Asset prices have seen massive inflation in the last decade due to ZIRP, asset purchases by central banks on an unprecedented scale. The risk free rate has been zero for far too long, and this has directly led to people moving into more risk in order to try to get a return, any return at all. So asset prices, particularly risky speculative asset prices, are no longer judged on their fundamentals like cash flow, but are tightly tied to monetary policy instead. This is starting to feed through to prices of food and other commodities as price inflation as well. So now central banks (and the Fed in particular) have an invidious choice - crash the stock market and save the real economy, or crash the real economy via inflation and save the stock market.
The Fed just suggested they would take away the punch bowl from assets a little earlier than planned, so the party is over and people are scrambling for the exits - that will continue this year. This impacts tech stocks which are not making money and not likely to make money, and speculative assets like bitcoin which money has piled into due to Fed policies.
We've seen this story before, we know how it ends.
1. How does this story end? 2. Which Fed announcement are you referring to? That rates will be raised? What do you mean the party's over, that speculation will decrease and prices will drop? 3. "This impacts tech stocks which are not making money and not likely to make money" You mean that this will impact stock of tech companies which are not profitable, since their stock values are speculative, and not that tech stocks won't make money, right? 4. So that means the Fed has chosen to crash the stock market and save the real economy, right? And by that statement, you mean that the Fed will curb speculation in order to stop price increases in food and other commodities? 5. How and why does rises in prices of risky speculative assets trickle down to rises in food and commodities prices? Is this because some part of the market gets out of the high risk assets and start bidding up lower risk assets? Is this true in general, that price increases due to too much speculation in one part of the market will eventually spread to everything else?
2. For the last few months and more strongly recently the Fed has been signalling that they are going to taper stimulus, hence the rocky ride in the US stock market (driven to spectacular highs over the last decade by Fed purchases of treasuries and even corp bonds).[1]
3. US stocks in particular have not been valued on fundamentals in a long time - the indexes are propped up by a small group of tech stocks which are very overvalued, even world indexes are imbalanced in this way (50% US, 2% Apple for VWRL for example).
4. Well so far, they will doubtless have some wobbles on the way and may even reverse position completely as they have in the past (see 2013 and 2018 withdrawal of QE below [2]). This prevarication IMO just makes the eventual shock when they have to withdraw it even greater, and/or devaluation of the currency worse. They may choose to devalue the currency further so that nominally stock prices stay level, but that leads to inflation...
5. I don't think the two are linked, save that commodities are also linked to monetary and fiscal policy which has bid them up to unsustainable highs and led to unrest around the world (after 2008 and now again as price inflation rises). Sorry if that was unclear, I meant the Fed policies were starting to feed through to inflation.
To be fair to cryptocurrencies like Bitcoin, this is precisely the sort of market distortion and financial repression it was created in reaction to and attempts to solve, it's just unfortunate it was unsuited to use as a currency and has been taken over instead by speculative carpet baggers intent on fleecing others.
[1] https://www.reuters.com/markets/europe/wall-street-closes-sh...
People getting into crypto in fratboy style have gone on the rollercoaster and often are pushing it to their desires.
In the history of money (I'm talking U.S. at this point but other countries have their story) this carpet bagging happened earlier on... we've just been using it long enough that the story was forgotten and long before our time.
I'm referring to the Gold Reserve act Executive Order 1602 of 1933 where gold was required by law to be turned in at an exchange of $20/oz and a year later jacked up to $35/oz an ounce.
This decoupled the Federal Reserve from backing credit with gold, etc. The story continues but you get my point.
https://en.m.wikipedia.org/wiki/Executive_Order_6102#:~:text....
And the secondary thing you need to keep in mind, when the money supply is growing at a rate faster than the real economy, and the value of that money is pushed into either consumption(CPI) or investments. But because the Fed explicitly outlaws more than 2% inflation, it must therefore be in investments. Those investments can be anything, from houses to stocks to tulips to receipts of monkey jpegs.
The third thing you need to realize is that once an asset is above their 'true' value, there is no rule that better assets will grow more. What actually happens is those which have the least supply and largest marketing raise the most. So you see houses go up, you see buyback stocks go up, you see collectables go up.
So next you need to look at, how is the money supply going up? The money supply goes up when interest rates fall. Wealthy people who have good credit take out more and more money to buy more and more assets. As the wealthy don't use this new wealth to consume, as they already consume as much as they want, inflation doesn't occur. This is the savings glut of the rich[0]. When this happens, because we don't get inflation, this pushes the Fed to allow even more money printing to occur to allow inflation to hit their 2% target. It becomes a vicious cycle of more wealth inequality begets more interest rate reductions.
But with interest rates at 0%, the Fed is no longer able to move the money supply anymore. Now they need to do it directly. When they were doing it indirectly, they had that indirect buffer, "that's just how the way the world works", but when they do it directly, suddenly they have accountability. So instead of 90% of new money going to the wealthy, maybe only 50% goes to the wealthy and 50% is spread around to the non-wealthy.
So once the Fed starts Monetary Policy 2, now we see inflation. And once inflation kicks in, the Congress and others will see the hurt that is occurring to normal people, and they will push for even more policies that trigger inflation even more. This is what happened in the 70's.
So the Fed needs to put a stop to the bubble, just as they did in the 70s, so they will raise rates. Those raised rates will push the balance to currency, and money managers will work out that fact, and more a bigger and bigger percentage of their investments into this area. This will crush all of that extra value, and boom will go the inevitable cyclical money velocity bubble. Houses will drop down to their fundamentals, stocks will correct, monkey jpegs will crash to 0.
