The central bank system ran into a problem at the end of World War 2: globalization.
This was a shift which made the system obsolete in a short period of time. The ability to directly influence monetary policy on a global scale was beyond the scope of central banks. Even the Fed, the ones tied to the reserve currency, were limited by their geographic boundaries. In short, their reach was not past their shores.
It is a situation that was always somewhat present for central banks. Here we see the idea of Triffin's Paradox introduced. This concept is based upon the idea that the reserve central bank will, at some point, be confronted with the decision to support the global economy or its own.
For 6 decades, the Fed did not have this problem.
Since the central bank system became obsolete, something else had to step in. This was established by the international banking system. It knew the limitations and sought to fill it. We know call this the Eurodollar system (also offshore, wholesale, or shadow banking). The point is this system took monetary policy out of the hands of central banks.
Ultimately, this grew to funding over 90% of global trade. So while most focus upon central banks, the true power for the economy was elsewhere.
Great Financial Crisis And Sickness
The Eurodollar system is sick right now. It started with the Great Financial Crisis and only got worse over the last 15 years. We are now mired in what is termed balance sheet constraint which is upsetting the entire global economy. Some even theorize that, due to loss of GDP, we are stuck in a major depression. Trillions of dollars in global GDP was not realized due to this "sickness".
Sadly, it is not going to be cured anytime soon. The central banks does not create broad economy money. Unless they are creating physical cash, i.e. banknotes, what they "print" is nothing more than a bank instrument. We could think of this as bank tokens. They can only be swapped inter-bank. Individual people or businesses cannot participate.
So while the Fed tries to solve the world's woes with reserves, it is completely inept to do so. Nevertheless, since the Fed, as Alan Greenspan said, finds it a "dubious proposition" even to find money, we will conclude they will keep wallowing in the same failed policies.
Perhaps, before getting to the solution, we should look at what led up to the GFC and how it all came down.
Collateral And Negative Interest Rates
The Great Financial Crisis (GFC) was not as the media advertised. This was a bank run caused by the Wall Street rating agencies.
Back in the early 2000s, companies such as Moody's declared mortgage backed securities (MBS) to be on par with U.S. Treasuries. This presented a windfall of collateral for the Eurodollar system since banks could now treat MBS on the same level. This massively expanded the balance sheet capacity of the system since more than sovereign debt was available. We also have to keep in mind that many of the transactions made during this period were unsecured.
In August 2007, things started to crack when BNP Parabas had difficulty pricing its funds. The bank suddenly found the MBS it was dealing in had no market. It took 3 days for this to clear up.
That set off a mad rush. Suddenly all banks were starting to question the collateral Collateral transformation has helped a bit but, even with all the money Congress spends, there simply are not enough Treasuries to fund the tens of trillion in global trade.
Cryptocurrency And Hive Bonds
With all due respect to people like Warren Buffett and Charlie Munger, they are missing a major portion of the cryptocurrency puzzle.
As it stands now, there is no way the central banking system can get enough money into the system, to finance global trade. The constraints on balance sheets is only growing, especially for primary dealers.
For this reason, something else has to step in. To me, cryptocurrency is the solution. It has the ability to expand currency available, by creating money. This is especially true for stablecoins which are a vital component to the global equation. Whereas many feel Bitcoin is the solution, the volatility makes it inappropriate for the lending we are discussing here.
Currency is only one factor. The other, as we saw above, is collateral. This is the entire premise behind the notion of Hive Bonds. We are talking about a major global crisis here, one that few are looking to fill.
The banks cannot do it since they are constrained by the system they operate within. For the last 15 years they tried to create other assets that would be used as collateral. Unlike retail investors, banks have long memories. They understood where the system went wrong last time and are not going to put themselves in the same boat again (instead they create others).
At the core of this is transparency. When Lehman Brothers took a bunch of mortgages, packaged them up in different products, and sold them into the market, nobody truly knew what was in them. The information was proprietary since it was Lehman's design. This was the case with every bank generating these.
Hive Bonds has the potential to bring transparency to the table. Because of this, we can generate a level of collateral does rivals Treasuries. By using the system on Hive, the counterparty risk is limited to the blockchain and not some institution.
We will delve deeper into this in our next article.
Global And Digital
Cryptocurrency is unstoppable for a simple reason: it is global.
This means that no government, even the United States, can step in a destroy it. The ability to make it difficult for its citizens is present but taking the system down is not possible.
The path was laid out by the banks starting in the 1950s. They created private, reserveless money that could expand as the economy dictated and it could be delivered to where it was needed. This was out of the reach of the central banks.
So what is cryptocurrency? It is private reserveless money except without the banks.
This is why it is the solution to the limitations of the central bank system. It is mirroring what was already created just removing the banks from the equation.
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