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“Evil spawn of the financial crisis” And Financial Yellowstone: The Future Standoff Prediction

13 December 2018 08:54, UTC
Oleg Koldayev

People living in the interests of the digital economy have already begun to forget the year of 2015 - the time before the leap in the value of digital coins. It may seem that the high price appeared by itself and has always been here. But today's situation on the market makes us recall that virtual assets have not been the easiest way of the establishment. Economists estimate that today, December 12, 2018, for the first time in four years, the 14-week relative strength index (RSI - the indicator of technical analysis of stock trends) was below 30.00. And this means that at any moment, the downtrend on the market can be replaced by the uptrend.

“Many people believe that cryptocurrencies have “finished their play” and are in the process of an irreversible decline,” the Harvard economics and the national policy professor Kenneth ROGOFF comments. “But, probably, their value will not fall to zero.”

According to Kenneth Rogoff, the states are not intent upon tolerating virtual currencies, due to the fact that they are supposedly used for money laundering, and they want to regulate the market. However, if numerous coins lose their decentralization and anonymity - their main qualities, they will no longer be attractive to consumers. The digital market is now located in this semantic plug and the professor believes that it is impossible to predict the price of assets objectively - it can be either $100 and $100,000.

“Economists, including me, are well aware that price bubbles accompanying assets lacking natural value, burst sooner or later,” the economist concludes. “The prices of assets with real fundamental value do not strongly deviate from the historical common datum. Money imitated by states is unlikely to have value only by virtue of a social contract, as it is happening in the case of cryptocurrencies; governments pay salaries with their money, tax them, and so on.”

We would find difficult to argue with this statement: at first glance, digital assets are worth nothing other than taking them as a value to a small stratum of the population; on the other hand, it is the population of very many countries. In addition, there is another side of the problem: is it possible to say that there are absolutely no material assets behind decentralized currencies? And in general, how is value formed?

Trump’s signal

The German philosopher Hegel once said: “That which most accurately personifies the process around is the most beautiful”. Simply put, trend generates value. Cryptocurrencies appeared on the wave of the 2008 financial and economic crisis. The birthday of bitcoin is considered to be October 31 - the peak time of the cataclysm. The turning point in the fate of the coin was 2017: the time of Brexit, the Catalan demarche, and the first statements of Donald TRUMP about the return of the dollar to the US economy. Then the cost of BTC increased about 20 times, to $19,000.

Other cryptocurrencies also behaved in a similar way: they grew when destabilizing factors were strong in the world economy, and crashed when the situation got better. But even while dropping, small leaps of value during political events are noticeable. The latest example is the Parisian performances of the "yellow vests": the bitcoin exchange price reacted quite sensitively.

We can say with confidence that macroeconomic and geopolitical factors affect the cost of cryptocurrencies more than it is commonly believed. If we are right, the price of BTC will increase as soon as a new global cataclysm happens. And three factors arising from each other can trigger it.

“Evil spawn of the financial crisis”

The board member of the European Central Bank (ECB), Benoit COEURE, called Bitcoin "the evil spawn of the financial crisis." “Few people remember that Satoshi Nakamoto inserted the title of the Time article about financial assistance to British banks, published in early 2009, into the first Bitcoin block,” he said.

Indeed, in this part, economic theory coincides with the theory of evolution: useful mutations of organisms are fixed during catastrophes and new ecosystems following them. Cryptocurrencies can be called such a useful mutation. However, the question remains: has the 2008 crisis been completed to the end and has a new ecological niche appeared?

According to the International Monetary Fund (IMF), 85% of the economies that survived the collapse of banks have not returned to the pre-crisis indicators, although 10 years have passed since the bankruptcy of Lehman Brothers. Moreover, the long-term effects of the crisis have a stronger impact every year. In the countries that have experienced financial turmoil, the birth rate continues to decline, the income inequality is growing, and the quality of migration is declining (not qualified specialists, but ordinary people who are already overtaken by poverty move to developed countries). In addition, economic systems have become more vulnerable: the ratio of the GDP of developed countries and their national debt increased from 35 to 52%.

