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Modern Economic Nonsense — The self-fulfilling recession

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The global economy is in a tailspin. To make matters worse, everyone knows it will likely only get worse before it gets better. Consumers are afraid to spend, businesses are afraid to hire, and banks and investors are so scared to invest. In these times of peril, the best way for companies to deal with risk is to cut back on expenditures and remain as liquid as possible. Unfortunately, that’s not exactly what’s happening. The global recession is becoming a self-fulfilling show that everyone wants it to arrive, but it may never do. There may not be an official declaration from the U.S. Department of Commerce or the Bureau of Economic Analysis but rest assured that we’re currently in a state of recession. The first thing you should know about a recession is that it’s not the same as a depression or general economic malaise lasting years or even decades (like the Great Depression). A recession is generally understood as a sudden decline in economic activity—as measured by things like unemployment or retail sales—that lasts no longer than six months. Now that’s good news because if a recession was anything else we might all be out of jobs right now. The bad news is the recession may already be here that we just can not predict after the confirmation.

Defining Recession

A recession is defined as a period of two consecutive quarters where economic growth has been negative, or if GDP shrinks by more than 10%. This can be attributed to a number of different factors, such as increased tariffs, an unstable housing market, or a general oversupply of goods and services (which is referred to as a “stimulus glut”). In essence, a recession is a drop in the overall pace of economic activity. A recession is generally understood as a sudden decline in economic activity—as measured by things like unemployment or retail sales—that lasts no longer than six months in usual. However, some recessions may drag longer than we anticipated. 

Why We Should Be Thankful We’re In a Recession Right Now

Economists usually say we should be thankful we’re in a recession because it’s a sign of an efficient market. But in addition to that, there are many specific reasons why we should actually be thankful that the global economy has hit rock bottom. Here are just a few of them: 

– The best way to get out of a recession is to let the recession run its course. By “running its course” we mean that it will naturally come to an end once the economic factors that caused it in the first place have been resolved. This can take anywhere from six months to several years, but it will end. To speed up the process, governments often try to intervene with fiscal stimulus, monetary stimulus, or a combination of the two. However, this rarely helps the situation. Instead, it prolongs the duration of the recession. 

– A recession is a natural consequence of a free-market economy. When it comes to the world of business, nothing good ever comes from artificially inflating demand. This is exactly what governments do when they try to “stimulate” their economies: they artificially inflate demand. And when this artificial demand ends, the market corrects itself through a period of recession.

Above are textbook recessions.

How a Recession Actually Works

When businesses and investors are experiencing high confidence, they are more willing to take on risks. They invest in new endeavors and start new ventures, and they employ more workers. This increase in spending is what drives economic growth. On the other hand, when they are experiencing low confidence, they are more risk averse. They try to preserve their current assets, and they become more conservative when it comes to investing in new endeavors. This decrease in spending is what drives economic contraction. When the economy has hit rock bottom and confidence is at an all-time low, the government steps in to “rescue” the situation. However, the best thing that government can do during these times is to stay out of the way.

This time, the government has already underwater. There is no rescue plan to let the market slowly experience the painful process one step at a time. 

The Self-Fulfilling Cycles of Recessions

Recessions are self-fulfilling in the sense that expectations about the future drive present-day behavior. When investors and banks see that a recession is on the horizon, they start loaning less money. This results in less cash flow for businesses, which means they can’t hire as many employees. When companies aren’t able to hire as many employees, unemployment rises. A similar thing happens with consumers. When they start to expect that their income is going to decrease, they stop spending. This too results in less cash flow for businesses.

Consumer Effects During a Recession

A recession is normally a bad time for consumers. For starters, they usually lose their jobs. But it doesn’t end there. Because consumers know that they’ll probably need more time to find a new job, they also have to deal with decreased income. And since consumers can’t spend as much as they used to, businesses have fewer customers. They either have to close down or lay off employees, which only makes the situation worse for consumers.

Crypto During a Recession

This is the first time cryptocurrencies have experienced a real recession. We do not know how it will perform during the downturn. However, it does not perform well in the past 6 months. We hope crypto will lead the recovery faster than the other business activities, but it has performed less ideal than we expected. However, it is an insurance plan with the cheaper premium for the grab.

Business Effects During a Recession

Businesses that rely on consumers for a large amount of their revenue are usually forced to cut back on their expenses. This includes things like marketing, hiring new employees, or investing in new technologies. Because consumers aren’t spending as much cash, businesses have to find ways to make their products less expensive. This is often done through cost-cutting measures. Businesses will decrease their hours of operation, lay off employees, and try to find cheaper suppliers.

