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Paradigm Rift? How the Convergence of Crypto and Central Banking Could Liberate the “Zero Lower Bound” Problem

Strap on your seatbelts. The world of capitalism and finance could start to get a little bit funkier… if that’s even possible.

Question: Is central banking the problem or the solution to the recurring global financial crises encounter every five to ten years since the tulip craze?

Answer: Yes!

It’s the Bubblist here. Much has been covered in the MSM about crypto, bitcoin, blockchain, DeFi, NFTs, and the plethora of ideas, products, startups with mega-Unicorn valuations. But today was the first coverage (or perhaps first “uncoverage”) in the MSM of the profound potential impact of that which is upon us. Handled properly when rightfully understood the convergence of central banking with cryptocurrency could solve the dilemma of capitalism and open an entirely new paradigm for the betterment of mankind. Fog of War thinking, intellectual bankruptcy on both sides of the topic has the potential to send the global financial system into a tail spin. Not today, not tomorrow but sooner than you might think

“Proceed at your own advantage/peril. Finally, a mainstream media outlet, the Wall Street Journal no less, has covered or perhaps uncovered the super-anomaly that can change the face of capitalism.

Satoshi Nakomoto’s Blessing/Curse

“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud…

The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.”

These passages from Nakomoto’s epic poem or some would say near -bliblical or certainly mythical proportions that might one day rank aside Homer’s Illiad and Odyssey.

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The Visual Capitalist: the 700-year Decline in Interest Rates

In Sidney Homer’s classic “The History of Interest Rates” he said, “It seems fair to say that free market long-term rates of interest for any industrial nation, properly charged, provide a sort of fever chart of the economic and political health of that nation.”

The infographic from VisualCapitalist.com suggests either the world is in a lot better shape than people think or we should re-examine the natural rate of interest rather than the highly manipulated rate structures imposed on the market by central bank interventions. These well-intentioned interventions might solve short term liquidity crises that result from boom and bust cycles, but invariably ends in epic bubbles bursting requiring massive liqudisity injection by the central banks (most importantly the Fed).

History might well look back at efforts to control the global economy with such interventions in the same way the medical profession views bloodletting as an effective protocol. However well-intended these interventions might seem in the short run supplying desperately needed liquidity into the bank system during a financial crisis, the long-term effects and the incredible distortions might prove to be the undoing of the global financial system in the long run even keeping in mind John Maynard Keynes’s comment about how we are all dead in the long run. But surely there must be a better way to stabilize the global financial system. Does anybody have any new good ideas?

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Next Up: New Zealand Goes Negative

Negative Interest rates in the Era of COVID-19

https://asia.nikkei.com/Economy/New-Zealand-weighs-negative-interest-rates-as-COVID-rages-overseas

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Greece Goes Negative

https://www.ekathimerini.com/258916/article/ekathimerini/business/greek-bonds-in-negative-yield-territory

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About Face and On the Table: Negative Interest Rates for the UK?

Outside of fish and chips, beef Wellington and bangers and mash are not well-known for their culinary prowess, but now the financial chefs at the Bank of England might be conjuring up a new monetary recipe: negative interest rates.

Long eschewing any discussion and denying they are under consideration, BoE Governor Andrew Bailey did an about-face and announced to the House of Commons Treasury select committee on Wednesday that they were indeed under active review: ” “We have been looking very carefully at the experience of those other central banks that have used negative rates.”

According to the FT: “the new position is a U-turn from just a week ago when Mr Bailey said the BoE was not ‘planning or contemplating”’ negative rates amid the coronavirus crisis.”

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Say Cheese: Negative Interest Rate Study from the University of Muenster

How Negative Interest Rates Affect the Risk-taking of Individual Investors: Experimental Evidence

https://www.scribd.com/document/459277113/Negative-Interest-Rates-Study-Ssrn

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Negative Gas Pains: Bubble Bubble Oil Then Trouble

The collective market reaction to negative oil prices can probably best be described as mind-boggling: “how on earth is this possible?” As the OPEC+ cartel becomes increasingly incontinent, it’s as if all the toilets in the world are full and there is no place left to pee.

Brussels: The Manneken Pis

https://hackernoon.com/the-new-space-race-24ccd953967d
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Breaking the Zero Lower Bound: As Goes Oil So Goes Interest Rates (sooner or later) in the U.S.?

With stunning psychological impact, world oil prices have broken the zero lower bound and have gone negative. Even relatively sophisticated investors have asked, “how is that possible?” Too much supply, not enough storage tank capacity, and fully tanked-up, topped-off super-tankers stranded out at sea with nowhere to go. Its like musical chairs but with no chairs.

The psychological barrier having been broken in a Kafka-esque COVID manner, do negative oil prices forbode a change, likely involuntary, of putting negative interest rates on the table for U.S. monetary policy, one that has long been eschewed like the plague. Without the participation of the U.S. in the global market’s $15 trillion of government bonds bearing negative interest rates, NIRP is a bit of an orphaned monetary tool for the rest of the world’s central banks who have to contend with the “exorbitant privilege” bestowed upon the U.S. dollar as the global reserve currency.

But in the extreme uncertainty of re-opening the world economy, one can expect some pretty strange anomalies to emerge. Having crashed into a brick wall and totaling the car, it might be more challenging to get back to the business of business for the global financial system than people might realize. As such, everything should be on the table including negative interest rate policy since no one knows how a recovery will unfold. Keep your options open at all times. Never say never. And follow Warren Buffett’s views on negative interest rates which he calls “the most important question in the world.”

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The Once Unthinkable… well some people thought about it:)

Here we go! Stay tuned…

https://www.reuters.com/article/usa-bonds-negativeyields/update-1-once-unthinkable-investors-contemplate-negative-us-treasury-yields-idUSL4N2B21F8