IIf you’re a crypto investor, it’s hard not to think about the red ink in your wallet right now, as concerns over US Federal Reserve interest rate hikes have sent token prices plummeting.
But if you want to think about the long-term outlook, it’s better not to look at your “DeFi” holdings but at your “TradFi” portfolio of stocks and bonds. Although the losses there have not been as steep as in crypto, these markets are also collapsing, and so much so that they will eventually trigger a political response, which will impact crypto.
you read Money reinvented, a weekly look at the technological, economic and social events and trends that are redefining our relationship with money and transforming the global financial system. Subscribe to receive the full newsletter here.
The Fed is currently in hawkish mode as it is determined to stifle inflation. But it’s easy to imagine that once Wall Street’s pain trickles down to the mainstream economy – which it certainly will – and it starts to fuel politics relaxation – which will certainly be the case – the central bank will become accommodative again. After that, economic circumstances in the post-coronavirus pandemic world could quickly become so dire that, with no other options to deal with them, the Fed and other central banks will revert to the same policy framework of the past decade. and a half, with interest close to zero and quantitative easing (QE) the norm. And that will be the basis for a crypto rebound.
The complicating factor here is what this could mean for the reputation of the Fed. If he so quickly reverts to a political solution that has created wild distortions and contributed to the inflation woes of the past year, could that show that our entire monetary system is broken? Could this finally be the time when people recognize that we need a new model?
After so many false starts, I hesitate to declare that the next cycle is one in which crypto and Web 3 technologies and ideas rise above the fashionable way in which traditional investors and businesses have otherwise tendency to engage with them and become rather better integrated into the global economy. But I think a dynamic where central banks feel compelled to provide ‘helicopter money’ could have an ’emperor’s new clothes’ effect where people question the prevailing financial paradigm and look for alternatives .
Broken government = broken money
Before seeing what awaits us, let’s go back 14 years to solve the fundamental problem.
In the aftermath of the 2008 financial crisis, it became clear in the United States that a failure of federal government action made monetary policy the only lever to stimulate economic growth. This dependence is now, no doubt, even more entrenched.
This was not always the case. In the 1930s, the solution to the Depression lay in rolling out massive government-funded public works projects and creating a safety net for the unemployed. This ultimately spurred economic recovery and created a basic infrastructure upon which the great expansion of the American economy in the 20th century was built.
But in 2009 and beyond, the Obama administration was thrust into battle with a Republican-controlled Congress. Both sides have unexpectedly sought a bipartisan deal to back fiscal spending plans, but aside from the controversial trillion-dollar bailouts that kept Wall Street from imploding, nothing substantial to meet the needs of traditional America was never adopted. Stimulus initiatives became piecemeal and politicized and ultimately fell short of giving the US economy what it needed to grow.
Read more: David Z. Morris – Will rising interest rates sink the crypto ecosystem?
It was a deeper problem than most people recognized. It directly challenged trust in the democratic process, supposed to be the mechanism by which public resources are distributed in the service of a common national interest.
Libertarians, many of whom the crypto community lays claim to, might argue that the best thing the government could do was step aside. But their idealism tends to ignore pre-existing market distortions created by Wall Street’s politically privileged place in the economy, a privilege that manifested itself most clearly during the housing bubble that preceded the crisis. As such, “going out of the way” was itself a biased action. US banks were bailed out, but everyone else got crumbs.
The result of our politicians abdicating their responsibility in this regard is that the burden of stimulating a moribund economy has fallen on the Fed, which has been forced to cut interest rates so aggressively that it has quickly reached the so-called limit zero. With no room left to go below zero percent, quantitative easing became the solution. Buying bonds, and later other financial instruments, was a way to keep market borrowing rates low for companies that use capital markets to raise funds.
The trillions of monetary expansion kept things afloat, but also proved to be a brutally brutal instrument. Savers have been harmed, borrowers have been helped. Hedge funds and other institutional owners of stocks, bonds and other financial instruments posed as bandits as tens of millions struggled to keep their heads above water.
Either way, QE became the default option whenever times got a little tough, which is what we’ve seen during the pandemic. The Fed instituted what became known as “Infinity QE,” an unlimited commitment to keep buying assets to keep rates low. Combined with the demand and supply distortions caused by the economic disruptions of the pandemic, it was a recipe for runaway inflation that eventually arose.
So what now?
Fast forward to 2022. The political divisions are arguably even worse than they were during the Obama era. And confidence in government to solve our economic challenges is at rock bottom.
So what happens when this year’s financial meltdown leads to the inevitable decline in funding for everything from start-ups to homes? Growth will stagnate dramatically and jobs will be lost. And while this slowdown in demand should help dampen inflation, there is a legitimate concern that COVID-related supply chain issues mean that shortages and price appreciation will continue.
It is hard to believe that Congress will accept an aggressive stimulus to solve this problem. So, as the midterm elections approach and the issue becomes politicized, the pressure will increase on the Fed to act.
But what then? The effectiveness of monetary policy depends on trust in the overall system – that people believe the Fed will protect the value of the dollar even if it boosts the money supply. It is not certain that this confidence will last in response to such an about-face.
In other words, the failure of the overall system, writ large, will become apparent. And this is where bitcoin and blockchain solutions provide the alternative.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.