It is described as the week in which the financial world changed – the CNBC business channel described it as a “new reality” – when it became clear that the world’s central banks intended to raise interest rates, whatever happened.
The main action was the decision of the US Federal Reserve. UU. of increasing its base rate by 0.75 percentage points, the largest individual increase since 1994, with more to come.
The Bank of England raised its rate for the fifth time and predicted that the UK inflation rate would rise to 11 per cent. Smaller central banks, such as the Reserve Bank of Australia, have indicated that further rate hikes are being prepared.
One of the most significant decisions was made by the Swiss National Bank, which raised its base rate by 0.5 percentage points. He had previously been one of the strongest advocates of keeping rates at historic lows.
The official reason for the rise in rates is the need to fight inflation, but central banks are well aware that their actions will not reduce price increases. Its concerted action has another purpose. As inflation reaches its highest levels in four decades, it aims to suppress working-class wage demands around the world by causing a recession, if necessary.
Rising interest rates have caused a sharp drop in Wall Street-led stock markets around the world. The broad-based S&P 500 is down about 22 percent from its previous high and the Dow is approaching 20 percent. The technology-sensitive and interest-sensitive NASDAQ index fell more than 30 percent, and significant equities fell more than 50 percent from their highs.
One indication of the growing instability is the precipitous fall of cryptocurrencies and the decisions of traders to suspend operations due to turbulent market conditions.
Cryptocurrency lender Celsius Network, which sent a shock wave to the cryptocurrency market last week when it suspended withdrawals, said it would “take time” to normalize its operations. In a blog post yesterday, he said he would continue to work “with regulators and officials on this break and our company’s determination to find a solution.” But he gave no details.
The chaos began last month when the so-called stablecoin TerraUSD, used to facilitate cryptocurrency trading by providing a link to the US dollar, failed to maintain the dollar’s parity.
The closure of the retreats extended beyond Celsius. On Friday, Hong Kong-based cryptocurrency lender Babel Finance said it was halting withdrawals because of “unusual liquidity pressure” and that Singapore-based cryptocurrency hedge fund Three Arrows did not respond to calls. of margin of creditors.
Yesterday, Hong Kong-based cryptocurrency exchange Hoo halted transactions that threatened to deplete its funds. He said he was trying to reconfigure his assets in the medium and long term in an “orderly and reasonable manner”.
Previously, the fluctuations in the cryptocurrency market were considered somewhat isolated from the stock market and the broader financial system. That was usually the case in the period before the COVID-19 pandemic.
In a comment posted on Australian Financial Reviewcolumnist Karen Maley drew attention to an analysis by an International Monetary Fund official published in January that pointed to the growing correlation between cryptocurrencies and stock markets.
Writing in response to bitcoin falling below $ 20,000 over the weekend (from about $ 70,000 in November amid forecasts of $ 100,000), he said more conservative investors “could be silently congratulating each other.” for his ingenuity in not succumbing to cryptographic madness.But his presumption may be premature.This is due to the fact that the sharp fall in the price of bitcoin will inevitably affect global stock markets.
According to the IMF research note entitled Cryptic connections“The analysis suggests that cryptocurrency and stock markets are increasingly interconnected between economies over time.”
The research note detailed the extraordinary expansion of the crypto market, especially after the rescue operations launched by major central banks in response to the March 2020 crisis at the start of the pandemic.
“Launched in 2009,” the note began, “the total market capitalization of cryptographic assets increased exponentially from less than $ 20 billion in January 2017 to more than $ 3 trillion in November 2021. Much of this increase occurred during the COVID-19 pandemic as trade in cryptocurrencies accelerated, leading to a twenty-fold increase in the market capitalization of cryptocurrencies between March 2020 and November 2021.
IMF research found that in September 2021, two major cryptocurrencies, bitcoin and ether, “ranked among the world’s top traded assets, competing with the market capitalization of some of the world’s largest companies.”
Although the risks of cryptography were considered minimal until a few years ago, “their widespread adoption could pose risks to financial stability given their highly volatile prices, the increasing use of leverage in their negotiations, and the direct and indirect exposures of financial institutions.” Due to the relatively unregulated nature of the cryptocurrency ecosystem, any significant disruption to financial conditions caused by the volatility of cryptocurrency prices could be largely beyond the control of central banks and regulatory authorities.
The results of the research, according to the IMF note, “suggest that the interconnection between the crypto and stock markets has increased markedly during 2017-2021.”
Together, bitcoin and stablecoin tether accounted for 19 to 23 percent of the change in the volatility of the world’s major stock markets and between 12 and 17 percent of changes in their return in what they called the “post-pandemic period.” The effects of contagion were in both directions: from cryptocurrencies to stock markets and vice versa. Cryptographic assets could no longer be considered a class of marginal assets and “could pose risks to financial stability due to their extreme price volatility.”
The movement of bitcoin prices has been associated with a non-trivial part of the change in US stock prices, which accounts for about one-sixth of the volatility of US stock prices and about one-tenth of the change in US stock yields.
He described these results as “quite remarkable” given that five years ago, “the contribution of cryptocurrencies to explain changes in U.S. stock markets was at most one percent and suggests a significant integration of cryptocurrency markets, very probably due to the increased adoption of cryptographic assets by retail and institutional investors. “
The cryptographic crash also caught the attention of academic economist Robert Reich, the Secretary of Labor in the first Clinton administration.
He described cryptocurrencies as a now-failing Ponzi scheme, citing the words of the head of the Securities and Exchange Commission, Gary Gensler, who described cryptocurrencies as “the result of fraud, scams and abuses”.
“There are no standards for risk management or capital reserves. There are no transparency requirements. Investors often don’t know how to handle their money. Deposits are unsecured. We go back to the wild west finances of the 1920s. “Reich wrote.
But, as always with Reich and other aspirants to reform the capitalist system, there is no explanation for the underlying objective dynamic that has led to the growing integration of crime at the very heart of the financial system. Reich simply stated that in the 1980s, “the United States forgot the financial trauma of 1929.”
Reich’s response was a call for greater regulation of the cryptographic world. But in doing so, it has revealed the failure of even that limited perspective, pointing to the revolving door that exists between the financial system and the regulatory bodies that supposedly control it.
He noted that the crypto industry has hired “dozens of former government and regulatory officials” to press on their behalf against the controls. These included “three former chairmen of the Securities and Exchange Commission, three former chairmen of the Commodities 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 firm and is on the board of a financial technology company that invests in cryptocurrency payment systems.
The growing turmoil in cryptocurrencies and the financial system is not the result of oblivion, but is rooted in the response of governments and central banks to the growing crisis of the capitalist system.
Over the past period, starting with the stock market crash of 1987, and intensifying after the 2008 crisis, financial authorities have injected even more money as a “solution” to the growing storms.
But the effect of these actions was only to create the conditions for the recurrence of the crisis at a higher level. This essential dynamic is once again in place as central banks move forward to cope with the rising inflation created by their previous policies.