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Market Lab / Crypto Report - Digital Fiat; QE4Ever then Helicopter Money?

Dr. K's Crypto-Corner
by Dr. Chris Kacher
Riding the Revolutionary Rocket with Cryptotechnologies... Entirely Evolutionary™


Digital National Currencies

We consider Facebook an alt-currency as the capital from QE has to find a home, and money managers have to keep up with their peers thus having some exposure to mega cap alt-currency companies such as Facebook is necessary. Facebook as well as the other FAANG stocks must stay focused on innovative technologies as the bleeding edge continues to evolve at an ever quickening pace. Facebook's digital currency Libra has stirred other countries into jump starting programs aimed at digitizing their own currencies. While Libra is centralized thus can be controlled and regulated, some believe it would be an alternative to Facebook simply adopting bitcoin as one congressman recently shared his belief that Facebook would be better off adopting bitcoin. Despite Zuckerberg admitting he’s still unsure if Libra will work, most major companies will be creating their own centralized coins as it improves efficiency and speed, thus Libra can work in such a centralized, controlled environment, but only if it does not compete with the Federal Reserve. The way Libra is currently set up, Facebook controls Libra's monetary policy and earns interest on reserves, thus is a miniature version of a central bank. Facebook will have to adjust Libra if the U.S. government is to approve Libra.

That said, national digital currencies could make it harder for private cryptocurrencies to catch on because government e-cash would be operated, backed and controlled directly by central banks, so it could be viewed as more reliable than bitcoin. But the whole notion of a country digitizing its fiat currency does not in any way displace bitcoin which was created to leapfrog over the ability of governments to debase their fiat by printing more of it.

The benefits of digitization mean faster and cheaper money transfers across borders, lower costs to central banks, more efficient monetary policy, becoming more competitive to bitcoin, and offering a risk-free payment network to the public.

The country that is first to introduce a digital currency that is more easily stored and used abroad than its respective fiat or native currency will have “a first-mover advantage to greater currency use, though not necessarily to reserve currency use,” says Tommaso Mancini Griffoli, deputy division chief of the IMF’s central bank operations division.

Even central bankers such as the Bank of England's Mark Carney are starting to wake up to the use of cryptocurrencies such as bitcoin for peer-to-peer value transfer as he recently questioned the dollar's status as a reserve currency if the U.S. does not digitize the dollar.

Helicopter Money

How much longer can money be printed? How much longer can fiat be debased? How much longer can the can be kicked down the road? What happens should current modes of QE fail? The next stage of monetary policy should put money more directly into the hands of spenders instead of investors/savers to help the economy. This demographic tends to be the less well off as the wealthy have less incentive to spend the money which is only a small boost to their overall wealth. There is past precedent for this such as the bonus given to U.S. Veterans during the Great Depression. Incentives to spend the money such as the money disappearing if not spent within a year would be part of the program. The money would also be targeted into desirable programs such as small business or education. The central bank could also promise to print money to cover debt payments, though this would be viewed neutrally at best by the markets as it would not help boost the stock market.

Trade War

As for the trade war between the U.S. and China, the protests in Hong Kong are having an impact on trade negotiations. Beijing threatened to interfere with a ruling by Hong Kong's highest court in regards to the ongoing protests in Hong Kong, so the U.S. stepped in and said it would curtail China's trade preferences if it failed to respect Hong Kong's political autonomy. Beijing reacted badly to this.

As part of an ongoing trade war with China, on August 24, 2019, Trump tweeted that he “hereby ordered” US companies to start looking at alternatives to China on the basis of claimed powers under IEEPA. Trump, however, did not formally declare an emergency as required by IEEPA (International Emergency Economic Powers Act). The IEEPA empowers the president to declare a national emergency to “deal with any unusual and extraordinary threat, which has its source…outside the United States, to the national security, foreign policy, or economy of the United States.” Were Trump to declare an emergency, capital flows into China from the U.S. would be slowed or halted. He could also create conditions that could stop companies from doing business with China. 

China Has Been Bullish on Blockchain

In an interesting turn of events given China's banning of ICOs and bitcoin exchanges as well as plans to ban bitcoin mining, China's president Xi Jinping recently said the country needs to "seize the opportunity" offered by blockchain technology. Blockchain has a wide array of applications within China from financing businesses to mass transit to poverty alleviation. Xi remarked, "We must take the blockchain as an important breakthrough for independent innovation of core technologies. We must clarify the main direction, increase investment, focus on a number of key core technologies, and accelerate the development of blockchain technology and industrial innovation."

Such in-depth remarks are the president's first on blockchain tech. But major companies in China have already been gearing up their platforms for the last couple of years to take advantage of blockchain technology. No surprise there. This should further help push blockchain forward so expect the cryptospace which is currently valued around $200 billion to add a zero over the next couple of years, pushing total valuation into the trillions as the breakneck speed of innovation continues.

(͡:B ͜ʖ ͡:B)  
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