In Effect, The Policies Pose The Risk Of Shocks To The Financial Systems
January 11, 2022–Cryptocurrencies and stock market equities skyrocketed as central banks produced loose monetary policies amid the 2020 global pandemic.
Although cryptocurrency prices and some high-growth stocks have dipped since the start of the year, they both “surged amid easy global financial conditions,” the International Monetary Fund reported on today.
That may come as no surprise among high finance investors who carefully watch interest rates established by central banks, especially those in the United States and Europe. But today’s report by the IMF appears to be the first acknowledgment from the multilateral organization that government agencies are fueling the boom in risky assets.
Today’s report appears to be the first acknowledgment from the multilateral organization that government agencies are fueling the boom in risky assets.
The market value of crypto assets soared to nearly $3 trillion in November 2021, up from just $620 billion in 2017, the IMF reported. That total has since moderated to $2 trillion.
Now inflation is creating pressure on central banks to raise federal fund rates. In a Senate Banking Committee hearing today, Federal Reserve Chairman Jerome Powell acknowledged that multiple interest rate hikes may be necessary. However, he hedged his comments on interest rate hikes, adding they would take place “over time.”
It is fair to say, central banks in the United States and Europe have been slow to react to rising consumer prices. It is also fair to point out that governments have taken on extraordinary debt levels, even in terms of a percentage of the GDP, especially during the pandemic. Once central banks raise interest rates, these governments will face higher interest payments on their high levels of debt.
To date, both central bankers and fiscal policymakers have danced around this relationship.
Meanwhile, investors have sought returns from riskier assets, as safer assets such as bonds simply don’t pay returns. And today, there’s no mistaking the impact of central bank policies on this higher risk to the global financial system. Meanwhile, some analysts suggest that cryptocurrencies offer more than an alternative investment, they offer the world a new type of financial system. That concept has taken hold in El Salvador, where the country has adopted the digital coin as its national currency.
‘No Longer Fringe’
As IMF economists Tobias Adrian, Tara Iyer and Mahvash Qureshi write, crypto assets are “no longer on the fringe of the financial system.”
“They were thought to help diversify risk and act as a hedge against swings in other asset classes. But this changed after the extraordinary central bank crisis responses of early 2020. Crypto prices and US stocks both surged amid easy global financial conditions and greater investor risk appetite.
IMF “Crypto Prices Move More in Sync With Stocks, Posing New Risks,” Jan. 11, 2022
According to the writers, the risk is that the assets can pose shocks “that can destabilize financial markets.”
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