Billionaire VC Warns Fed Stimulus Risks Triggering “Deflationary Supercycle” That Could Crush Main Street

Appearing for the third time in 6 weeks, Social Capital founder and former Facebook exec Chamath Palihapitiya joined the hosts of CNBC’s “Squawk Box” for an interview Tuesday morning where he warned that the Fed’s coronavirus response will create serious long-term problems for the American economy.

Palihapitiya has participated in a series of widely-discussed interviews on CNBC in recent weeks, including here and here.

Chamath started the interview by going all-in on the Fed and the White House’s response to the economic crisis caused by the coronavirus, skewering programs like ‘PPP’ for funneling money to companies that didn’t really need it and once again bashing the Fed for once again pumping up asset prices while placing Main Street at immense risk.

“There should be no doubt now that we’ve completely divorced the economy from stock and bond markets…” Palihapitiya warned.

The end result of this trend, he added, will be a “deflationary supercycle” as the Fed’s abuses come back to haunt the American economy and the dollar.

“All this money going in to prop of companies – what you are going to start or accelerate is a really bad deflationary super cycle.”

“There should be no doubt now that we have completely divorced the economy from the stock and bond markets,” says @Chamath. “All this money going in to prop of companies–what you are going to start or accelerate is a really bad deflationary super cycle.” pic.twitter.com/dtQAomEdJC

— Squawk Box (@SquawkCNBC) May 12, 2020

With the Fed’s balance sheet well on its way to $12 trillion by year’s end, levels that were deemed to be unfathomable just months ago, Palihapitiya reiterated that the rebound in equity markets has done almost nothing to put food on people’s plates, or assuage the anxieties of small business owners, as an NFIB report released earlier would suggest.

“Asset inflation does not solve income disparity. It actually doesn’t solve full employment. It doesn’t do any of the things we need it to do for it to be a robust economy. What it does is it allow people who play in the financial markets to make money,” says @chamath. pic.twitter.com/0l9E1CGObM

— Squawk Box (@SquawkCNBC) May 12, 2020

Exactly how might this “deflationary spiral” happen? The former Facebook executive explains that by doling out money to massive corporations that have spent the last 10 years borrowing money to buy back stock, while paying workers more money in unemployment benefits than they earned in wages, creates a perverse system of incentives that, once the crisis has ended, could create the same economic dynamic that played out in Japan during the 1990s.

With the flood of cheap money, the financially shell-shocked consumers will save more, preventing the consumer-driven economy from generating the roaring growth needed to compensate for the crisis, while leaving the US in a kind of limbo as growth slows, prices fall, savings rise (despite rates remaining extraordinarily low, or negative) and productivity lapses while employment never really recovers.

The best example of this is, of course, Japan. We’d note that Zero Hedge has been warning about the “Japanification” of the US economy and monetary policy for some time).

“If you don’t break this cycle and teach a new pattern of behavior, we’re going to be looking at a Japanese-style deflationary period,” says @chamath on the Fed’s actions during the crisis. pic.twitter.com/FeGl7vSrln

— Squawk Box (@SquawkCNBC) May 12, 2020

Moving on, Chamath also joined Donald Trump in expressing sympathy for Elon Musk in his battle with California, a campaign that has turned public opinion decidedly against Tesla. Chamath, who has long praised Tesla to the consternation of the $TSLAQ community, urged Alameda County to “sit down” with Musk and Tesla and work out a mutually acceptable compromise.

“Alameda should sit down with Tesla, have them walk through their entire testing mechanism, the protocols they are taking and actually make a decision and not fight him [@ElonMusk] over Twitter,” says @Chamath. pic.twitter.com/ucamTp9bk1

— Squawk Box (@SquawkCNBC) May 12, 2020

Finally, Palihapitiya joined PTJ in praising bitcoin, arguing that the pioneering cryptocurrency is the only legitimate asset that has “decoupled” from the rest of the market, and that by it’s very nature, the declining trust in the traditional financial system could be a huge boon for bitcoin.

“Now all of a sudden even he [Paul Tudor Jones] is looking at #btc and the reason is because we are in this massive deflationary spiral,” says @Chamath. “I still struggle to find anything that is as uncorrelated to anything else and to everything else than #bitcoin.” pic.twitter.com/TzIG9H05dq

— Squawk Box (@SquawkCNBC) May 12, 2020

Indeed, the inherently deflationary BTC will perform even better in real terms as the value of the dollar weakens, one of several important market dynamics explored in greater depth by PTJ – one of the most successful traders of his generation – here.