HONG KONG (Project Syndicate) — Financial markets today are thriving. The Dow Jones Industrial Average , the S&P 500 SPX, +0.28% , and the Nasdaq Composite index COMP, +0.08% have all reached record highs lately, with emerging-economy financial markets also performing strongly, as investors search for stability amid widespread uncertainty.
But, because this performance is not based on market fundamentals, it is unsustainable — and very risky.
According to Mohamed El-Erian, the lost lesson of the 2007 financial crisis is that current economic-growth models are “overly reliant on liquidity and leverage — from private financial institutions, and then from central banks.” And, indeed, a key driver of financial markets’ performance today is the expectation of continued central-bank liquidity.
After the Federal Reserved revealed its decision last month to leave interest rates unchanged, the Dow Jones Industrial Average set intraday and closing records; the Nasdaq, too, reached all-time highs.
But there is another factor that could further destabilize an already-tenuous leverage- and liquidity-based system: digital currencies. And, on this front, policy makers and regulators have far less control.
But, because this performance is not based on market fundamentals, it is unsustainable — and very risky.
According to Mohamed El-Erian, the lost lesson of the 2007 financial crisis is that current economic-growth models are “overly reliant on liquidity and leverage — from private financial institutions, and then from central banks.” And, indeed, a key driver of financial markets’ performance today is the expectation of continued central-bank liquidity.
After the Federal Reserved revealed its decision last month to leave interest rates unchanged, the Dow Jones Industrial Average set intraday and closing records; the Nasdaq, too, reached all-time highs.
But there is another factor that could further destabilize an already-tenuous leverage- and liquidity-based system: digital currencies. And, on this front, policy makers and regulators have far less control.
The notion that central banks can really control asset prices by interfering in the supply of money and credit is not a sensible one. Even the central banks will tacitly admit that any manipulation can only work in the short term, and is only for the smoothing of extremities in short term market trends. The larger, primary trends that markets exhibit are unstoppable, and they will always correct themselves of any artificial influences.
However hubristic or arrogant, the central banks are not bigger than the markets, and cannot be by definition. They may well control the grand denominator that goods are priced with, but they cannot control the value of those goods, as the markets aggregate it. This is because the markets are us, it is our demand and supply of goods that really sets the price. We simply need the tools, and the lack of interference, in order to maximise our ability to leverage the power and control we should have over setting prices. Professional price-setting is a scourge on humanity, these people will resound through history as the biggest crooks humankind ever knew. Cryptocurrency is the start, when this revolution in information tools is over, our forebears will not recognise the world we left behind.
The concept of private cryptocurrencies was born of mistrust of official money. In 2008, Satoshi Nakamoto — the mysterious creator of bitcoin, the first decentralized digital currency — described it as a “purely peer-to-peer version of electronic cash,” which “would allow online payments to be sent directly from one party to another without going through a financial institution.”
A 2016 working paper by the International Monetary Fund distinguished digital currency (legal tender that could be digitized) from virtual currency (non-legal tender). Bitcoin is a cryptocurrency, or a kind of virtual currency that uses cryptography and distributed ledgers (the blockchain) to keep transactions both public and fully anonymous.
However you slice it, the fact is that, nine years after Nakamoto introduced bitcoin, the concept of private electronic money is poised to transform the financial-market landscape. This month, the value of bitcoin reached $4,483, with a market cap of $74.5 billion, more than five times larger than at the beginning of 2017.
A 2016 working paper by the International Monetary Fund distinguished digital currency (legal tender that could be digitized) from virtual currency (non-legal tender). Bitcoin is a cryptocurrency, or a kind of virtual currency that uses cryptography and distributed ledgers (the blockchain) to keep transactions both public and fully anonymous.
However you slice it, the fact is that, nine years after Nakamoto introduced bitcoin, the concept of private electronic money is poised to transform the financial-market landscape. This month, the value of bitcoin reached $4,483, with a market cap of $74.5 billion, more than five times larger than at the beginning of 2017.
So typical of financial journalism: vague, wooly language that essentially refuses the reader the respect of communicating, however indirectly, what money is and what it does, and why. The meaning of money is the most fundamental aspect of finance, and yet financial journalists so often speak as though they have zero clue how money works at all.
Whether this is a bubble, destined to collapse, or a sign of a more radical shift in the concept of money, the implications for central banking and financial stability will be profound.
At first, central bankers and regulators were rather supportive of the innovation represented by bitcoin and the blockchain that underpins it. It is difficult to argue that people should not be allowed to use a privately created asset to settle transactions without the involvement of the state.
At first, central bankers and regulators were rather supportive of the innovation represented by bitcoin and the blockchain that underpins it. It is difficult to argue that people should not be allowed to use a privately created asset to settle transactions without the involvement of the state.
The implications for central banking is strong competition to their (up till now) private market cartel. In fact, the central banking product is managed (and designed, to be fair) so corruptly that their only choice is to do what they do best: lie (how convenient that marketwatch.com is so willing to help the central banks prop up their bs with exactly the sort of nonsense central bank would like to hear)
And marketwatch.com get it right the first time here: it is difficult to argue that people should not be allowed to use a privately created asset to settle transactions without the involvement of the state, they, for instance, go on to fail in this ostensible "market" study (which is actually better described as a study of the world's incumbent protection racket)
But national authorities were wary of potential illegal uses of such assets, reflected in the bitcoin-enabled, dark-web marketplace called Silk Road, a clearinghouse for, among other things, illicit drugs. Silk Road was shut down in 2013, but more such marketplaces have sprung up.
