With no sign of the US COVID-19 crisis easing, central banks around the world have deployed quantitative easing fiscal airbags and plan to do more. Modern critical theory has taken center stage and we see it working. It’s a scene you’ll love: the financial version of the first nuclear explosion in Los Alamos and the Manhattan Project.
What is wrong with the global economy is unprecedented. We are entering a completely new and unfamiliar territory and all bets on inflation / deflation are void. How will different asset classes interact with the stimulus? Will we see price inflation, price stability or chaos? no one knows. One thing is for sure: More absurdities are sure to come, and one should keep their wits about it and pay close attention.
QE 2020 vs QE 2008
In 2008, printed quantitative easing money was not in circulation – it stayed with the Federal Reserve in a tenant account of member banks in the form of computer accounting records. This was just ignorance of how cash flows would work, although the net effect was positive: Bitcoin (BTC) was born in response to quantitative easing.
However, quantitative easing today is a different beast – it is meant to go to homes and small businesses to pay for food and rent, or simply to prevent famine, mass displacement, public unrest and social breakdown. What we have seen is the end of the nineteenth century of industrial capitalism and the rule of financial capitalism. This has been true since the end of the Bretton Woods agreement nearly 50 years ago, but it is not clear to everyone. Humanitarian goal: avoid death, misery, and social turmoil. Suddenly, this new money went straight into the bank accounts of households and small businesses as deposits injected by the Federal Reserve, without asking any questions, and accidentally found its way into the financial markets. The result: a massive rally in stock markets that cracked some necks and surprised sociopathic short sellers.
Don’t bet against the Fed. If you do, you will end up with a fast, unpredictable, and stressful death. While Robinhood traders are usually behind the rallies in the market, the truth is that operators linked directly to the Fed make the bulk of the behind-the-scenes purchases, buying everything from bonds to index funds to individual stocks. And soon – cryptocurrencies.
What does this mean for cryptocurrencies?
Ironically, cryptocurrency heads are uniquely conditioned to understand what is happening with the current monetary system and market-driven instruments – all in the market order books. Cryptocurrencies have never been supported before by a real economy – they don’t have internal cash flows. Their main economic value propositions are (1) speculation; (2) Drugs and tax evasion; And (3) alternative stores of value outside the traditional banking system.
In short, they are valid financial instruments. Increasingly, stocks are no longer linked to fundamental economic value and depend exclusively on the supply and demand dynamics of financial markets without forming the economic foundation. The economy is collapsing, but stocks are rising – that’s not a paradox, it’s a defining feature: This is exactly what happens to cryptocurrencies.
The paradox of zero cash flows and infinite valuations is the paradox of perception. Asset support is important. Cryptocurrencies have generally held their own as an asset class even when there is little wealth, and – maybe! – Because of that. Because cryptocurrencies are not directly related to the health of the economy, their movements have been largely independent of economies. They have done well as a store of value, cutting losses in March, and at this point it looks like they are on the verge of collapsing in the future. This is the logic of pure supply and demand – the psychology of numerical financial assets (limited supply of only 21 million BTC) and the endless wall of liquidity that haunts them. What you see is an influx of financial and monetary demand, not economic demand, on the demand side in the market makers order books, in both the stock markets and cryptocurrencies.
Forget the basics, narration, and traditional evaluation methods. Stocks are now like cryptocurrencies: a store of value that exists only in the traditional economy and on exchanges. The value of something is determined by what someone is willing to pay for it.