The dollar has a liquidity issue. What?! Can you believe it when the Fed continues barring the money out of thin air?
Well, domestically, the US dollar supply may be sufficient. Internationally, not really.
The Fed’s limitation
You may believe the central bank is omnipotent. However, it does has its limitation that the powers are only limited within the nation.
Therefore, unlimited money for US citizens only!
What about the rest of the world?
The name got it because, after World War II, the US helped the European countries to rebuild through the Marshall Plan.
It means there are not enough dollars to pay off when people need them.
The financial crisis means everyone sells assets or anything that they want to convert into cash but the banks do have not enough money to pay for which makes the devaluation of assets worsen. A vicious cycle that reaches the bottom that people permanently lose money.
The mini financial crisis in Defi
Defi creates a similar scenario as the financial crisis. The impermanent loss is when a liquidity pool loses a large amount of money due to large portions of assets being sold out as taking profits that eventually bring down the price and people start getting out of the pool as fast as possible even if they are selling to lose.
What triggered the sale?
I am not talking about what caused the financial crisis because no one can predict it. However, what triggered the sale are IBFs who dealt with Eurodollar knew dollar shortage beforehand and likely sold their assets to accumulate currency at first. Then other institutional investors would follow until fall or shortage was revealed.
Similar to the gold standard market that people demanded more gold but issuers got not have more gold to provide.
Why the liquidity issue?
The Fed can only supply money for domestic demand but not for Eurodollar.
So the global financial crisis made the rest of the countries worse than the US if other countries’ currencies were pegged in the dollar.
Lebanese liquidity crisis
The real-world example of the Lebanese liquidity crisis is because The country was short for dollars that caused it into a long-term recession and difficult to recover.
Crypto to the rescue
The idea is that cryptocurrency can provide liquidity when a financial crisis happens.
To prevent dollar shortages created by IBF, people can convert crypto into other currency to recent total losses.
The Fed improvement
The Fed issued an emergency swap line for IBF to increase dollar supply so that the shortage will not further trigger sold-off during the 2020 COVID-induced financial crisis.
There is no historical evidence suggesting that crypto can ease out the dollar shortage but the speculation suggests that it may work.
Photo by Erik Mclean on Unsplash
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Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose cryptocurrencies are mentioned in this article. This information is only for educational