?

"Musk's comments remain extremely influential," Jason Deane, Bitcoin Analyst at Quantum Economics in London, told Newsweek. "His Twitter account has 55 million followers and there are around 106 million to 135 million Bitcoin users worldwide, according to current estimates. The simple maths—percent of Bitcoiners that could be reached through a single account—shows the size of the current problem, although as adoption continues that influence is expected to erode over time."

In mid-day trading Tuesday, Bitcoin changed hands at $38,943.96, up 1.91% in the last 24 hours and up 29.13% for the year. The 24-hour range is $36,498.64 to $39,966.88 The all-time high is $64,829.14. The current market cap is $710.22 billion, CoinDesk reported.

Market Pulse

Friday's report by the U.S. Bureau of Economic Analysis (BEA) may provide insight into a key question: Will consumers continue to spend heavily on durable goods now that the service and travel industries are re-opening?

The answer may hint at the immediate course of inflation, driven higher by strong consumer demand amid a tight supply of goods limited, in part, by kinks in the supply chain.

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A report issues Friday by the the U.S. Bureau of Economic Analysis (BEA) showed that personal consumption expenditures (PCE) increased $6.16 billion, or 4.2% in March. Gary Cameron/File Photo/Reuters

Consumer spending represents about two-thirds of the U.S. economy.

Typically, consumers hunker down during a recession and delay the purchase of durable goods, or products intended to last several years, and spend on the routine living expenses such as food.

But the COVID-19 pandemic reversed the pattern. Forced to stay at home during state-imposed lockdowns, many people bought expensive items such as computers, TVs, appliances and exercise equipment.

For many, the lockdown also meant adopting The Old Man of the Mountain look— hair grew long and shaggy as barber shops closed or people simply avoided going out. In short, spending on personal services gave way to spending on durable goods.

People also saved at a record pace during the lockdown.

The Kansas City Fed said savings as a percentage of disposable personal income rose from 7.2% in December 2019 to a record high of 33.7% in April 2020.

"That means that for every $100 of disposable income, consumers saved $7 in December and by April consumers were saving almost $34 of every $100 of disposable income," A. Lee Smith, a researcher at the Kansas City Fed, said in a report.

Disposable income is the amount an individual or household has to spend or save after all local, state and federal income taxes have been deducted.

Last month, the BEA said personal consumption expenditures (PCE) increased $6.16 billion, or 4.2% in March.

Pent-up demand drove the increase and millions of people returned to work as the economy reopened. The unemployment rate dropped from 14.7% in April 2020 to 6.1% last month, giving many a paycheck for the first time in months.

Confident consumers spent—and ringing cash registers sent inflation higher.

Earlier this month, the U.S. Labor Department said inflation increased at the fastest pace since September 2008. The Consumer Price Index (CPI), a measure of a basket of goods plus energy and housing costs, jumped 4.2% from a year ago.

The jump in inflation exceeded Wall Street estimates.

Federal Reserve Chairman Jerome Powell
Federal Reserve Chairman Jerome Powell has predicted that any increase in inflation above the Fred's 2% target will be "transitory." Greg Nash-Pool/AFP via Getty Images

Jerome Powell, chairman of the Federal Reserve, the nation's central bank, believes any increase in inflation above the 2% target will be "transitory."

But it looks like inflation will persist at least into next year.

"We are going to see more inflation. That's not really a surprise," James Bullard, president of the St. Louis Federal Reserve Bank, told Yahoo Finance. "I think it's mostly temporary but that some of it will flow through to inflation expectations and we will get inflation above 2% this year and into 2022."

Others expect inflation to continue into 2023.

High inflation erodes purchasing power, especially among those at the lower end of the wage scale who spend a larger percentage of their income on rent and other basics.

Persistent inflation could become an issue in next year's midterm Congressional elections. Democrats hold narrow majorities in the House and Senate.

Spending heavily on personal care and recreation might ease inflationary pressure on consumer goods—unless consumers sitting on fat savings accounts are eager to spend on both goods and services.

Those who kept their jobs and worked from home during the pandemic fattened their savings accounts while many in hourly service jobs were let go during the COVID-19 lockdown and struggled to scrape by.

That suggests that companies catering to upscale workers will do better now that people are spending again.

"More than 50% of U.S. consumers expect to spend extra by splurging or treating themselves, with higher-income millennials intending to spend the most," McKinsey & Company said in a report.

"Around half of consumers who plan to splurge are pandemic-fatigued and intend to spend soon, particularly on discretionary categories such as apparel, beauty and electronics. The other half is waiting for the pandemic to fully resolve, and plan to splurge mainly in experiential categories such as restaurants and travel."

That sounds like the economy will have its cake and eat it, too, suggesting no immediate reduction in inflationary pressure.