Many ask what problem cryptocurrency solves. There are many answers to this question, all espousing the benefits of blockchain and cryptocurrency. However, there is one aspect that is overlooked since most do not step back and look at what is taking place.
In 2016, technologies that fell under the laws of Informational Technology accounted for [email protected] of the global economy. By 2020, that number has jumped to 3%. There is a great likelihood that, by 2030, this will come in at around 6%.
Over the past decade, we saw somewhere around $23 trillion in easing done by Central Banks. At present, around the world, there is roughly $200B put out each month. In fact, this month, that number is going to jump since China just dumped $170 billion onto its markets.
The world is changing very quickly. Thus, ideas and beliefs which were with us for decades are being proven invalid. Many disciplines are starting to see the lines separating them from others starting to fade. Therefore, a holistic approach provides more value.
When looking at global implications, we see that there are three facets at work: monetary, fiscal, and now, technological. These components are driven by experts and people knowledgeable in each area. However, the challenge is that few take an across-the-board approach.
Looking at the monetary policies of the Central Banks, their actions should have resulted in inflation. In fact, that is what they were setting out to do. The policy makers desperately wanted global inflation. Instead, they see flat to negative inflation rates.
What is going on here? How can this be? The amount of money pumped into the economy is historic. Never before have we seen this take place. If ever there was a time for hyperinflation in many economies, it would be now.
Yet, it is almost non-existent.
To illustrate what is taking place, count the number of devices that would be considered techno-deflating. Those would be anything with a chip in it.
Just off the top of my head we see: televisions, laptops, smartphones, routers, printers, thermostats, door bells, cameras, tablets, coffee makers, appliances, wearables, and even, beds.
How many do you find that are in your home? 7? 10? 15? 20?
Now contrast that with what things were like 30 or 40 years ago. What did you have? 1? Maybe 2?
Be sure to add your car to the list. Many automobiles contain somewhere around $4,000-$5,000 worth of digital electronics is them. Of course, if we look at the manufacturing of these devices, automation is showing how much of the process falls under the law of IT.
From a productivity standpoint, this is crucial. We are seeing global production numbers going through the roof. The sad part of the equation is that this productivity is not being shared in by all. In fact, because of the way the distribution of money occurs with most Central Banks, the ones who benefited are those closest to the start of the process. This is why areas like New York and San Francisco saw the huge jumps while the rest of the United States, for the most part, was flat.
We see the same situation in China. One of the reasons for this country's historic growth was the huge funding provided. The expansion of money was easily swallowed up by technological development. Three decades ago, the percentage of the Chinese economy that operated under these laws was minuscule. Today, it is a much different story.
The technological angle has the economists of the world scratching their heads. Surely, this monetary policy is apt to bring about the inflation they desire. Ironic that the U.S. Federal Reserve thought this was the case in 2017 and started to raise interest rates. After all, they had to be prepared to combat inflation. This policy lasted a few months once they realized they were squashing what positives there were in the economy.
Of course, fiscal policy is mirroring this around the world. Countries are running record deficits, unfortunately, on the backs of taxpayers. Since they do not have the tax revenues, politicians are funding this all with debt. In the United States, with a supposed decent economy, we saw over $1 trillion in deficit spending in 2019. What will this look like when the next recession hits?
A more important question is, however, where is all this money going? Logic dictates that we should see historic inflation to match the historic spending. Where is the hyper inflation?
Cynthia Wu and Fan Dora Xia published research that is terms the Fed Funds Shadow Rate. This research showed how QE did not produce inflation but, rather, deflation. As the Fed expanded QE, the Shadow Rate went negative. Pulling back pushed it to zero.
What does all this gobbledygook mean? The important point to note is there is a massive deflationary force in operation that is likely being overlooked by the traditional economic and fiscal models. We saw the results of the easing having little to no impact. This is going to blow some minds, but the simple fact is the global economy is swallowing up that money and wants more. The challenge, as noted earlier, is that economic models at Central Banks omit the technological aspect and fiscal policies of governments are saddling taxpayers with the burden.
Both are failing missions.
This is where I believe cryptocurrency enters the picture. The ability to distribute money directly to individuals shifts the entire spectrum of what is taking place. Instead of being close to the Central Banks, the money, i.e. liquidity, can happen anywhere in the world.
The gains in production levels we saw of late are going to be usurped by a wide margin in the next few decades. One of the ironic things about the last 20 years is we were in a technological "down" period. Technology runs in 15-20 year cycles and the 2000s saw a "catchup" to the major innovations from the 1980s and 1990s. We are now sitting at a point where we will see major improvements over the next 15 years.
What does this require? Basically, we are looking at the need for money, and lots of it. Right now there is a couple hundred billion in total cryptocurrency wealth. What could that fund in terms of innovation and development? How will this differ when the number is $2 trillion? Or $20 trillion?
What is the likelihood that major innovations come from areas unforeseen before since access to funding, via cryptocurrency is suddenly available? Could it be that cryptocurrency will offset the deflationary forces of technology?
We already know that wages, in developed countries, were flat for the past couple decades. Most attribute this to automation or the threat of it. We are going to see more of this in the future. While productivity rate, per hour, have gone through the roof, the wages are stagnant. Here is the crux of a problem.
Never before in history have we entered a period of huge technological expansion while also having tremendous global deflationary forces in operation due to previous technological advancement. As we see the demonitization of many industries, this trend will only accelerate.
These truly are unchartered waters.
Thus, the machine of innovation and development is going to remain very hungry. Nevertheless, this is one of the ways that we are going to see a 10x explosion in the global economy over the next couple decades. Cryptocurrency is going to help offset the deflationary pressures the world is seeing by putting more money in people's hands. This will stimulate even further investment which will continue to accelerate the process.
It is a wonderful feedback loop and does not have the hands of government or the Central Banks all over it.
On so many levels, it is a different world than we saw only 30 years ago.
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