By Robert Koenig
On March 2020, the US Senate passed a $2 trillion coronavirus stimulus bill aimed at slowing the economic free fall caused by the measures adopted to slow the spread of the virus. To obtain this money, the U.S. government will borrow it by issuing Treasury bonds, which will then be sold to banks. Should the banks not have enough money to buy all of them, the Federal Reserve (FED) will lend the government as much as needed to make up the balance. The banks will sell the bonds they purchased, to investors from around the world. And because bonds can be attractive to investors in uncertain times, there is always a market for them. This is not only happening in the US, but around the world. By law, central banks are the only entities that have the ability to implement new monetary and fiscal policies and that they can bypass the financial markets will play a key role.
While studying economy, did we not learn that increasing the money supply faster than the growth in real output would cause inflation? Somehow that seems to longer be applicable. In 2008, we saw an exponential increase in the money supply, but inflation remained low. Since 2007, the Fed’s balance sheet has quadrupled, but inflation has stayed the same.
In current economies, although a monetary policy focused on interest rates worked during times when an economy’s success was linked to productivity (products and services), it has now become ineffective. Similarly, a monetary policy based on quantitative easing has also become ineffective. The monetary policy that is currently being implemented will not be just through quantitative easing as the financial assets being traded will stay within the financial community and will only marginally benefit the rest of the economy. Increasingly, central banks and governments are moving toward putting money directly into the hands of spenders. To avoid a bigger crisis, governments run deficits which their central banks monetize by lending them the money. Some governments will even transfer money directly to the spender.
What instruments are central banks using?
Currently, the total value of all of the world’s coins and banknotes is roughly $8 trillion, the market capitalization of all of the world’s stock markets is above $80 trillion, the global money supply is over $100 trillion, the global debt is over $240 trillion (which is 325% of global GDP), and the value of all derivatives is estimated to be between $900 trillion and $1.6 quadrillion. In most countries, derivatives are an integral part of their financial system.
A derivative is a financial security with a value that is reliant upon or derived from, an underlying asset or group of assets — a benchmark. … The most common underlying assets for derivatives are stocks, bonds, commodities, currencies, interest rates, and market indexes.
Derivatives are usually traded over-the-counter (OTC), are traded between two parties, and are with some exceptions unregulated.
Most central banks started to use derivatives to achieve their fiscal and monetary objectives because of their volume and ease of creation. In other words, central banks are now participating in a market of endless size that is mostly unregulated. Derivatives provide a perfect way to increase the balance sheet of a central bank.
What about Small Countries?
Cryptocurrencies are the solution.
Small countries are usually not able to participate in the synthetics market, as most of these markets are closed to them. Also, in some cases, their currency is pegged to the USD, thereby making impossible the implementation of their own monetary and fiscal policy.
For small countries, the alternate solution is cryptocurrencies, which are, in a sense, similar to derivatives: they are unregulated, and they can be created without any value backing them. In 2015 and 2016, the crypto-industry re-invented investing in projects by using ICOs (initial coin offerings) as a vehicle. Through ICOs, companies can gain substantial investment from a global market without having to present any product or service. No collateral is required. All that is needed is a whitepaper, a team, and a good-looking website. Two examples are
- EOS (one of the over 5000 cryptocurrencies), which collected over $4 billion through their ICO, and
- Tether, another great example of a cryptocurrency. Tether is pegged to the USD and so is a stablecoin. A stablecoin is a cryptocurrency that can be backed by another stable asset, like gold or the U.S. dollar, or can be un-backed whereas they are then tied to an algorithm (for example the currency DAI). It is a currency that is global, is not tied to a central bank, and has low volatility, allowing for practical usage like paying for things every single day. The market cap of Tether is currently over $4 billion.
A stablecoin would be a perfect solution for a small country to overcome a financial crisis. They can be generated within days, and the basic infrastructure to use them already exists. (A nation-wide roll-out would be too much too soon: the implementation of a stablecoin has to be started in a controlled environment.) The coin would be using a blockchain infrastructure but would be fully controlled by the central bank or local government. If wanted, there will be no link to the rest of the all other cryptocurrencies.
There are already many solutions available for small countries: Digital Monetary Crypto-Solutions for Small Countries.
Robert F. Koenig is currently living in Miami, USA and has lived in several European countries, speaks multiple languages and is a passionate believer in blockchain technologies. Robert studied Industrial Engineering at Darmstadt University in Germany, and Mechanical Engineering at the Ecole Centrale de Lyon in France. He started his career with Andersen Consulting, where he led large SAP projects. Since 2015 Robert is involved in Cryptocurrencies, investing in projects and shaping the industry from the application point of view. He is a non-executive director in a multitude of companies and is also well known for his public speeches. Robert is a member of Tomorrows Company and The German Industry Association. His experience and knowledge of leadership has led to appearances on several television programmes, including European Business News and American News.