The big thing we need to watch as this occurs is what happens to things that we thought were not correlated, but ended up correlated based on everyone buying into the bubble. What happens when people pull their broad index funds? When the index funds are net negative, how low can the market go? Can the Fed have the precision to crash the Bitcoin market, to slow down the housing market, and not allow the stock market to fall 90%? I guess we'll see.
[0]: https://scholar.harvard.edu/files/straub/files/mss_richsavin...
Of course, this virtual space is coupled with physical space, by hugely centralized entities called exchanges. To get your money across the border, you need to deal with them. In that case the physical value you can buy with your cryptocurrency comes about from the exchange, not the currency.
Value is a physical thing, not a virtual thing. That’s because we live in the physical, not the virtual world. But we’ll readily delude ourselves into believing that’s not the case.
An exchange is merely a full node with a user interface.
To operate as an exchange there are certain KYC/AML rules they must follow.
Setting up a node takes about 20 minutes and then letting it sync for a couple hours to a day depending on your internet.
You can send crypto with as high or low as a fee as you want...it's just a manipulation of the queueing metric and which transactions miners add to the chain. With exchanges they set that for you.
"Coins? Why would I want those instead of food? I can't eat coins."
To which the killer adoption feature was governments saying "Well, you have to pay taxes in coins, so you need some" to bootstrap & put a floor in under the system's value.
Crypto doesn't appear to have had a "tax" moment yet.
Is there anything I can only do with Bitcoin, Ethereum, etc? Which is to say, if the value of both absolutely collapse (to some fraction of a cent), who would still be buying, and to do what?
Note that in the latter case, the physical money doesn't even change hands - it's all in a ledger, but the ledger is in people's heads. In fact, you could say it's a proof-of-work system, since making the stones is expensive in terms of amount of effort spent, even though they don't have any utility as such.
E.g. If someone said "The value of the cowrie has crashed!", then how long did it take for everyone to find out & the cowrie economy to reprice itself?
I'd hazard we deal with much more sophisticated, capable, fast, and aggressively predatory market participants now.
Cryptocurrency can never be an abstraction of some physical process.† Therefore, I would argue, it can never be useful to us.
† Well, technically, it actually is an abstraction of a physical process: a heat engine with 0% efficiency.
But that wasn't sufficient alone to give it utility. And without utility, there is no buyer of last resort, and no floor under value. Hence taxes.
Fiat currency removed the proof of work, and replaced it with proof of stake (-ish?), but retained taxes.
You could probably make the argument that "buy NFTs" or "run dApps" are the beginning of crypto's tax moment, but both seem a pretty small scale to base value on.
IMHO, that's the entire point behind dApps: a crypto-native version of taxes that puts a value floor under the cryptocurrency. If you have a solution that can only be solved by dApps, and you need cryptocurrency to run dApps, then there you go...
The value of money is derived from moving against thermodynamic equilibrium. Cryptocurrency’s value comes from moving towards thermodynamic equilibrium. The conversion of work into heat — not heat into work!
I’m not talking about taxation or apps. Those are things built with the axioms of crypto-evangelism. I’m talking about the physical fundamentals underlying those axioms.
The thermodynamic direction is less important than the fact that people didn't want to do it.
But proof of work was always a transitory, bootstrapping phase. Even among the crypto evangelists, I can't believe anyone saw a long-term future in that.
Solar, geothermal, wind, nuclear et al. are cleaner (from an energy production standpoint, and mostly from a generator production standpoint), but still have fundamental capacity limits.
"We're going to burn {currentWorldPower}+1, forever" isn't a viable end state.
Building oligarchical proof of stake ponzi games is not progress. That is when we have given up and just want to stagnate.
Increasing at 1.5x vs 2x has very different implications for the planet, economy, and international politics.
This is a very important point, that I’ve also been saying for a while. Crypto is purely digital, almost every application that goes popular is fully digital, and almost no ideas have any connection to the real world. That’s gonna cause problems one day…
Do you have a source for this? I find it hard to believe that high stakes gambling is hindered by banking systems.
The blog post itself also touches on this, slightly, by asking what the connection between compute and money is. Is compute just a proxy for money? Or, will in the future money become increasingly a proxy for how much compute you have at your disposal. The latter surely seems unlikely, but with what you said here, it is not out of the question, especially if people increasingly associate pleasures with things that require compute.
This economy-scale decoupling is the dual of each and every one of our very own psychological uncoupling from our own physical worlds, which has occurred because of the computerization of work, socialization, and life itself (the shimmering neuralink dream).
Cryptocurrencies are what happens if you completely decouple the asset price from the physical world. To create the "value" of cryptocurrencies, we purposefully do nothing at all. The asset is valuable only because of the flow of entropy. Not the flow of energy (which generally has some physically useful function). But entropy itself -- a thing that exists only in the "map" of information, not the "territory" of the real world.
Typically, moving entropy around is useful to us, because it actually corresponds to changes in an underlying physical process. Like, your job doing excel spreadsheets for warehouse inventory management is just changing the flow of entropy -- to you, it is decoupled from the physical world. But there is a link to the physical world: when you change a cell in a spreadsheet, so too a physical good moves somewhere else in the warehouse.
With cryptocurrencies, not so. All this entropy is moving for the sake of itself. It's all virtual -- none of it can be coupled with the physical world (by design! if it could be, some physical force could go in and take your crypto-coins).
Now, here's the delusion: unfortunately for us, moving entropy around is actually still coupled with moving energy around. It actually has a tremendous physical effect on the world around us.
Something I've noticed about cryptocurrency people is that they are very, very plugged in. The evangelists never have a physical job; always a computer job, and they are always online, and believe in being online to the greatest extent possible. And I think, actually, there is a very obvious reason for that.