When the bitcoin exchange Mt. Gox failed in 2014, some central banks, such as the People’s Bank of China, started discouraging the use of bitcoin. By November 2015, the Bank for International Settlements’ Committee on Payments and Market Infrastructures, made up of 10 major central banks, launched an in-depth examination of digital currencies.
But the danger of cryptocurrencies extends beyond facilitation of illegal activities. Like conventional currencies, cryptocurrencies have no intrinsic value. But, unlike official money, they also have no corresponding liability, meaning that there is no institution like a central bank with a vested interest in sustaining their value.
Instead, cryptocurrencies function based on the willingness of people engaged in transactions to treat them as valuable. With the value of the proposition depending on attracting more and more users, cryptocurrencies take on the quality of a Ponzi scheme.
When the bitcoin exchange Mt. Gox failed in 2014, some central banks, such as the People’s Bank of China, started discouraging the use of bitcoin. By November 2015, the Bank for International Settlements’ Committee on Payments and Market Infrastructures, made up of 10 major central banks, launched an in-depth examination of digital currencies.
But the danger of cryptocurrencies extends beyond facilitation of illegal activities. Like conventional currencies, cryptocurrencies have no intrinsic value. But, unlike official money, they also have no corresponding liability, meaning that there is no institution like a central bank with a vested interest in sustaining their value.
Instead, cryptocurrencies function based on the willingness of people engaged in transactions to treat them as valuable. With the value of the proposition depending on attracting more and more users, cryptocurrencies take on the quality of a Ponzi scheme.
Commercial banks are only too happy to launder drug money. HSBC and Wachovia were caught by US regulators doing just that, and received a fine that represented a small proportion of the profits made from their drug money washing.
Who moralises about perceived immoral acts, commits those same acts, then goes on to moralise about some other group of people doing the exact same thing?
Gangsters
As the scale of cryptocurrency usage expands, so do the potential consequences of a collapse. Already, the market capitalization of cryptocurrencies amounts to nearly one tenth the value of the physical stock of official gold, with the capability to handle significantly larger payment operations, owing to low transaction costs. That means that cryptocurrencies are already systemic in scale.
There is no telling how far this trend will go. Technically, the supply of cryptocurrencies is infinite: bitcoin is capped at 21 million units, but this can be increased if a majority of “miners” (who add transaction records to the public ledger) agree. Demand is related to mistrust of conventional stores of value. If people fear that excessive taxation, regulation, or social or financial instability places their assets at risk, they will increasingly turn to cryptocurrencies.
Last year’s IMF report indicated that cryptocurrencies have already been used to circumvent exchange and capital controls in China, Cyprus, Greece, and Venezuela. For countries subject to political uncertainty or social unrest, cryptocurrencies offer an attractive mechanism of capital flight, exacerbating the difficulties of maintaining domestic financial stability.
Moreover, while the state has no role in managing cryptocurrencies, it will be responsible for cleaning up any mess left by a burst bubble. And, depending on where and when a bubble bursts, the mess could be substantial. In advanced economies with reserve currencies, central banks may be able to mitigate the damage. The same may not be true for emerging economies.
There is no telling how far this trend will go. Technically, the supply of cryptocurrencies is infinite: bitcoin is capped at 21 million units, but this can be increased if a majority of “miners” (who add transaction records to the public ledger) agree. Demand is related to mistrust of conventional stores of value. If people fear that excessive taxation, regulation, or social or financial instability places their assets at risk, they will increasingly turn to cryptocurrencies.
Last year’s IMF report indicated that cryptocurrencies have already been used to circumvent exchange and capital controls in China, Cyprus, Greece, and Venezuela. For countries subject to political uncertainty or social unrest, cryptocurrencies offer an attractive mechanism of capital flight, exacerbating the difficulties of maintaining domestic financial stability.
Moreover, while the state has no role in managing cryptocurrencies, it will be responsible for cleaning up any mess left by a burst bubble. And, depending on where and when a bubble bursts, the mess could be substantial. In advanced economies with reserve currencies, central banks may be able to mitigate the damage. The same may not be true for emerging economies.
marketwatch.com, the website that doesn't even understand the fundamentals of the commodity used to transact on financial markets
, let alone cryptocurrency itselfOne can make this argument about any commodity price: that the value depends on a willingness to pay. And while the utility of cryptocurrencies persists, so will it's market value, QED.
In a capitalist system, the state has zero role in making right the finances of the people who bet on a financial instrument and lose the value of their investment. So, marketwatch.com are essentially confessing here that this world does not run on capitalism, that wealthy people who fail should be subsidised with the money of those that contribute the most to tax revenues. Which is expressedly the problem in the world financial system since 2008 that this article begins with purporting to understand
The fact is that even before 2008, we did not have capitalism in the world. The state intervened to prevent regular people from investing in stocks, shares, commodities, currencies and other financial instruments long ago. Qualified cronies invested money on regular people's behalf by proxy, and kept the fattest profits for themselves. The regulated financial markets are the biggest affront to capitalism the world has seen, essentially a facade to keep the investing profession a closed-shop culture, and to manipulate that nepotistic, incestuous culture to cultivate the financial world's superclass. The superclass whose interests are represented by websites like marketwatch.com, how strange that they write hitpieces like this worshipping their bed-fellow incestuous lovers: the state and central banks.
But all farmers and animal specialists know: what does incest breed?
An invasive new species does not pose an immediate threat to the largest trees in the forest. But it doesn’t take long for less-developed systems — the saplings on the forest floor — to feel the effects. Cryptocurrencies are not merely new species to watch with interest; central banks must act now to rein in the very real threats they pose.
As long as the will to use cryptocurrencies exists, there is nothing that can be done about it, except extreme violence and other rights violations. There is nothing, therefore, that the central banks can do, without the aid of state gangsterments.
