Here’s why everyone is screwed (except for you)
Here’s why everyone is screwed (except for you)
A brief history of economic illness (and its cure)
In the past thirty years, the USA has had two recessions, whilst Australia had none. Australia was “the lucky country”, but a black swan event out of China this year changed things. COVID19 saw shutdowns, lockdowns and slowdowns in every country around the world. Some nations fared better than others, but all were affected.
In response to the previous so-called “global” financial crisis of 2008, many central banks around the world dropped interest rates (to encourage consumer borrowing and spending) and printed money to give away as “stimulus” for more spending. The GFC event of 2008 was mostly the fault of bankers in USA and UK. It did not affect China, and as their largest trading partner, Australia rode happily on Chinese coat-tails and sailed through 2008-2010 without a recession.
The economies of other countries slowly recovered from 2008, so long as nobody mentioned the deficit. Or the interest rates. Or the debt ceiling.
A healthy body can survive for a long time. But when it becomes ill, even small and weak infections can become life-threatening. Economies are the same. Despite their apparent recovery from the GFC, most countries were carrying large debts, and had interest rates at record lows. This meant that they were not healthy enough and had no room to manoeuvre when another event occurred.
When was the last time someone with a US savings account could earn 5% on their cash? The answer is 2007. Low interest rates became the norm after the GFC, and no economy was well enough for the rates to be lifted. Even in “post-2008-recovery” the economic body was still sick and in danger of further illness.
When the Great Depression struck in the 1930’s, governments were able to drop interest rates and print money to stabilise their economies. As soon as they were able, the stimulus stopped, and the rates went back up to more normal levels. This provided a buffer against anything else which could go wrong.
Since the GFC, economies have been operating without a safety net. Interest rates have stayed low for a decade. Banks and other businesses which were run badly were provided with bailouts and stimulus, instead of being permitted to fail. The concept of “survival of the fittest” went out the window, and so did our banks chances of getting better.
Money 2.0 and Banking 3.0
Thankfully, after the GFC fiasco there was a visionary who realised that central banks’ constant money printing and slashing of interest rates was not going to work forever. The creator(s) of Bitcoin and other digital currencies envisioned a better world: one which was controlled by the people, for the people; not by the banks, politicians or economists.
Just as the internet had given us the ability to slash the cost of sending documents or making international calls by more than 99%, early coders imagined a future where money could be sent as easily as email, without having to go through an intermediary. Peer to peer transactions could be faster, cheaper and have no interference by governments or central banks. It was an idea so revolutionary as to be almost treasonous.
Bitcoin and other digital currencies are still not as ubiquitous as paper money, but they are becoming more mainstream by the day. After denigrating them for years, major financial power-players are finally realising that they cannot beat cryptocurrencies, so they must join them.
The race to issue new digital currencies has begun, and despite early failures from Facebook’s Libra and many others, the marathon continues.
More and more businesses are accepting cryptocurrency as a payment option. Bank of America owns more crypto patents than any business on earth. Major investment firms, mutual funds and retirement funds are investing into cryptocurrencies as a hedge against inflation. Investors and savers can even enjoy earning interest on their digital money, at rates decided by the market, not by the banks.
Bitcoin has long been called “digital gold” as it is in finite supply and immune to devaluation by inflation. However, it has an intrinsic volatility (just like gold prices) which may make it unsuitable for your weekly paycheck or your grocery shopping.
There is now a vast swathe of digital currencies which are pegged 1:1 with local currencies, eliminating fluctuations and volatility, whilst still maintaining many advantages over paper cash. These “stablecoins” may be the gateway via which many traditionalists (OK, boomers) finally enter cryptopia.
Twenty years ago, conservative retirees who did not wish to enter stocks or property markets could sit on a mountain of cash and live off the interest rates. One million dollars invested at 5% would give you $50 000 per year to live on, with no loss of capital. These days, with bank interest rates around 1% (and inflation arguably over 2%), cash-based retirees are going backwards… Except if they go digital.
There is little difference between $1 million in a traditional bank account and $1 million in stablecoins. It is still just numbers on a screen, with the potential to become paper cash at the push of a button.
The major difference is that stablecoins can be deposited into cryptocurrency exchanges and earn interest from another party like it’s 1999 (cue the Prince song). The interest rates are so 20th century, they will make you swoon with joy. There is no volatility, and no more risk than having cash in your local bank.
Some cryptocurrency exchanges have vastly superior liquidity rules to normal banks, where fractional reserve banking may see you only receiving less than 10 cents in the dollar if things go wrong (cough, Lehman Brothers, IAG, Merrill Lynch, Fanny Mae, Freddie Mac, HBOS, Bank of Scotland, cough, cough).
Those who follow the Cryllionaire channel on Youtube would know that Celsius, for example, lends only at a 2:1 ratio, instead of the general banking practice of 10:1 or 12:1. This means you have significantly lower risk with your stablecoins on a crypto exchange than you do with a traditional bank savings account.
Other crypto exchanges such as Binance and Kraken have applied for banking licences (in EU and USA), and are likely to succeed. Many crypto exchanges now have arrangements where you can earn interest on your cryptocurrency or stablecoins, and make purchases anywhere in the world using a standard Visa card. If you are in business it is possible that you have accepted cryptocurrency as payment without even realising it, as it happened through a crypto Visa card.
If bitcoin was Money 2.0 then decentralised finance (“DeFi”) is Banking 3.0
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