2017 – the year of Crypto-currencies?

Week ending Friday January 5th 2018

There was no break in trends a far as markets were concerned. Equities hit new highs, bond yields rose gently across the curve and the USD weakened. These are all good signs for better nominal GDP growth ahead.  Our NGDP growth forecast for 2018Q4 jumped to 4.3% in the week after Christmas and would probably be higher now. We won’t see that as we always focus on four quarters ahead so the next NGDP Forecast release will be for 2019Q1.

We (and markets and nowcasts) expect 2017Q4 to have been another quarter of decent growth and it now looks like 2018 as a whole will be decent too, judging by markets and our NGDP Forecast. Again, nothing is being done to recover the level growth lost since 2009 as that would require above recent trend growth for a number of years. But it is better than weak growth rates, of course.

It’s sad that this better rate of growth is still not coming through to US workers in their pay packets. The BLS Average Weekly Earnings for December still showed barely 3% nominal growth YoY, even it is at the higher end of recent trends. The labor force data and the economy both remain weak  in the longer term perspective.

A market solution to tight US money supply?

Maybe it’s just me but most of the excitement in markets is all around crypto-currencies. If they really are currencies then $800bn extra money has been created for the global economy during the last 12 months.

What is this as a percent of global high-powered money supply? A hard question. There is currently $4tn US high-powered, base money – ie cash in circulation plus banks reserves held at the Fed. Base money at the ECB is around $3tn. The PBOC in China has currency in circulation and reserves of around $3tn too. If world base money is, say, $16tn then the $800bn from cryptos is a not insignificant addition in just one year. The next question is what is it’s velocity? It may be little used for buying non-money stuff as yet, but it does circulate in the crypto exchange markets. On Friday $24bn was traded on the various exchanges.

Insofar as fortunes are made in crypto space and then converted back into US$ or whatever and then spent, it will be boosting velocity in non-crypto space.

One of our team is keen on helicopter drops and posted on it last week, he may be getting his wish!

China is boosting it’s money supply and doomster bears like Zerohedge fret over it intensely. But such growth will have little impact while the currency remains pegged to the US$ and thus hitched to US monetary policy. Unless … those surplus Chinese RMB can get leaked out of the country at the artificially high RMB/USD exchange rate, and thus boost global money supply. Maybe this is what crptyo is enabling, too. The Chinese population has been highly ingenious in finding ways to escape the financial repression (i.e. exchange controls) that is necessitated by a fixed exchange rate and crypto is one more way to help.

Of course, central banks could shut a lot of the crypto world down by trying to ban its conversion into non-crypto currency. Even now, it is far easier to put fiat money into the crypto world than take it out.

Battle of the crypto economic theorists

Strangely, one of the main drivers of crypto-currency entrepreneurs has been a sort of Austrian macroeconomics view that fiat currency is inherently inflationary and that deflationary currencies are superior. Hence, the fixed cap on Bitcoin at 21mn and on other crypto currencies.

Fascinatingly, there appears to be competing macroeconomic drivers out there and other successful cryptos build in 5% annual growth in their number of coins. Sort of market monetarist, steady NGDP growth, crypto-currencies – like Doge and Reddcoin.

Some other coins appear to be Austrian in their desire to create deflation and gradually destroy coins each year. Madness I know, but it all makes a market in coin and economic ideas. The deflationists and fixed number coin producers will lose out, as it is so easy to come up with new coins. There are over 1300 and counting out there fighting for shelf space.


Surveys were mildly weak for December but nothing dramatically poor and the payrolls were OK too. Nothing disturbed expectations for a good 2017Q4 GDP result from these income elements.

Next week sees more data on expenditure with December retail sales and the CPI data. Snow might be a messy, depressing, factor but then Winter comes every year, around the same time.



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