The Great Recession of 2008 hit hard. The stock market plunged by dozens of percent in months — wiping out trillions of dollars worth of wealth across the world — and people lost their homes and livelihoods.
Though, in a dramatic fashion, the central banks of the world, namely the Federal Reserve, swooped in to save the day; the Federal Reserve, for instance, began to lower interest rates to seemingly historical lows all while it also began to implement what has been dubbed “quantitative easing” — when central banks buy securities and other assets on the open market to inject liquidity into the economy. Other central banks followed suit.
And it worked. These two monetary policies helped to rejuvenate a previously flagging economy and the stock market, the latter of which is effectively at all-time highs, in the U.S. at least. So on the surface, times seem good.
But times may not be as good as some may think. CNBC reported earlier this month that the International Institute of Finance (IIF) has found that there is now $250.9 trillion worth of debt — around 300% of global GDP — in existence. Sure, debt isn’t always as bad as some economists say, though a regional president of the Federal Reserve recently admitted that a portion of this debt could hamper the economy in the long run. And many say that’s bullish for Bitcoin.
Dangerous Corporate Debt
Dallas Federal Reserve President Robert Kaplan recently sat down with CNBC to talk debt, specifically corporate debt. And what he said may harrow some investors:
“The thing I am worried about is if you get two or three BBB credit downgrades to BB or B, that could lead to a rapid widening in credit spreads, which could then lead to a rapid tightening in financial conditions.”
In layman’s terms, Kaplan is explaining that if credit rating agencies begin to believe that corporations raising money via the bond market are risky to lend to, financial conditions could quickly tighten.
This could lead to a case where downgraded corporations raising debt could see their business slip from their fingers, creating recessionary qualities in the economy.
What’s interesting is that some believe that corporate debt is just the tip of the iceberg when it comes to issues with the economy. Case in point, Ray Dalio, who helms the world’s largest hedge fund, earlier this month argued that “the world has gone mad and the system is broken.”
Dalio referred to negative interest rates, large government deficits that he believes are almost certain to “increase substantially,” the impending collapse of “sound finance” in “reserve currency countries and their currencies,” massive liabilities in pensions, and a growing wealth gap.
Where Does Bitcoin Fit In?
Many see these macroeconomic conditions as bullish for Bitcoin.
In the case of ballooning corporate debt that could trigger a recession, many say that Bitcoin acts as a hedge against falling traditional equities; in the case of negative interest rates and hyperinflation, Bitcoin is an investment that yields 0% and has disinflationary qualities.
As Chamath Palihapitiya, a former executive of Facebook and venture capitalist, said in July, Bitcoin is the perfect hedge “against the traditional financial infrastructure”. He elaborated that if fiscal or monetary policy is wonky, as it arguably is now, having Bitcoin is like “the schmuck insurance you have under your mattress”.
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