The age of easy money seems to be well and truly behind us. The graph, below, of UK monetary aggregates from the Federal Reserve Bank of St Louis shows how much liquidity has been floating around the system in recent years:
The steep rise to combat the economic impact of the Covid-19 pandemic, and a slight rise at the start of the war in Ukraine, are clear. However, between both those events and since it has been downhill more or less all the way, equating to a 5% annual drain. This is a figure that has never before been reached and which could quite easily mean a severe recession.
Now, you may not be feeling the economic pain, and the businesses of restaurants and pubs would tend to suggest that all is just fine and dandy, but at the lower end real anguish is emerging.
The numbers of people materially behind on all sorts of bills has rocketed over the last three months and may only get worse. Anecdotally, credit card companies have apparently been hiring and training staff to deal with setting up payment plans.
Remember, tax drains cash away from the real economy too, and it appears that the Treasury is getting more cash in than anticipated. So much so that the Chancellor might have as much as £90 billion to play with in his Autumn Statement, according to the National Institute for Economic and Social Research (NIESR).
NIESR has said that if things continue at the same rate, it would mean the government would be in surplus by the end of the decade. Handing back some of the excess that has been generated from the people who pay these taxes, and letting them spend it, would do more for the economy than anything else.
That brings me back to Central Bank Digital Currencies (CBDCs). If you recall, some time ago in this column I talked about how good they could be for the economy in general.
The main attribute of CBDCs is that they don’t mess up the quantitative easing that distorts so much of what remains of the economy. Forget trickle down – if it ever happens it really is a trickle, not even a tap full. And they can be turned on and off at the flick of a switch (metaphorically), going directly to consumers to spend. If they are not spent within a specified timeframe, the credits expire. Simples.
So, in theory, the BoE could be draining liquidity from the fiat system to combat inflation – and we know how bad that is in every sense of the word – yet at the same time handing out CBDCs to individuals to combat poverty and want. This is one of the reasons I say fiat and crypto go side by side.
None of this has much to do with why crypto markets have had a good ‘Uptober’ and are carrying it on into November. But excitement about crypto’s potential does tend to wax and wane and, given the times we are in, people may well be in the market for reasons to be positive.
It seems to me that the usual metrics going towards the ‘halvening’ next April are finally taking place. Some people are still saying there’s going to be another drop, but it would appear less likely as time goes on.
There has been a ‘Golden Cross’ – the 50 day moving average crosses the 200 day moving average from below – though some say this is not a definite bullish pattern. As ever with Bitcoin, it does its best to surprise and wrongfoot you. Prepare to be amazed – one way or the other.
PS: In last week’s Sermon, I mentioned Klarna in the same breath as FTX and WeWork. Klarna is, of course, a fully licenced and regulated bank, while we all know about FTX and WeWork has filed for bankruptcy. The point I was trying to make is that venture capitalists, spraying money everywhere, had not done well with some of their recent investments – even in Klarna, which is still going strong, but has seen its valuation drop considerably.
If Crypto AM readers would like to know more about blockchain and crypto, please drop me a note on email@example.com and I will send you my book on both topics for free.
Temple Melville, CEO of The Scotcoin Project Community Interest Company (CIC)