The Interest Rate Fallacy And Cryptocurrency
We hear a lot about interest rates these days. It is in the news since the Federal Reserve, along with other central banks, keep raising interest rates. This challenge is this distorts what is really happening.
Many feel the Fed has artificially kept interest rates low. However, as showing in yesterday's article, its quantitative program, according to their own research, does not have much of an impact. Thus, we have to believe something else is going on. After all, we are looking at declining interest rates for the better part of 30 years.
So what is the cause of this? How can this be when we are told things are so great with the economy?
The answer lies in the fact things have not be strong in a long time. We see this with global growth rates in the developed countries they are horrific. Part of this stems from exactly what we are discussing here.
Fortunately, cryptocurrency can provide the answer.
The Interest Rate Fallacy
This was developed by Milton Friedman during the 1960s and later updated. His view was the evidence that high interest rates were a sign of tight money and low ones associated with easy money simply did not hold. This was from analysis of the Great Depression along with other recessions over the years.
Why so many people miss this is they view it from the demand side. The thinking is that when interest rates are low, people will take out loans. This is a microscopic view of the entire equation.
We will try to piece this all together to show where cryptocurrency is needed and the solution it provides.
Basically, the entire picture has to be viewed through the lens of economic productivity. The economy can be broken down to two phases: prosperous and non-prosperous.
To have the former, money is required. This is something that should be common sense. If you want to expand your business, it takes money. Whether you want to build a new factory, hire more employees, or bring on a new product line, the reality is someone always wants to be paid.
Here is where two important variables enter.
The first affects demand. Going back to the fallacy, many people think that low interest rates stimulate demand. This is because we think of it in terms of consumption. However, there is a bigger piece to this: return.
When things are poor economically. do you think businesses are rushing to expand? Will the restaurant owner take out a mortgage on the house to open a second location? Not likely. At the same time, the CFO is not going to approve a $10 million plant if the ROI is going to be flat (or negative) for the next 5 years regardless of the interest rate charged.
Then we have the supply side which is the second factor. Banks are not excited to lend during rough economic times. Many talk about cheap credit but few mention the idea of access to credit. When banks tighten up lending, money contracts.
Remember, under fractional reserve banking, the money supply only expands when banks are making loans. Of course, through the process of extending credit, business activity also grows. Hence, we see the correlation.
Cryptocurrency To The Rescue
Why would the Fed and other central banks want to keep rates low? If we understand how they work, they are proving Friedman correct.
The central bank is essentially doing what it can to get the commercial banks to lend. Since they cannot be forced, there is a bit of manipulation taking place. Here is where the Fed is basically admitting the economy is not doing well.
Of course, interest rates are driven, long term, by the market. When the Fed Funds rate is moved, the market follows suit (it actually jumps ahead since the Fed foreshadows). However, over a few years, the market takes over. If economic conditions cannot substantiate higher rates, the market breaks from the Fed and reverses course.
The final component is global trade. This expands every year, hence more money, especially the USD, is required. Basically, we are looking at a situation where the lending needs to keep up with the overall thirst for the expansion in global trade. In other words, the bear (not market) needs to be fed.
Slowing growth rates are a sign of economies struggling. Central banks countered with stimulus in many different forms. The result, not surprisingly, is nothing worked. Since the Great Financial Crisis we saw global growth fall behind 70 trends lines. The result is tend of trillions of dollars in lost GDP.
Here is where cryptocurrency can enter the picture. If we understand how the economy is struggling, and why, we get a clear view of where cryptocurrency can step in.
To sum it up: cryptocurrency is money that is needed.
The world is suffering a monetary shortage. The monetary policy of the central banks clearly shows that. Funding simply is not taking place at the level which is required. Banks operate in their own best interest.
Cryptocurrency has the ability to generate and distribute money where it is needed. At present, the infrastructure is not in place. However, as that get built out, we will see the platforms where money is available to anyone in the world. This comes as we reduce the dependency upon intermediaries.
Chicken Or The Egg
Once we understand what is truly taking place, it becomes a game of the chicken or the egg. How do we get a thriving economy without the banks lending, which is needed to get a thriving economy? This is a question the world ignored for the last 20 years.
Here is where cryptocurrency is the solution. It does not depend upon bank lending yet is money that is added to the economy. Take a coin like Hive Backed Dollar (HBD). This is not dependent upon any USD or cash equivalents. Instead, it is backed by HIVE, the other native coin on the blockchain.
Each HBD is another USD equivalent without the banks "creating it out of thin air". To achieve this, no loan is required. Naturally, HBD is a non-player at this time since it has around 10 million in circulation and the global economy requires trillions of dollars. Nevertheless, it shows the gap that cryptocurrency can fill.
There are, of course, other mediums of exchange outside of stablecoins. Thus, the $1 trillion in market cap of cryptocurrency is a decent starting point. The challenge is, as we saw, this really did not move the bar. It shows how deep this hole really is.
Part of it could be the fact we are still at the stage where crypto is for HODLers. Speculation is still the main pastime. We are going to have to move into the funding and investing realm to truly make a difference.
In conclusion, we simply have to keep stressing there is a major need for cryptocurrency. The world GDP is over $95 trillion. This is up from $33 trillion at the start of the century yet is still far below the trendline that was in place at that time.
My estimates are that, if we maintained the growth rate from before, we would be at $120 trillion or so. This is how hungry the bear gets.
As we move further into the digital realm, the amount of money required to feed the technological expansion is only going to keep growing. This is where cryptocurrency is going to fill.
Just think of how much money is going to be required for investing and research to get the global economy to $200 trillion. That is the situation we are confronted with.
Cryptocurrency to the rescue.
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