The World Bank is more optimistic in its assessments, its experts believe that the crisis is over and, therefore, they have raised long-term forecasts concerning leading economies. But they also note a high risk of recession: the probability that the global economic growth will be below 2%, with a base rate of 3%, is 21%; the probability that the economic growth will be higher than the base rate is only 16%.

At the same time, many experts and analysts use dry figures and do not take into account the main negative effect of the 2008 crisis – the violation of the social contract. After the collapse of the Fannie Mae and Freddie Mac mortgage giants (the holders of private debts of approximately $14 trillion), millions of US citizens lost their homes and are indebted to banks for over $5 trillion. Moreover, the collapse occurred just due to the fault of banks and operators who were carried away by the speculations of “junk” assets (Penny stocks). But instead of helping the citizens who had suffered, the state began to save the organizations. For example, the United States government actually bought out Fannie Mae and Freddie for $148 billion but did not spend a cent on helping the society. Thus, pulling institutional fraudsters out of the trap, the political elite disavowed the social contract inherent in the very principle of democracy.

Authorities of many countries, from America to Europe, from Russia to China, acted in a similar way. After this, citizens’ confidence to state institutions, including currencies, was shattered.

Simple decisions are the way to the financial hell

The consequence of the collapse of the social contract was the loss of political orienting points, which led to an increase in protest sentiment and populism. Traditional parties began to lose voters and were forced to make primitive decisions. Brexit is a striking example. Being unable to make difficult and, probably, unpopular decisions on the problem of migrants, due to lack of credibility, the British authorities followed the simplest, but hardly the right way - they announced a referendum, where, of course, populist sentiments won.

In succession to Britain, the referendum was held in Catalonia, the Italian Veneto and the Dutch Flanders were close to the same decision. United Europe, bound by the complex system of mutual agreements and commitments, began to waver.

The victory of Donald Trump in the US elections became the culmination of populism: a lover of simple decisions, the American president chose the most dangerous economic way from the US point of view. To improve the well-being of citizens, he considered it to be necessary to return investments to the national economy. In other words, to invite the dollar to its homeland. However, in view of the fact that the entire world economy is actually based on the American currency, dollars in the global market began to be in short supply, and the monetarist rule does not allow printing new ones.

In addition, the spontaneous revitalization of the national economy has excessively strengthened the dollar, which puts pressure on developing Asian markets. The Nobel laureate Paul Krugman has already noted that the current economic situation is reminiscent of the events of 1997-1998 when the global crisis began with the stock markets of Southeast Asia.

When Yellowstone will blow up

If the markets of Southeast Asia crash once more, then in the current unstable economic situation, they can snowball the entire US stock market, where the derivatives bubble of $700 trillion has grown to gigantic size.

Warren Buffett has already called these derivative financial assets a weapon of mass destruction for the economy. Other experts compare the possible crash of the market with the blowup of Yellowstone. If this bubble bursts, the 2008 mortgage crisis will seem a child's play, if only because the derivatives market is 10 times bigger in terms of money.

The consequence of this cataclysm will be the lack of liquidity in the financial market. Banks will be forced to cut business credits and seek shelter for their assets, and people will look for a replacement for rapidly cheapening fiat money units. This is where the cryptocurrency will come on stage.

Going back to the words of Kenneth Rogoff: an asset cannot become a generally accepted means of payment if there is no fundamental value behind it. In the case of the global economic crisis, decentralization will be such a fundamental value.

As exemplified by Venezuela, we can see how cryptocurrencies behave in the conditions of the economic collapse. As soon as the government, led by Nicolas MADURO, announced the focus on the development of the digital economy, the mass adoption of virtual assets began. In the economic space of this South American country, a well-defined decentralized two-currency system has formed already: they store the value in one coin and accumulate funds in “heavy”, but protected bitcoins; another currency, the “lighter” DASH, is used as a means of payment. The latter, by the way, has become possible to be used for payments in the international network of snack-bars KFC in Karkas. At the same time, the native bolivar continues its circulation. Isn’t it the symbol of acceptance?

Perhaps, today, the world market is approaching the singularity point - the transition from the post-industrial stage of development to the digital one. Financial traditions, the institution of property, public relations, and the traditional business structure are audited. It is possible that in the period from 2020 to 2025, only those companies will stay afloat, which will be able to diversify both assets and worldview, as well as be able to integrate into the new technological reality in time.