How cryptocurrencies will change the current economic structure (Part #2)
The justification of the intrusion into the economic environment by a central authority, cultivated over time by economists who thought demand was the engine of economic growth, was initially given birth by Keynes, and then strengthened by Friedman, in the wake of the Great Depression of the ’30s. Keynes suggested that the government should borrow its way to prosperity. Instead, Friedman suggested that the FED should find the way to prosperity for the economy by pumping more money. In any case, both pointed the finger at a lack of aggregate demand. Needless to say, these are just fairy tales. The ability of a market player to push demand is determined by his ability to produce goods and services. That is, the more an individual is able to produce, the more he/she will have the opportunity to acquire other assets.
In fact it is through our production that we are able to pay for all those goods that we consider most useful for our existence. Without this fundamental passage, there would be no creation of wealth, nor would there be an improvement in the specialization of the supply of goods. So a reasoning that considers demand an independent parameter is fallacious, because what fuels the economy is not the demand as such but the production of goods. The producers, therefore, are the engines of an economy; or better to say entrepreneurs. Their ability to anticipate the future will allow them to offer certain goods and services that they expect to sell in the market. The more accurate their prediction, the more successful they will be, the faster a company will succeed in prospering. Having to do with uncertainty, they must study it in depth. Their calculations have to be as correct as possible.
This structure of society and production dismantles the Keynesian apparatus, because the entrepreneur employs human resources and capital resources before consumer demand shows itself. If successful, there will be a correlation between the demand for its assets and the profitability of the company. It can not be denied that production precedes consumption, so the economic environment must be as genuine as possible so that entrepreneurs can direct production in the best possible way in accordance with consumer needs.
No government or central bank can change the fact that their tricks will be useless when it comes to stimulating effective demand. If we want to increase our consumption capacity, we need to increase the capacity to produce first. This dependency can not be disavowed by monetary pumping or public spending. On the contrary, the loose fiscal and monetary policies will hinder the signals of the market, making them more turbid; as a consequence they will impoverish the economic environment, going to erode the actual demand. If then you really care about production and prosperity, you should abolish all those methods that facilitate the creation of fiat money and you should drastically cut public spending.
Instead, our monetary politburo has blindly followed the Keynesian and Monetarist dogmas, adopting those measures that waste wealth rather than create it. In fact, the fake economic recovery that media mainstream are talking about has been fueled by ultra low interest rates. Apparently low-cost funds pushed companies into production lines not required by genuine market demand, pushed families to consume beyond their means and pushed the public sector to spend more. This apparent recovery, however, will disappear once the aforementioned economic measures will be reversed, making a recession far worse than the previous one.
The intrusion of central banks into the economic environment has an even more pernicious effect: it makes investors believe that there is a safety net capable of safeguarding them despite their economic mistakes. It created the illusion that uncertainty can be overcome, embedding a growing dependency on central banks machinations. They cannot wield such a power. Central banks, through their unprecedented monetary policies, have pushed investors and entrepreneurs into a labyrinth of mirrors; they have disguised their harmful actions through persuasive appellations as “forward guidance”; they led the market actors to believe that recessions could be abolished, when the very essence of these interventions is to create a cycle of boom/bust.
The only thing that central banks can do is redistribute wealth within the economic environment, not create new one. They redistribute it to the first receivers of the newly created fiat money.
But once real interest rates start to rise again, then we can be sure that a bust is not so far. For example, the FED wants to tighten its balance sheet because of the improved conditions of the American economy. According to forecasts, by October this year the rate of reduction will have reached $50 billion a month, bringing the FED balance sheet by 2020 to reach $2.8 trillion (still greater than $1.9 trillion compared to the start of the Great Recession). Pay attention, however, because although there is the intention to carry out this reduction, it will not be effective, because the proceeds from the sale of the securities in its possession will be reinvested in the same securities if revenues exceed the imposed reduction rate.
Needless to say, therefore, that the FED would continue to influence the money and credit markets, because a total abandonment of its active role in these markets is not in sight. In fact, the last thing that Eccles Building wants is a surge in the interbank rate, consequently a contraction of the money supply will not become evident as long as the following conditions remain in play: the ability and the willingness of the commercial banking sector to expand their balance sheets, and the appetite of investors for the securities sold (sovereign bonds and MBS, mainly).
But be careful, because given the current interconnection of the world financial system, the catalyst for an economic crisis could not be exclusively internal. In fact, after the Japanese QQE, where the BOJ has literally bought everything (government bonds, equities, ETF, Japanese corporate bonds, Japanese REITs), it seems that the birthplace of the quantitative easing is pulling the oars in the boat. It is news of a few days ago that the BOJ budget fell by ¥444 billion in December; not a large sum compared to a ¥521.416 billion balance sheet, but it is the first month that BOJ purchases fall into negative territory.
The sacrificial lamb in this case is represented by the JGB, that is, the Japanese sovereign bonds: on December 31 had fallen by ¥2,900 billion. In short, it is very likely that the BOJ will simply let them mature without renewing purchases. Even if this decline seems almost imperceptible if we consider the total assets, amounting to 96% of the Japanese GDP, it is interesting to note that it coincided with the will of the FED to restrict its balance sheet.
And let’s not forget that last April the ECB cut its QE from €80 billion a month to €60 billion a month, and from this year a further cut is expected up to €30 billion per month. As a result it seems that the propellant supplied to the financial markets by QE is now fading, leaving empty hands all those who thought that central banks were omnipotent. Without forgetting, of course, the mammoth Chinese economy, which despite the numbers say it is growing 6.5% a year, is fueled by a growing money supply to 14% a year and a public debt now quadrupled since the beginning of the Great Recession. This scenario would not be worrying if in return there were solid economic returns, while instead almost half of the companies in the Hang Seng index contract debts to repay the interest on the old ones and now China needs about four times the debt it had needed in 2007 to generate the same growth.
The overcapacity of the Chinese industry is preparing to invade the rest of the world and the gigantic real estate bubble has made high-risk debt attractive. China is also a big risk, because while the Chinese Communist Party shows its political and economic muscles to the world, it is ignoring the financial time bombs that its reckless search for absurd statistical records has triggered.
=> Click the following link to read Part 1 of this series: https://medium.com/@melis.io/how-cryptocurrencies-will-change-the-current-economic-structure-part-1-3723c5a5f2f
