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DeFi and Credit Risk
It was dubbed the Great Moderation.
After Federal Reserve governor Paul Volcker broke the back of US inflation in the 1980s, the US and other western economies experienced a long period of benign consumer price trends, with small, predictable rises averaging around 2% per year. It was a critical factor in a positive feedback loop: confidence in central banks' autonomous monetary policy expanded and became entrenched, and economies and stock markets soared as a result.
There were some bumps in the road – the dot.com bust in 2000 and the Great Financial Crisis of 2008, to name two – and an ever-widening haves-versus-have-nots divide engendered disillusionment with the political model that fueled Wall Street's wealth. Nonetheless, the fact that inflation had become a distant memory, with all the uncertainty and stress it brings to economic decision-making, meant that the ship of economic expansion was continuously steered back on course.
What happens now? What does the recent price increase signify for the global economy's long-term prospects? What does this imply for Bitcoin? Its proponents portray it as an inflation hedge, but its price in dollars has moved in lockstep with the stock market's ups and (mainly) downs in recent months, making it difficult to justify.
Consider the influence of continuous price uncertainty on economic and, more importantly, political decision-making while considering these issues.
Uncertainty has returned
With inflation at 8.5 percent in March and the Federal Reserve launching its sharpest rate hikes in 22 years to try to bring it down, Americans throughout the economic spectrum – not just those in lower-earning segments of society – are facing economic challenges they haven't faced in decades. Should I buy that new automobile now, in case it becomes more expensive later, or should I be concerned about my job stability, given the predictions of an impending recession? This kind of societal uncertainty has a significant influence on the economy as a whole.
This uncertainty is unpleasant for everyone save the most astute (and fortunate) individuals who can make money in an inflationary climate. And it will inevitably have political ramifications. Consider how inflation endangered Jimmy Carter's single-term presidency in 1980. Consider the regular turnover of governments in inflation-prone economies like Argentina.
Many people fear that President Joe Biden is bound to follow in Jimmy Carter's footsteps. In the most recent Gallup poll, his approval rating was a dismal 41.3 percent.
Stagflation, a double punch of inflation and unemployment brought on by pandemic-related supply chain bottlenecks, is adding to Biden's worries. The danger is that even if the Fed pushes us into a recession, reducing aggregate demand will not be enough to break the inflationary cycle since supply-driven costs' price increase will offset it.
Already, reports from Amazon and Apple have indicated that China's latest COVID-related lockout is causing supply concerns for businesses. It has the potential to lead to stagflation. That is a politician's worst fear.
Changing political dynamics
Aside from the electoral challenges to incumbent leaders, inflation politics may differ significantly from those of 1980. There was more trust in the way society was governed back then. As evidenced by Edelman's annual Trust Barometer study, confidence in government, corporations, law enforcement, the media, and other vital institutions has eroded over time, coinciding with the upheaval produced by globalization and the internet.
The political and economic decisions people will make will be even more unpredictable as a result of this developing ennui. What will it mean for all those swing voters who voted against Trump in disgust in 2020 if he runs for President again in 2024, for example? They may hold their noses and restore him to power, but they will not be pleased. Democrats, on the other hand, will be downright depressed. There will be a level of mistrust in the political outcome and the system that brought it about that wasn't present when Ronald Reagan defeated Jimmy Carter in 1980.
In other words, there's a growing consensus that traditional politics won't solve our economic problems.
Money is important
What impact will this political disenchantment have on people's attitudes about money?
It's important remembering that money has been essentially a political endeavour for millennia, with governments attempting to regulate its issuance and circulation. The fiat money era, which lasted 50 years, was the pinnacle of that endeavour.
When people's faith in the democratic system has eroded, they have resorted to alternatives, with gold being the most prominent example.
Bitcoin now provides an alternative, one that has valuable features that go beyond being a store of value. Most significantly, bitcoin is digital, which means it can be programmed and integrated into the dominant internet economy. And its functioning – both its mandated scarcity and transaction and recordkeeping methods – is determined by a social consensus process.
To put it another way, Bitcoin is an alternative monetary governance system. There's no assurance that people will pick it in masse, but the current moment of economic and government uncertainty, as well as the distrust it will foster in institutions, provides a compelling case.
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