Bank and Investor Effects During a Recession

Investors and banks are usually the first to see the recession coming. The moment they realize that a recession is imminent, they become more conservative with their money. They stop investing and start hoarding their cash. Because cash is less plentiful, banks start to loan less money. This results in less cash flow for businesses, which means they can’t hire as many employees. When companies can’t hire as many employees, unemployment rises.

Lessons Learned

A recession is a self-correcting economic cycle. If we keep our heads down and work hard, it will pass. It’s far from an ideal situation, but it’s better than an economic depression. It’s best to keep in mind that recessions are a necessary evil. They happen because of a number of different factors, and they’re often unpredictable. There’s no way to prevent them, but we can take measures to lessen their effects. If we want to get out of this recession as soon as possible, we need to keep our heads down and work hard. We need to spend less and save more, and we need to do our best to minimize our spending. We also need to be patient, because this recession will likely last longer than we’d like.

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Crypto Research

What if you regret your crypto transaction

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Defi hacking is a pandemic now. We lost $2.2B this year, which marked the worst year of the crypto losses despite the fact that we are at the bear market, in which the market capital has shrunk to $1 trillion.

There are a few solutions that can prevent hacking. One of them is creating reversible transactions on Ethereum.

Ah, it goes back to the debate on blockchain trilemma.

If you ever noticed the old debate on blockchain trilemma, you realize these three elements control how a perfect blockchain works: security, decentralization, and scalability.

https://www.ledger.com/academy/what-is-the-blockchain-trilemma

Lacking one of the three elements will make blockchain unusable.

The idea of decentralization is providing an option to give power to people by using computer governing and to reach a fair and square consensus.

The characteristics of decentralization include:

  • transparency
  • immutability
  • accessibility
  • trustless

The reversible transactions are challenging the decentralization assumption of the blockchain, which sparks debates on sacrificing decentralization to prevent hacking losses.

Is preventing theft more critical than permissionless immutability?

Of course, the proposal is just a suggestion of one possible solution, but I shared some of my ideas about such a proposal.

Utilitarianism

If we only focus on what will work for us, that reversible transactions feature is preferable and can prevent hacking from damaging the crypto project.

Defi hacking is a pandemic now. We lost $2.2B this year, which marked the worst year of the crypto losses despite the fact that we are at the bear market, in which the market capital has shrunk to $1 trillion.

There are a few solutions that can prevent hacking. One of them is creating reversible transactions on Ethereum.

Ah, it goes back to the debate on blockchain trilemma.

If you ever noticed the old debate on blockchain trilemma, you realize these three elements control how a perfect blockchain works: security, decentralization, and scalability.

https://www.ledger.com/academy/what-is-the-blockchain-trilemma

Lacking one of the three elements will make blockchain unusable.

The idea of decentralization is providing an option to give power to people by using computer governing and to reach a fair and square consensus.

The characteristics of decentralization include:

  • transparency
  • immutability
  • accessibility
  • trustless

The reversible transactions are challenging the decentralization assumption of the blockchain, which sparks debates on sacrificing decentralization to prevent hacking losses.

Is preventing theft more critical than permissionless immutability?

Of course, the proposal is just a suggestion of one possible solution, but I shared some of my ideas about such a proposal.

Utilitarianism

If we only focus on what will work for us, that reversible transactions feature is preferable and can prevent hacking from damaging the crypto project.

Liberalism

If we focus on individual freedom rather than preventing losses, we will not trade off from the immutability feature of blockchain to a centralized governing function to reverse transactions.

Virtue Ethics

Of course, stealing is universally wrong. But what if hackers stole funds to save local people from starvation? Then such stealing may not seem so wrong after all.

But if hackers stole funds to get themselves rich and purchased luxury goods, such action would be prevented.

Moral Absolutism

But if you believe stealing is universally wrong, no matter the circumstances, reversible transactions seem an excellent idea.

Moral Nihilism

We may go extreme that moral is no matter in crypto whatsoever, then implementing reversible transactions simply changes nothing.

Theory of Justice

If you think fairness is more important than utility, implementing reversible transactions is an excellent choice to ensure the ecosystem is fair.

Majority Rule

You may also not decide but ask consensus to vote on such changes and implement them upon the majority vote agree upon.

