The past week has been described as the moment when the financial world changed – business channel CNBC called it “the new reality” – when it became clear that global central banks were intent on raising interest rates no matter what.
Advertising of Bitcoin cryptocurrency on the street in Hong Kong, Thursday, February 17, 2022 [AP Photo/Kin Cheung] [AP Photo/Kin Cheung]
The main move was the US Federal Reserve’s decision to raise the key interest rate by 0.75 percentage points, the biggest increase since 1994, and this is just the beginning.
The Bank of England raised the rate for the fifth time and predicted that the inflation rate in the United Kingdom would reach 11 percent. Smaller central banks such as the Reserve Bank of Australia have signaled further rate hikes are coming.
One of the most important decisions was the decision of the Swiss National Bank, which raised the key rate by 0.5 percentage points. Previously, she was one of the most vocal supporters of keeping rates at historically low levels.
The official reason for raising rates is the need to fight inflation, but central banks are well aware that their actions will not reduce price increases. Their concerted action pursues a different goal. As inflation reaches its highest level in four decades, it seeks to crush the wage demands of the working class around the world, provoking a recession if that proves necessary.
Rising interest rates have sent stock markets around the world plummeting, led by Wall Street. The S&P 500 is down about 22% from its previous peak, and the Dow’s decline is approaching 20%. The tech-savvy, interest-rate-sensitive NASDAQ fell more than 30 percent, with some major stocks down more than 50 percent from their highs.
One of the signs of growing volatility is the sharp drop in cryptocurrencies and the decisions of traders to suspend trading due to turbulent market conditions.
Cryptocurrency lender Celsius Network, which rocked the crypto market last week by suspending withdrawals, said it would “take time” for its operations to return to normal. In a blog post on Tuesday, he said he would continue to work “with regulators and officials regarding this pause and our company’s determination to find a solution.” But he didn’t give any details.
The chaos began last month when the so-called TerraUSD stablecoin, used to facilitate cryptocurrency transactions by providing a peg to the US dollar, failed to maintain parity with the dollar.
The stop of rollbacks has gone beyond Celsius. On Friday, Hong Kong-based crypto lender Babel Finance said it was suspending withdrawals due to “unusual liquidity pressure” and Singapore-based crypto hedge fund Three Arrows failed to meet lenders’ margin calls.
On Tuesday, Hong Kong-based cryptocurrency exchange Hoo suspended trading that threatened to drain its funds. He said he was trying to reconfigure his medium- and long-term holdings in an “orderly and reasonable” manner.
In the past, the fluctuations and convulsions of the cryptocurrency market were considered somewhat isolated from the stock market and the wider financial system. This was usually the case in the run-up to the COVID-19 pandemic.
In a commentary published in the Australian Financial Review, columnist Karen Maley drew attention to an analysis published in January by an employee of the International Monetary Fund, which highlights the growing correlation between cryptocurrency and stock markets.
In response to bitcoin falling below $20,000 over the weekend — from nearly $70,000 in November when it was predicted to drop even to $100,000 — she wrote that more conservative investors “can quietly congratulate themselves on their insight and the fact that they did not succumb to the crypto-craze. But their complacency may be premature. Indeed, a sharp drop in the price of bitcoin will inevitably shock global stock markets.”
According to IMF research note Cryptic Connections, “the analysis shows that crypto and stock markets are becoming more interconnected across economies over time.”
The research note details the extraordinary expansion of the cryptocurrency market, especially following the bailout of major central banks in response to the March 2020 crisis at the start of the pandemic.
“Launched in 2009,” the note explains, “the total market capitalization of crypto assets has grown exponentially, from less than $20 billion in January 2017 to over $3 trillion in November 2021. Much of this increase has occurred during the COVID-19 pandemic. as crypto asset transactions accelerated, resulting in a twentyfold increase in the market capitalization of crypto assets between March 2020 and November 2021.”
An IMF study found that in September 2021, the two major cryptocurrencies, bitcoin and ether, “were among the world’s best traded assets, rivaling the market capitalization of some of the world’s largest companies.”
Although the risks of cryptocurrencies were considered minimal until a few years ago, “their widespread use could pose risks to financial stability, given their highly volatile prices, the growing use of leverage in their transactions, and the direct and indirect exposure of financial institutions to the risks associated with these cryptocurrencies. resources. Due to the relatively unregulated nature of the cryptocurrency ecosystem, any material disruption to financial conditions caused by cryptocurrency price volatility could potentially be largely beyond the control of central banks and regulators.”
The results of the study, according to the IMF note, “suggest that the relationship between the cryptocurrency and stock markets has increased significantly over the period 2017-2021.”
Bitcoin and the stablecoin peg together accounted for between 19 and 23 percent of the change in volatility in major global stock markets and between 12 and 17 percent of the change in their returns in what he called the “period” after the pandemic. The ripple effect went in both directions: from cryptocurrency assets to stock markets and vice versa. Cryptocurrency assets can no longer be considered a minor asset class and “may pose financial stability risks due to their extreme price volatility.”
The price movement of bitcoin was due to a significant portion of the change in US stock prices, which was about one-sixth of the volatility in US stock prices and about one-tenth of the change in US stock returns.
The IMF called these results “highly remarkable,” given that five years ago, “the contribution of crypto assets to explaining the movement of the US stock market was no more than one percent, and suggests significant integration of crypto asset markets, most likely due to the increased adoption of crypto assets.” retail and institutional investors”.
The collapse of the cryptocurrency also caught the attention of academic economist Robert Reich, secretary of labor in the first Clinton administration.
He called the cryptocurrency markets a Ponzi scheme that is now collapsing, citing the head of the Securities and Exchange Commission, Gary Gensler, who stated that “fraud, scams and abuses have been widespread in cryptocurrency investments.”
“There are no risk management standards or capital reserves. There are no transparency requirements. Investors often do not know how their money is being used. Deposits are not insured. We are back to 1920s Wild West finance,” Reich wrote.
But, as is always the case with Reich and other would-be reformers of the capitalist system, there is no explanation for the underlying objective dynamics that led to the growing integration of crime into the very heart of the financial system. Reich simply argued that in the 1980s, “America has forgotten the financial trauma of 1929.”
In response, Reich called for increased regulation of the cryptocurrency world. But in doing so, he exposed the bankruptcy of even this limited perspective by pointing to the revolving doors that exist between the financial system and the regulators that should control it.
He noted that the cryptocurrency industry has hired “dozens of former government officials and regulators” to independently lobby against controls. They included “three former chairs of the Securities and Exchange Commission, three former chairs of the Commodity Futures Trading Commission, three former U.S. Senators, a former White House chief of staff, and a former chairman of the Federal Deposit Insurance Corporation.”
Former Treasury Secretary Lawrence Summers advises a cryptocurrency investment company and sits on the board of directors of a fintech company that invests in cryptocurrency payment systems.
The growing turmoil in the financial and cryptocurrency system is not the result of surveillance, but has its origins in the response of governments and central banks to the deepening crisis of the capitalist system.
In the most recent period, beginning with the 1987 stock market crash and intensifying after the 2008 crisis, financial authorities have poured in even more money as a “solution” to increasingly violent storms.
But the effect of these measures was only to create conditions for the re-emergence of the crisis at a more acute level. This significant momentum is resurfacing as central banks grapple with the surge in inflation caused by their past policies.
(Article published in English on June 21, 2022)