I would like to send a greeting to all those who visited’Rethink Money’.
This week, the cryptocurrency market has been a deep bear market after a long time. There was a strong sell-off, with bitcoin falling by 25%. Among those who recently started investing in cryptocurrency, some have become suspicious of the investment itself, but those who have invested in cryptocurrency for a long time did not show any signs of fear.
In 2017, the cryptocurrency market enjoyed a sparkling boom due to the cryptocurrency disclosure (ICO) craze, but in the next year, 2018, a number of tokens including Bitcoin (BTC) and Ether (ETH) were at its worst. Have been sent. However, it is difficult to find anyone who says that something similar to what was then will be reproduced. Rather than the beginning of a long-term bearish market, the price collapse is interpreted as a price adjustment or a brief rise.
Why do these thoughts come up? This is the topic of this week’s column. This is because the weaknesses of the existing financial system have been revealed intact due to Corona 19 over the past year, and cryptocurrency is attracting attention as a new alternative.
The gap between finance and the real economy proves that the financial system has failed.
The following is a brief summary of corona-related indicators since January 2020.
■ The number of COVID-19 deaths worldwide: 2.54 million
■ Total world working hours lost due to coronavirus: equivalent to 255 million regular workers (International Labor Organization, ILO)
■ Global economic growth rate: -4.3% (World Bank, World Bank estimate)
■ Federal Reserve System (Fed) Emergency Support Fund: $3.4 trillion
■ Total market capitalization of the S&P 500: an increase of $6.8 trillion
■ Morgan Stanley Capital International (MSCI) Emerging Countries Index Yield: 21%
■ US house prices: 10.4% increase (Case-Shiller, Case-Shiller index)
■ Bitcoin price rise: 60%
The first death toll in the U.S. from Corona 19 was last year on February 6th. A little over a year since then, the cumulative death toll in the United States has exceeded 500,000. How did this disease affect the United States?
According to the data above, there is currently an incredibly large gap between finance and the real economy. The real economy, which faced the health and economic crisis at the same time, has been hit hard, while those who have real financial and digital assets have made tremendous profits.
I am not trying to talk about the obvious injustice through this page. A more serious problem is the failure of the financial capitalist system that supports Western economies, including the United States.
This failure is the reason why we are in a period of significant change in terms of money, and that is why people’s attention will continue to be focused on this technology, which is pursuing breakthrough changes despite the volatility of the cryptocurrency market this week, such as Bitcoin.
What is an efficiency market?
We have learned over the past century that in a capitalist society, the market allocates capital in the most efficient way. Governments can only intervene in the market for the purpose of increasing market efficiency, and have broad access without privileges of special interests.
The government’s principle of intervention was that regulation should not be an unnecessary obstacle to competition, and in some cases involving antitrust, monopolists take proactive steps to eliminate such obstacles. The most important of these was to ensure that the control of the information that governs market decisions was not systematically biased in favor of only a few companies.
This principle is based on the so-called’Efficient Market Hypothesis’. In this hypothesis, all the information available by the market is efficiently processed and prices are set quickly reflecting the global situation, and valuable for capital allocation. Seems to be providing a signal.
In the absence of information distortion, asset prices rise when positive news comes out and fall when negative news comes out. Since the various reactions poured out to one piece of information come to an agreement and price is formed, the best solution for everyone can come out.
Market failure
It turns out that this efficiency market hypothesis has not been true since the 2008 financial crisis. That’s why some people will see the contradictory relationship between financial information and prices in the coronavirus era and say once again whether the hypothesis is wrong. This is because the global economy is experiencing the worst economic downturn since the Great Depression in the 1930s, and stock prices, which should reflect expectations for future profits, skyrocketed, breaking new highs every day.
However, in this case, the market did not process the information properly, but the cause was elsewhere. Right away ‘Large-scale currency expansion’ is a powerful information variable that influenced investors’ investment decisions..
The value of stocks and other assets has risen since central banks announced the implementation of their quantitative easing (QE) programs, for two reasons.
First, it drove the interest rates of several types of debt to almost zero. Therefore, even if companies’ future nominal returns declined sharply, they could be more attractive assets than bond yields.
Second, the Fed’s so-called “unlimited quantitative easing” policy did not pinpoint the end date of the monetary expansion program, thereby physically raising the value of dollar-denominated assets with limited supply.
Newly released money on the market has turned to a store of value that does not increase in supply. Stocks have been in the spotlight for liquidity, and real estate, art, and recently, digital art of scarce value, are driven by many assets with less liquidity than stocks, but far less supply.
The monetary expansion policy, which prints money indefinitely and quickly as time passed, invaded all different types of non-financial information.
The eyes of investors have declined day by day, Each asset lost its differentiation from other assets and became uniform.. Reddit’s ant army teamed up to make the price of so-called’meme stocks’ like GameStop, which was struggling with management difficulties, soared, and the stock price soared due to factors unrelated to the company’s own fundamentals. Increased.
That’s why young investors who will live in the era of zero interest rates have come to tell this story.
I am hearing from a lot of young people I teach economics to that they believe going all in on assets is the only chance they have of getting ahead or having a life like their parents or grandparents for the younger kids. They say what do I have to lose.
— Sitiveni (@sitiveni05) February 21, 2021
Avid Commentator Tweet: When you need to get a mortgage loan because of bad circumstances, your family and friends aren’t telling you to borrow only enough to pay it off financially, but rather to take the capital you’ll earn in the future as collateral as much as you can. . If that happens, you might think you’ve won, but in reality, it’s an act of taking a huge risk.
Sitiveni Tweet: Many of my young friends in economics classes tell me that going all-in on assets is the only way to live better than others and give their children the same life their parents or grandparents have given them. In the meantime, they ask what they are going to lose.
This is a proof that the financial capitalism we are operating has failed. Effective capital allocation is impossible if we cannot properly identify alternative investment products in our system.
Bitcoin price is the truth
Of course, the central bank will argue that price data accurately reflect economic expectations because their policies are stabilizing the recession and leading the economy to rebound.
But most people think differently. The gap between our current financial information and reality (as shown in the chart below) tells us a simple but grim truth. The policies implemented by the central bank are actually It was just a policy for some of the wealthy who owned the assets.In other words, it wasn’t a policy for the majority of the people.
The evidence that better supports this claim is the price of bitcoin, which has surged since the end of March.
Bitcoin is not a profitable asset. It is buying coins to invest in non-legal currency. Unless a better payment platform or decentralized finance (DeFi) solution emerges, that will be the primary purpose of investing in Bitcoin for at least a while. If you have to make a choice, you are not betting on economic recovery, but on the opposite.
As I said before, the price of bitcoin provides policy makers an informational signal of how much the public trusts the financial system. It is this time that policy makers should pay attention to this signal.
Employment growth on the move vs. high-margin stock market
As an indicator to explain this gap, let’s take a look at the US Bureau of Labor Statistics’ non-agricultural employment indicator, which Wall Street considers the most important monthly economic indicator.
In terms of the total number of employees, the US labor market has not yet recovered for a while as of the time of the global economic shock caused by Corona 19 in March last year. However, the S&P 500 has a completely different move.
In the first three months from March of last year, the total number of employees increased slightly and the movement of the stock market was in sync, but after that, employment growth continued to slow down, failing to recover the lost 10 million jobs, while the stock market. You can see the figure of marching high altitude day after day as if with wings.
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