Money Market Turmoil and What It Means For Cryptocurrency
The Most Important Catalyst Nobody is Talking About
The stock market is hitting record highs and unemployment is at record lows, but money markets have been throwing shade at traditional markets signaling economic uncertainty. If you follow mainstream finance, I’m sure you’ve been hearing about the repo markets which have been forcing the Federal Reserve (Fed) to intervene regularly. The Fed has been injecting the market with billions of dollars, yet banks are still scrambling for reserves. The uncertainty this brings in traditional finance may be the perfect catalyst for Bitcoin and blockchain technology.
Personally, I believe what we’re seeing today is the reason bitcoin was created roughly 10 years ago. The similarities between bitcoin and gold are no mistake, but before I get into it, let me quickly explain money markets and how central banks use repurchase agreements (Repos) to expand and contract the economy.
Worlds Largest Pawn Shops
A repurchase agreement is a form of short-term lending which is used by the Fed and other central banks to extend credit, control interest rates and guide the economy. Repo dealers sell government securities to large investors at a slightly higher price; usually overnight, and buy them back a short time after and the tiny price gap is the implied overnight interest rate. Repos are used by central banks to control the supply of money and produce market liquidity when the economy is tight. Changes in money supply affect the amount of credit available for commercial and consumer borrowers which ultimately controls supply and demand.
For example, if a central bank is fearing a tighter market, they use repo operations to ease economic pullback. The fed expands the market by using reserve cash to purchase government securities from commercial banks. When banks swap securities for cash, it enables them to lend to lend more to consumers and meet reserve requirements. Think of it as a short-term pawn between the fed and commercial banks, except on a massive scale.
Are Repo Markets Dead?
Money markets have been showing a lot of stress and some experts claim they may even be broken. Not more than a few months back, cash available for repo operations all but vanished, prompting the Fed to make an emergency injection of billions of dollars for the first time since the financial crisis. According to the Bank for International Settlements (BIS) 4 big U.S. banks were reluctant to lend cash while hedge funds were simultaneously driving demand. This caused a 10% spike in the overnight repo rate forcing the fed to act.
Since the spike in lending rates, the Fed has been aggressively trying to calm money markets and even introduced longer-term loans and started buying treasury bills. Because of the increase in aggressive intervention by the fed, many people see continued quantitative easing (QE) on the horizon.
It’s becoming increasingly evident that central banks are losing control. Every time the Fed injects the market with liquidity, it vanishes and calls for more injections or the market risks crashing. Central banks cant account for trillions of dollars which have been disappearing and without this liquidity, the markets cannot function properly.
Think of liquid money as the oil which greases the world economy and with the engine calling for more oil, one of two things may happen. First, if the supply of oil is cut off the engine will seize and stop working and the economy crashes, or second, if the engine is kept oiled it will eventually call for an oil change. Money markets are at the point where they need an oil change or risk the possibility of crashing the market. Well, central banks can’t liquidate the world’s money supply to re-balance everything appropriately, so an oil change is out of the picture. What’s the next best thing? Top that engine off with new oil.
This exactly what central banks have been doing since 2009 with the use of QE. Just like repo operations, QE is a monetary policy central banks used to cycle liquidity through the economy, but with interest rates low, central banks have no choice but to use new money instead of reserves to purchase assets from banks. Introducing new money is topping off the globes economic engine while simultaneously drowning everyone in debt, widening the gap in wealth and prolonging the real issues.
With the rise of Bitcoin and cryptocurrencies, mainstream adoption is taking effect. Banks across the world are adopting the new technology and more people are feeling comfortable using blockchain technology in their day-to-day lives. With it becoming increasingly evident that our current financial infrastructure is not only corrupt, but failing, it makes perfect sense to adopt blockchain technologies.
Although I admit, I doubt bitcoin or any existing cryptocurrency will take over the role of the U.S. Dollar or Euro, I do however see them playing a much larger role. With the adoption of tokenized currencies, retail outlets, banks, and other institutions used by consumers will be forced to integrate bitcoin, Ethereum and other popular cryptocurrencies. This will open the floodgates to new capital which will expand the market dramatically.
One of the main reasons people advocate for bitcoin is its limited rate of output. Just like gold, bitcoin is finite regarding supply which plays a massive role in the properties of currency. Throughout history, governments have devalued currency through hyperinflation and blockchain may solve this historic problem. Tokenized currency may automate output, similar to bitcoin, but without causing unintended consequences like we have with quantitative easing.
With central banks ramping up their usage of monetary policies, we are seeing the effects of unaccounted variables.
For example, the Wall Street Journal recently noted:
“Banks are issuing more notes than ever and yet they seem to be disappearing off the face of the earth. Central banks don’t know where they have gone, or why, and are playing detective, trying to crack the same mystery.”
Yes, you read that correctly. Central banks are losing track of the world’s money supply which may lead to hyperinflation. If you’re familiar with fractional reserve banking practices, you know this may be a very serious issue. Our global economy is run on consumer backed debt which has inflated substantially and will continue to do so. With the central banks controlling the show, yet blindly writing the rule-book, it’s simply a matter of time before current banking fails.
With political, personal, and immoral factors influencing economic decisions made by central banks, automated currency using blockchain technology may be the solution we need to reduce human error and corruption. It’s becoming increasingly obvious people prefer currencies like bitcoin and gold because of the reduction in interference and if central banks do not follow suit, we the people may end up making that decision for them.