Right now, what’s going on in the world’s financial markets, including crypto, is insanity. All indicators are screaming bubble and yet, there’s no way it all can crash together.
There’s big big money out there. Not just credit, but actual (fiat) money. If something happens in one of the markets, this big money needs to move somewhere else. It’s like a super tanker that can only move slowly, turn slowly, generally make slow decisions. But once it moves, it carries tremendous weight with it.
So let’s play this through.
The FED tightens it’s monetary policy, to decrease the bubble and it’s balance sheet. Meaning, it increases interest rates further. They’ve already started to increase interest rates slowly since December 2015 and are now at 1.25%. Still crazy low. And thus, easy credit and way too much money in the system. What happens when too much money is around? People need to spend it. And they did, in the stock market. Which is now way too overvalued. A crazy bubble.
Once the FED tightens up, the stock market will deflate, if not just simply crash on one point. People need their cash back to pay for interest on their loans. But the big money doesn’t need to pay interest. They just want to keep what they have, rescue it. So they’ll move out of the stock market and into the USD. Because of tighter policy, the USD will become stronger again. So holding USD seems logical. But, if the crash happens, and the economy nose dives, than the FED will have to loosen it’s policy again and with that might cause inflation to explode.
Because now, the big money will loose faith into the USD and move out. Where can it go? Well, the Euro is a massive bubble too, and so is the Yen. Globally seen, it’s tricky to park money anywhere. But it can’t just disappear. So where can it go? Now we are playing macro economics. If the money moves into the Euro, the Euro bubble will become even more crazy. The Euro will become so strong that European exports will nose dive. Same for the Yen. This will destroy the economy too. So the ECB will then loosen it’s policy to decrease the value of the Euro. Which in return could also cause inflation, and the big money to run.
The alternative for big money could be Gold and Silver. Only that if they go that way, I assume the prices will skyrocket. Which is good for all the ones that have seen the bubble and invested in such crisis proven commodities. But I can’t really see that happen too much. Big money is just way too big. Usually it’ll buy government bonds at ridiculous low interest rates, just to have a promised save heaven for their big money. But this will only work, if there’s still trust in the governments.
How is crypto going to play into this?
The crypto/ ICO market is also completely flooded with speculators at the moment. But there’s also a lot of value being created. No question, it’s the future. Nevertheless, it’s a bubble. And the quick money will leave in times of crisis. Leaving only the true believers and real value companies behind. Question is, what will happen to Bitcoin? It’s currently hold by a lot of speculators too I believe. So it might nose dive in times of money policy tightening, when the speculators leave. But it’ll stay, bottom lime, the entire network has value and this value will be the rock bottom of bitcoin. So if money deflates out of alt coins, it usually first has to go via bitcoin. Which should increase it’s value temporarily. If people believe strong enough, most might just stay there and increase it’s value into the sky. But if people have to pay their loans, they’ll need to get their cash out and leave Bitcoin.
The thing is, Bitcoin is the future, but the world doesn’t know it yet. So the chances that people jump into bitcoin in times of crisis are not clear. I think most people will fall back onto things they know, which is Silver and Gold. This would be in an inflationary scenario.
In a deflationary scenario, people would want to hold fait currency as it becomes stronger and stronger. Which means, Bitcoin and it’s likes would loose value in comparison. Which will make people leave Bitcoin to hold fiat. In that sense, Bitcoin is comparable with the stock market. At least in terms of public behavior. Only that the true believers will stay, as they don’t want to change their valuable Bitcoin against fiat currency. So there will be a bottomline that should hold.
But, a deflation means decrease in commodity prices. Everything will become damn cheap until it’s not worth to produce anymore. Exports will hold almost completely, with the USD being way to expensive to buy. Much cheaper imports will increase and undermine local production. Money will leave the US to buy things outside. This will destroy the local economy which results in layoffs, which results in failing demand of products, which results in even cheaper prices, which goes on and on until the economy is completely destroyed.
The FED or ECB in that sense, would not let this happen and pump cheap money into the markets again. And this could result into hyperinflation. And that’s when the big money moves into real assets and commodities like Gold, Silver, and maybe even Bitcoin.
So Bitcoin is not deflationary safe. It just can’t, as the only safe place in such scenario is the deflating fiat currency itself.
So if financial markets crash, and money moves into fiat, we will automatically see a deflation. But the money will also be withdrawn from the FED. Basically removed. Which decreases supply, thus increases demand. Thus fires deflation.
To be continued..