Netizen Premium | Bitcoin Deep Dive #14

Why Higher Inflation Will Eventually Take Bitcoin to All-Time Highs

Trump's Tariffs May Set the Stage for Stagflation

The U.S. economy is about to face a perfect storm as the Trump administration's aggressive trade policies collide with an already tight labor market. President Trump's sweeping tariffs on steel, aluminum, copper, and other building materials (imposed through Section 232) aren't just making imported goods more expensive—they're creating ripple effects throughout the economy, with housing soon to be hit particularly hard. Recent economic data tells a concerning story: housing construction permits and starts are dropping, homebuilder confidence is at its lowest level since late 2022, and labor shortages from stricter immigration policies are further driving up costs. This combination of rising prices alongside slowing economic growth would lead to a RISK-OFF macro regime called STAGFLATION, where the Federal Reserve faces the difficult choice between fighting inflation (by raising interest rates) or supporting growth (by cutting rates). With the economy already running hot (economic output exceeding its sustainable level by 1.6% and unemployment below its natural rate), these supply shocks can't be absorbed without further price increases. For Bitcoin investors, this initially may present a headwind as risk assets typically struggle in stagflationary environments, but recent market behavior suggests Bitcoin may be beginning to decouple from traditional risk assets—as we witnessed during the most recent market correction when Bitcoin recovered faster than equities—potentially signaling a shift in Bitcoin's correlation patterns as we approach the USD endgame.

TLDR: Near-term tariff-induced stagflation may temporarily pressure Bitcoin as a risk asset, but the Fed's inevitable pivot toward growth support will ultimately create a bullish monetary backdrop.

Why the Fed Will Likely Surrender to Higher Inflation

The Federal Reserve faces a growing dilemma that will likely force a monumental policy shift—one that could catalyze Bitcoin's secular bull case. Federal Reserve Chair Powell recently doubled down on the Fed's sacred 2% inflation target, but a confluence of economic realities suggests this commitment may be abandoned by whoever leads the Fed after his term ends in May 2026. The math simply doesn't add up: cyclical inflation models consistently signal that the trend rate of core PCE inflation in today's economy runs between 2.5-3%, meaning the current 2% target is artificially low and increasingly difficult to achieve without more restrictive monetary policy. The real problem lies in America's ballooning government debt, which now accounts for approximately 35% of global public sector debt—continuing to force this debt into a 2% inflation framework would require keeping interest rates painfully high, strangling economic growth and preventing smaller businesses and consumers from accessing affordable credit. A future Fed Chair, potentially under pressure from the Trump administration's growth agenda, could solve this dilemma by simply raising the inflation target to 3%—a seemingly small change that would allow the Federal Reserve to declare victory while cutting rates and restarting bond purchases to help finance government spending. This policy shift would amount to a tacit admission that the U.S. has chosen debt monetization (essentially creating money to pay for government spending) over fiscal discipline, creating the perfect environment for assets with fixed or limited supply like Bitcoin.

TLDR: Bitcoin stands as the ultimate protection against the coming inflation target increase—a monumental policy shift that would confirm governments have chosen money creation over fiscal responsibility.

Below, we’ll dive into Bitcoin’s on-chain data to see what is going on underneath the hood: