Friday, 28 December 2018

Review of 2018 - Part 3

“Bitcoin Goes To Zero” 

Well, about 80% correct. From its peak of $20,000, Bitcoin now stands at just over $3,000, and continues to fall. As one of the first, and most prominent crypto-currencies, Bitcoin has fared better than some of the others. As I wrote in the prediction, none of these crypto-currencies have any value, and nor do they act as a token for something that does have value such as a coin, or bank note, backed by a state or a bank, as a claim to say a quantity of gold or silver. In fact, therefore, these crypto-currencies are not even currencies. They are simply an ephemeral asset whose only purpose is speculation. 

There is a possibility that the underlying blockchain technology used by crypto-currencies may have some future relevance. It enables money transactions to be undertaken without reliance on a central clearing house. As I have written, previously, there is no reason why a financial crisis caused by a collapse in the prices of speculative assets, such as shares, bonds, and property should lead to an economic crisis. There are two ways in which such a financial crisis can impact the real economy. 

Firstly, where businesses or the state have themselves engaged in widespread speculation, a collapse of the assets in which they have speculated can cause the firm, or the state to go bankrupt. In 1847, as Engels describes, private capitalists had used the resources of their businesses to speculate in railway shares. When railway share prices collapsed, the private capitalists had to drain money-capital from their actual businesses, to cover their losses, and margin calls on their speculative activity in railway shares. In 2008, some state bodies in small countries had speculated in financial assets, in the use of pension schemes etc., and when those shares became worthless, the state itself had to step in to cover those losses, which meant revenues had to be used to cover those losses, or else revenues that would have been used to cover government spending had to be diverted, with a consequent effect on aggregate demand within the economy. 

The second way a financial crisis can impact the real economy, is that as money gets hoarded to meet commitments, credit becomes restricted, so that a credit crunch unfolds, and interest rates are forced sharply higher, so that the circulation of capital and commodities gets restricted. As banks and financial institutions play a major role in the creation and provision of credit and liquidity, the degree to which those institutions are embroiled in such a crisis, due to their own speculative activity, means that they restrict the provision of credit and liquidity. The central bank can always fill that gap, as it did in 1847 and 1857, and in 2008, but it requires a mechanism by which the liquidity can be put into the system. It currently does that via the banks, which means it has to remain committed to keeping those banks afloat, thereby providing a backstop for the speculative activity of the banks. Various measures to separate out the speculative activity of the banks from their money-dealing activities have been used over the years, but these are always limited in application, and are usually relaxed several years after any financial crisis, so that when the next one comes along, no such measures exist to prevent it. 

There appears no reason why blockchain cannot operate alongside existing fiat currencies, rather than crypto-currencies, to provide a direct means by which the state, via the central bank can enable currency to circulate within the economy, effecting payments, and so maintaining the circulation of capital and commodities, without the need for this to go through the commercial banks, or shadow banking system, and thereby avoiding the need for a central clearing system, operated by those banks. It would mean that the central bank would always be able to regulate the amount of currency put into circulation, so avoiding a credit crunch, without having to bail-out the banks, as the central mechanisms for the transmission of liquidity into the system. 

As I expect interest rates to continue to rise, and thereby asset prices to continue to crash – probably via, some large single day, or multi-day falls, followed by a period of recovery, followed by more sustained periods of declining markets, so creating a secular downward trend, lasting around thirty years - I expect that Bitcoin will continue to fall, with minor recoveries, until all faith in it has vanished, and it sinks without trace.

Back To Prediction 2

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