So which one would you like to choose from?

But no matter what you choose, I think crypto is more toward to Majority Rule that consensus will decide what moves forward with decisions everyone votes.

Of course, who controls the voting power is another debate in the crypto ecosystem—this question we will discuss the next time.

Support writer here or join Medium here

Photo by lucas clarysse on Unsplash

If we focus on individual freedom rather than preventing losses, we will not trade off from the immutability feature of blockchain to a centralized governing function to reverse transactions.

Virtue Ethics

Of course, stealing is universally wrong. But what if hackers stole funds to save local people from starvation? Then such stealing may not seem so wrong after all.

But if hackers stole funds to get themselves rich and purchased luxury goods, such action would be prevented.

Moral Absolutism

But if you believe stealing is universally wrong, no matter the circumstances, reversible transactions seem an excellent idea.

Moral Nihilism

We may go extreme that moral is no matter in crypto whatsoever, then implementing reversible transactions simply changes nothing.

Theory of Justice

If you think fairness is more important than utility, implementing reversible transactions is an excellent choice to ensure the ecosystem is fair.

Majority Rule

You may also not decide but ask consensus to vote on such changes and implement them upon the majority vote agree upon.

So which one would you like to choose from?

But no matter what you choose, I think crypto is more toward to Majority Rule that consensus will decide what moves forward with decisions everyone votes.

Of course, who controls the voting power is another debate in the crypto ecosystem—this question we will discuss the next time.

Support writer here or join Medium here

Photo by lucas clarysse on Unsplash

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Crypto Research

The core reason why Defi is not working

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Defi or decentralized finance is an alternative way to traditional finance. It sounds fancy, but it does not work in reality. Here is why:

Securitization

You cannot ignore the innovation of securitization that gives banks a further push on their asset management and expand their operation into more risky asset management in modern finance.

In the past, banks heavily relied on deposits from users, but with securitization, banks can turn illiquid assets into liquidated assets while raising more cash to make more loans.

In theory, a bigger pool with more loans can reduce default rates and make such financial instruments more secure.

In reality, it will trigger a chain reaction and melt down the entire finance in a second.

What makes security secure?

It is a way to make the default rate as accurate as possible, giving a higher security grade than the lower ones.

A lower grade of loan means a higher potential of default because there are not as straightforward as of default rate whoever originated can be calculated. 

There are many ways to calculate loan grading however, there are some factors, include:

  • The borrower’s credit history.
  • Quality of the collateral.
  • The likelihood of repayment of the principal and interest.
  • Cash flow of borrower that can sustain

Defi’s assumption

The loan grade is automatically low when you allow everyone to get loans from the smart contract without sharing financial background because there is no information about how likely the loan will be the default.

Also, the pool is open to all who can get in and out quickly, which makes it even harder to provide sustainable management of such loans.

Defi is very similar to subprime Morgage-backed securities.

The digital finance product is like a shell company with fake value stocks that attract investors to buy in with the high return rates and risk of defaulting at any time.

There is no innovation in preventing default rates but in speeding up cash flow transactions.

Defi only conveniences the money pooling process but has not improved the prevention of possible default and provided sustainable solutions for long-term gains. Instead, it just repackaged the bad loans and sold them for liquidity.

And even worse, Defi will have no mechanism to force investors to repay loans.

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Photo by Akinori UEMURA on Unsplash

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Crypto Research

When fiat currency is volatile

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Cryptocurrency may not promise you to become rich immediately, but it did foresee the worst scenario of the fiat currency – uncontrollable inflation that makes fiat currency unstable. 

We knew it would happen, but it just did not happen as quickly as we imagined dating back to 2008.

Inflation is climbing into the most dangerous zone in decades:

These types of inflation usually will never occur unless we were:

✅ at war

✅ at the trade war

✅ at the political turmoil

✅ at the economic crisis

✅ at the energy crisis

✅ at the challenge of new power

✅ at the currency transition

In the meanwhile, governments are doing a business-usual.

While the currency crisis intends to repeat itself, it will get worse,

Or maybe not…

Or maybe yes…

Okay, the point is, why is the currency in crisis mode?

It is unresponsible for massive spending that gets out of control from central banks.

Who is paying the bill after the math?

Do you want to guess it?

What is the bright side of the development of the currency crisis?

I have seen no light in the tunnel in the coming years, but it does not mean we are out of any solutions. I just have not yet seen anything.

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Photo by Breno Machado on Unsplash

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