Financial and crypto markets have gone into free-fall this month as Coronavirus pandemic panic intensifies and investors liquidate positions. Looking at the bigger picture shows how it could be one epic debt bubble starting to deflate.
Two decade Wall Street veteran and CEO of AvantiBT, Caitlin Long, has taken a look at the bigger picture for the financial system and current macroeconomic meltdown.
1/ HOW TO UNDERSTAND WHAT'S GOING ON IN FINANCIAL MKTS. Western world built up a debt bubble of stunning proportions over past ~50yrs. It's deflating now, just as it tried to do in 2008, 2001, 1997, 1994, 1987, 1981 & 1974. Each time, tho, there was enuf balance sheet capacity…
— Caitlin Long ???? (@CaitlinLong_) March 14, 2020
The Covid-19 outbreak has caused panic among investors who have liquidated their positions in favor of hard cash which is always preferable to other assets in times of extreme adversity.
Digital asset markets have plunged almost 40% this month alone and major stock markets such as the S&P500 have dumped 26% since this time last month.
Debt Bubble Deflation
Markets have crashed before though and each time there was enough balance sheet capacity to re-inflate the system by pumping more debt into it, according to Long.
She added that the western world has built up a debt bubble of stunning proportions over the past 50 years and it is deflating now, just as it tried to do in 2008 and previous years.
Assets still existed that hadn’t yet been encumbered by debt meaning the countries were solvent which is why their fiat currencies had value she continued.
Debt has increased dramatically over the past 50 years and currently stands at record levels. When debt expands, liquidity grows which largely inflates financial asset prices.
Long noted that what we are seeing now is governments and central banks scrambling to offset credit contraction by creating new debt through monetary stimulus to fill the hole.
“What they’re really doing is back-filling for shrinking debt by creating new public sector debt, in an attempt to counter the financial asset price correction that inevitably accompanies a credit contraction (aka debt deflation). That’s what we’re seeing now.”
The figures and recent FED action, such as dropping interest rates to zero on Sunday, back up this theory of a huge collapsing debt bubble.
What does it mean for Bitcoin?
Contrary to hopes of a safe haven, Bitcoin has crashed with the rest of the world’s markets, dumping to its lowest price in almost a year.
Industry analyst ‘PlanB’ commented that BTC may become the last asset not yet mortgaged, adding that all that leverage/debt is cleared by the drop, all leveraged longs are liquidated.
— PlanB (@100trillionUSD) March 15, 2020
There are no ‘circuit breakers’ unlike stock markets, no stock buybacks, no bailouts so the system clears itself which is a good thing.
Unlike fiat, which is effectively central bank debt, Bitcoin is nobody’s debt as it is a bearer asset like gold.
At the moment however BTC and crypto assets are behaving like stocks as the panic intensifies, and this is unlikely to change until a Covid-19 vaccine has been developed.