It has been described as the week the financial world changed – business channel CNBC described it as a “new reality” – when it became clear that global central banks were intent on raising interest rates. interest no matter what.
The major action was the US Federal Reserve’s decision to raise its base rate by 0.75 percentage points, the biggest increase since 1994, and more to come.
The Bank of England raised its rate for the fifth time and predicted that the inflation rate in the United Kingdom would reach 11%. Smaller central banks, such as the Reserve Bank of Australia, have signaled further rate hikes are on the way.
One of the most important decisions was that of the Swiss National Bank, which raised its key rate by 0.5 percentage points. Previously, he had been one of the strongest advocates of keeping rates at historic lows.
The official reason for the rate hikes is the need to fight inflation, but central banks are well aware that their actions will not reduce price increases. Their concerted action has another objective. As inflation hits its highest level in four decades, it aims to suppress the wage demands of the working class around the world by provoking a recession, if that proves necessary.
Interest rate hikes caused stock markets around the world to fall sharply, led by Wall Street. The broad-based S&P 500 is down about 22% from its previous high, and the Dow Jones’ drop is approaching 20%. The tech-heavy, interest-rate-sensitive NASDAQ index fell more than 30%, with major stocks falling more than 50% from their highs.
One of the indications of growing instability is the precipitous drop in cryptocurrencies and traders’ decisions to suspend trading due to turbulent market conditions.
Cryptocurrency lender Celsius Network, which sent shockwaves through the crypto market last week by suspending withdrawals, said it would “take time” to normalize operations. In a blog post yesterday, 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 did not provide any details.
The chaos began last month when so-called stablecoin TerraUSD, used to facilitate cryptocurrency trading by providing a link to the US dollar, failed to maintain dollar parity.
The halt in pullbacks extended 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 did not respond to calls from lenders margin.
Yesterday, Hong Kong-based crypto exchange Hoo halted trades that threatened to deplete its funds. It said it was trying to reconfigure its medium- and long-term assets in an “orderly and reasonable” manner.
Previously, the fluctuations and fluctuations of the crypto market were considered somewhat isolated from the stock market and the wider financial system. This was generally the case in the run-up to the COVID-19 pandemic.
In a comment published in the Australian Financial Reviewcolumnist Karen Maley drew attention to an analysis by an International Monetary Fund staffer published in January that highlighted the growing correlation between crypto and stock markets.
Writing in response to bitcoin’s plunge to below $20,000 over the weekend — from nearly $70,000 in November, amid predictions that it would rise to $100,000 — she said investors more conservatives “could quietly congratulate themselves on their shrewdness in not succumbing to the crypto craze. But their complacency may be premature. Indeed, the sharp decline in the price of bitcoin will inevitably shake global stock markets. »
According to the IMF research note titled Encrypted connections“The analysis suggests that crypto and equity markets have become increasingly interconnected across economies over time.”
The research note details the extraordinary expansion of the crypto market, especially following the bailouts 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 crypto assets has grown 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 trading in crypto assets accelerated, resulting in a twenty-fold increase in the market capitalization of crypto assets between March 2020 and November 2021.”
IMF research found that in September 2021, two major cryptocurrencies, bitcoin and ether, “ranked among the top traded assets in the world, competing with the market capitalization of some of the world’s biggest companies. “.
While the risks associated with crypto were considered minimal until a few years ago, “their widespread adoption could pose risks to financial stability given their highly volatile prices, increasing use of the effect of leverage in their transactions and the direct and indirect exposure of financial institutions to these risks. assets. Due to the relatively unregulated nature of the crypto ecosystem, any significant disruption to financial conditions driven by crypto price volatility could potentially be largely beyond the control of central banks and regulators.
The research findings, according to the IMF note, “suggest that the interconnectedness between crypto and equity markets has increased significantly over the period 2017-2021.”
Together, bitcoin and stablecoin explained about 19-23% of the variation in volatility of the world’s major stock markets and about 12-17% of the variation in their performance in what he called the “post-pandemic period.” . The contagion effects went both ways, from crypto assets to stock markets and vice versa. Crypto-assets could no longer be considered a fringe asset class and “could pose risks to financial stability due to their extreme price volatility.”
Bitcoin’s price movement was associated with a sizable portion of the change in US stock prices, accounting for about one-sixth of the volatility in US stock prices and about one-tenth of the change in US stock returns.
He called the results “quite remarkable” given that five years ago, “the contribution of crypto assets to explaining US stock market movements was one percent at most and suggests an integration significant impact of the crypto asset markets, most likely due to the increased adoption of crypto assets by retail and institutional investors.
The crypto crash also caught the attention of academic economist Robert Reich, the labor secretary in the first Clinton administration.
He called the crypto markets a Ponzi scheme now collapsing, citing the words of Securities and Exchange Commission chief Gary Gensler, who called crypto investments “filled with frauds, scams and of abuse”.
“There are no risk management standards or capital reserves. There are no transparency requirements. Investors often don’t know how their money is managed. Deposits are not insured. We are back to the Wild West finances of the 1920s,” Reich wrote.
But as always 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 center of the financial system. Reich simply asserted that by the 1980s, “America had forgotten the financial trauma of 1929.”
Reich’s response was a call for more regulation of the crypto world. But in doing so, he exposed the bankruptcy of even this limited perspective, pointing to the revolving door that exists between the financial system and the regulators that are supposed to control it.
He noted that the crypto industry has hired “dozens of former government officials and regulators” to lobby on its behalf against 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 the former chairman of the Federal Deposit Insurance Corporation “.
Former Treasury Secretary Lawrence Summers advises a cryptocurrency investment firm and sits on the board of a fintech company that invests in cryptocurrency payment systems.
The growing turmoil in crypto and the financial system is not the result of an oversight but is rooted in the response of governments and central banks to the deepening crisis of the capitalist system.
Over the past period, starting with the stock market crash of 1987 and escalating 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 a re-emergence of the crisis at a higher level. This essential dynamic is once again at work as central banks act to deal with the surge in inflation that their past policies created.