But at some point, confidence in the sovereign also collapses.Īfter all, debt is a game of confidence. But the state can and prop up the value of its currency for a time. They could not force anyone to use their tokens under the threat of sovereign violence. This is what both FTX and Terra Luna tried to do, to print their own private currencies, to prop up their asset books and valuations, but they were not sovereign. They take their cue from the sovereign, and in the case of the United States the Federal Reserve has doubled its balance sheet since the start of the coronavirus from four to eight trillion dollars. But the bad actors in a debt super cycle aren't just the companies making wild unkeepable promises or engaged in outright fraud. The criminality of what was underway is only now beginning to come to light. Millions of investors have lost significant amounts, if not all of their wealth. Because these companies were significant market makers, their collapse has triggered systemic shocks causing a cascade of insolvencies and bankruptcies. In effect high rate crypto savings accounts, which became very popular with retail investors in an environment of low fed rates where most Bank savings accounts effectively yielded zero percent.Ĭrypto exchanges and hedge funds also had venture arms that invested in hundreds of startups building across the crypto ecosystem. They also lent money they didn't have to financial services providers in the crypto space to prop up yield products. We are seeing the beginnings of this today, with the collapse of major cryptocurrency exchanges, like FTX and Voyager, and crypto hedge funds, like Alameda and Three Arrows Capital.Įssentially these institutions placed massive market bets using leverage, or debt rather than assets they owned. In other words we are witnessing the end of what some economists call a debt super cycle which is a multi-generational cycle in which a civilization increases its levels of public and private debt until they become unsustainableĪt that point the system of leverage quickly unwinds and debt is restructured but often not until the civilization undergoes an economic depression and shifts to a lower level of complexity.
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