The corona crisis urges states and central banks to take extreme measures. Without gigantic debts and inflated central bank balance sheets, our system can no longer be saved - we are facing an economic crisis. Why our interest rate system is currently being shut down and why the nationalisation of the financial sector is leading to a new decentralised financial system.
Central banks can no longer do anything but make their balance sheets available for (government) bonds and shares to cushion the economic crisis in 2020. The opportunities for interest rate cuts have already been fully exploited in the last 12 years since the Lehman crisis. The powder is shot, as the ECB's key interest rate of zero percent illustrates.
Even announcements by central banks to do everything possible to counteract a financial crisis are now being ignored by the markets. Only the states themselves are now in a position to prevent a major economic catastrophe and save our financial system from collapsing.
Jobs at any price
The massive financing of the real economy with simultaneous nationalisation of the credit system, which has basically just happened through the unlimited credit line of the KfW, is currently the only prospect to prevent a break-up of the Eurozone and social stability.
Both for the taxi driver and for the DAX group, the state must guarantee income through further debt, while at the same time bringing productivity to a standstill. At worst, the length of time a state can afford such a thing is limited to the period until the system collapses.
The state takes over the task of the commercial banks
Since banks are no longer fulfilling their primary function of lending to the real economy, the state must now step in. To be sure, the central bank is also attempting to boost lending through higher penalty interest rates. But even this will not lead to the banks lending.
Absolutely understandable, after all a cheerful lending policy among banks and towards corporate customers is illogical from a risk perspective. The monetary stimuli of the central bank must now give way to the real economic and direct financing of the real economy by the Kreditbank für Wiederaufbau. This is the last and only means to save our current system and avert a major economic crisis.
Market functions and interest rates will be eliminated
The consequence of these emergency measures is that market forces and the most important source of information in the financial system - interest rates - are overridden. Since the state is responsible for both the credit system and a massive investment programme, this also invalidates the important steering functions.
Supply and demand are now controlled and managed centrally, as the more decentralised private sector system comes to an increasing standstill. The big problem here is the resulting misallocation, since the information basis, namely interest formation through supply and demand, is missing. Put simply, interest is the price of risk. If you know the interest rate of an investment or financing project, you can make decisions based on rational principles. This orientation, which is fundamental to a free market economy, is now being cut.
This market-compliant intervention thus leads to a distortion of fundamental economic reality. This may be bearable for a certain period of time, but in the long run it will destroy our system. This is also shown by the expansive central bank policy of recent years, which has also gradually eliminated market forces. The consequences are well known: Asset inflation and zombie corporations. This very distortion is now only being exacerbated and is penetrating even deeper into the real economy.
Economic crisis leads to a planned economy financial system
Unlimited lending and the surge in public debt will create new economic realities, but also opportunities. It is hoped that the blatant investment backlog of recent years will be cleared and that investments will be made in (digital) infrastructure and ecological projects. The compulsion to generate growth in order to escape a deflationary shock can, if intelligently implemented, lead to enormous technological and social progress.
If the first measures ignite, market mechanisms and "interest rate realities" will also recede in the future. Also, once assets such as shares and real estate have been sold off to a certain extent, a countermovement will occur. On the private side, there is still enough cash to protect tangible assets from absolute loss. Especially since a total loss of substantial material assets is only possible to a limited extent.
Despite this gradual normalization, the damage to our economic system will be lasting. The costs for Germany and other countries are likely to be higher than those incurred during the financial crisis in 2007. The current average debt of the eurozone of 86 percent is therefore likely to be well over 100 percent in 2021, unless a miracle occurs.
The question of what healthy financial infrastructures, or at least alternative infrastructures, could look like is being asked repeatedly, just as it was in 2007 when Lehman bankruptcy occurred. It is precisely at this point that decentralized block-chain financial ecosystems, which are subject to different liability and credit rating structures in their decentralized structure, will play an important role.
The future is hybrid: The decentralized financial system
The fact that states and central banks have to completely abandon monetary stability in order to save our system creates a vacuum. In the long term, this vacuum can be increasingly filled by decentralised payment and financial ecosystems. While our account balances of up to EUR 100,000 are protected by the promise of European deposit protection, our deposits are protected by decentralised protocols such as Bitcoin, Ethereum or Dash by the totality of all participants and the underlying protocol. Each system, the centralised and the decentralised financial system, has its strengths and weaknesses.
The crucial thing is that there is an alternative. The block chain technology makes it possible for the first time to put a financial system on new and, above all, many legs without "legacy". Over-indebtedness and zero or negative interest rates will continue to accompany us for many years to come, provided there is no collapse. This makes it all the more important to build up safety nets, be it a parallel credit system with functioning interest rates as in some DeFi applications or simply a bitcoin that cannot be inflated to death by central banks and states.
The flow of information decides
The block chain systems may also fail, but they are based on relatively free market principles. The decentralized flow of information can therefore lead to a more efficient system in the future. No bottlenecks, no single point of failure, no hierarchical-centralistic level and above all no interventions that are not in line with the market. While centralist intervention by the state is the right thing to do in a crisis, it paralyses the market's ability to regulate itself and allocate resources.
In principle, decentralized markets are superior to centralized ones, which is best illustrated by the planned economy as we had it in the Soviet Union and the GDR. The great advantage of a planned economy is the reduction of complexity and the immediate implementation of political measures.
But this also means that a market can never become as competitive and innovative as in a free market economy, where many thousands of market participants define supply and demand. For this reason, decentralisation through free enterprise has also allowed "the market-liberal West" to win, at least from an economic theory point of view.
Pressure increases the speed of innovation
The entire crypto-ecosystem is still very immature and comparatively less user-friendly. Also, the volume is almost irrelevant in terms of market capitalization. Nevertheless, an infrastructure already exists that can be further expanded. The failure of the traditional financial economy increases the need for the crypto-ecosystem to grow up more quickly. MakerDAO & Co. will fulfil an increasingly important economic hedging function in the future, provided that further failures in the financial system occur.
It should not be forgotten that we are now still in a very early crash phase. At the present time, the aim is to guarantee the health care of the population. However, we will inevitably be confronted with a banking crisis in the next few days, especially from Italy and then Spain and France. Nor will it certainly remain with short-time work compensation and unlimited credit lines for companies.
What matters now is Blockchain and Bitcoin
For this reason, the next few months will be particularly important in the crypto-ecosystem. Even though the exchange rates of crypto currencies will naturally fall for the time being, as people divert everything into cash, the fundamental necessity of decentralized protocols is increasing. The integration of crypto currencies at payment terminals could also gain new relevance in the wake of bank closures in less powerful countries.
Due to the intensification and polarization of our monetary system, we need a parallel system to "let pressure out of the boiler". In the coming months, a new discussion is likely to take place on the relevance of value storage investments such as gold and Bitcoin in the central banking system. Where the discussion will lead to cannot be said, only that it will take place. It is about nothing less than the question of what our monetary system can look like after the corona bailout. How bad it will really be and whether there will be a euro and banking crisis can be seen from the course of the corona crisis in the coming weeks.
