"I don’t think that the -coins we are seeing now are the last word in digital currency. They are experiments. And I do think there is a bubble in the making, which will burst noisily at some point. But unlike others, I don’t regard this as a bad thing. Just as the dot-com bubble and bust was an essential part of the evolution of the Internet, so the bursting of the -coin bubble, when it comes, will enable a new digitized financial architecture to emerge.
"So bring on the -coin bubble and bust. I want to see what grows in its place."
A version of this post appeared on Pieria in December 2013.
In my post “The desert of plenty”, I described a world in which goods and services are so cheap to
produce that less and less capital is required for investment , and so easy to
produce that less and less labour is required to produce them. Prices therefore
go into freefall and there is a glut of both capital and labour. This is
There are two kinds of deflation. There is the “bad” kind,
where asset prices go into a tailspin and banks and businesses fail in droves,
bankrupting households and governments and resulting in massive unemployment,
poverty and social collapse. America experienced this in the Great
Depression and narrowly avoided it in the Great Recession. More recently, at least one European country has felt the effects of this catastrophe.
But there is also another kind. This is where falling costs
and increasing efficiency of production create a glut of consumer goods and
services. In other words, supp…
Last night, the Resolution Foundation hosted a debate to launch my book, "The Case for People's Quantitative Easing". A great panel consisting of Jagjit Chadha, Director of NIESR; Fran Boait, Executive Director of Positive Money; and James Smith, Research Director of the Resolution Foundation, debated my ideas with immense verve, ably moderated by Torsten Bell, Chief Executive of the Resolution Foundation. You can watch the debate here.
In 2008, QE did a great job of supporting asset prices and preventing the disastrous deflationary spiral of the 1930s. But since then, enormous quantities of asset purchases by central banks around the world have proved unable to raise aggregate demand and kickstart growth.
Although central banks didn't do a bad job in the last recession, many of the tools they used won't work in the next one, not least because the legacy of the tools themselves has not yet dissipated. Interest rates are on the floor, central bank balance sheets …
Yield curves have gone mad. Negative yields are everywhere, from AAA-rated government bonds to corporate junk. Most developed countries have inverted yield curves, and a fair few developing countries do too:
(chart from worldgovernmentbonds.com)
Negative yields and widespread yield curve inversion, particularly though not exclusively on safe assets. To (mis)quote a famous pink blog, this is nuts, but everyone is pretending there will be no crash.
Here, for your enjoyment, is an à la carte selection of the most lunatic government yield curves. You can find lots more here.
Exhibit 1: Switzerland.
Negative yield already extends beyond 30 years, and markets are pricing in further interest rate cuts and/or QE, or indeed anything to stop the Swiss franc appreciating as scared investors pile into CHF-denominated assets. Hence the curve inversion.
Exhibit 2: Denmark.
Every Danish government bond currently circulating in the market is trading at a negative yield. And the inverted curve tells us t…