Shiller price index

Crypto pokes its nose into US economic woes

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Several important macroeconomic questions intrigue economists, the Federal Reserve and everyone else. Why is inflation so hot? What’s behind soaring home prices? And why is it so difficult for companies to find workers?

There is no single answer, of course, and there are a few believable ones. Supply shortages, strong consumer demand and the Russian-Ukrainian war are undoubtedly contributing to the price hike. A slowdown in home building coupled with renewed interest in the suburbs during the pandemic has resulted in a housing shortage. And the pandemic has pushed some workers into early retirement while making it harder for others to return to work.

Yet questions persist, suggesting other forces at play as well. Chances are, one of them is cryptocurrencies.

It is well accepted that the availability – or scarcity – of money affects the economy by altering the desire and ability of businesses and consumers to spend. This is why the Fed printed trillions of dollars to support the US economy following the 2008 financial crisis and again during the pandemic. This is also why the Fed is now looking to tighten the money supply to rein in spending and inflation. The most widely held cryptocurrencies, such as Bitcoin and Ethereum, are easily convertible into dollars, so it’s reasonable to think they could have a similar impact on the economy.

There was little danger for much of their short existence. In mid-2020, about a decade after Bitcoin’s debut, the global market value of cryptocurrencies was just $250 billion, according to crypto data provider CoinMarketCap, a fraction of the $18 trillion in circulation at the time, measured by the so-called silver M2. supply. But the crypto footprint has grown significantly in the months since, reaching a market value of nearly $3 trillion by the end of 2021.

Here’s what happened to the economy over the same period: inflation, as measured by the consumer price index, rose 9.4% from June 2020 to the end of 2021, the highest any comparable period since the early 1980s. The S&P/Case-Shiller National Home Price Index in the U.S. jumped 29%, much more than any comparable period since the index’s inception in 1987 , including the rise of the housing bubble in the mid-2000s. Job vacancies more than doubled from 5.5 million to almost 11.5 million, by far the largest increase in absolute numbers or in percentage since the beginning of the data series in 2000.

Then came the crypto bust. Since the end of 2021, cryptocurrencies have lost $2 trillion in market value, with their global market capitalization dropping by two-thirds to around $1 trillion. While economic figures are released with a lag of a month or more, there are signs that inflation, housing and the labor market may also be cooling. Inflation expectations have fallen, as have the prices of certain components of the CPI, notably gasoline. Home price growth appears to be slowing and in some places prices may even fall. Job postings are down 1.7% this year through May, and some employers say it’s getting easier to find workers.

I am not saying that cryptocurrencies are solely or even primarily responsible for these broader economic trends, not least because it is difficult to determine what share of global crypto gains and subsequent losses can be attributed to Americans. But they are a factor, and perhaps an important factor. In a Redfin survey conducted near the peak of crypto in December 2021, 11.6% of first-time home buyers said that at least part of their down payment came from crypto earnings. This figure was up from 8.8% in 2020 and 4.6% in 2019, following the meteoric rise of crypto during this period.

Crypto profits also appear to have contributed to labor shortages. In a survey conducted by consumer data provider CivicScience last October, 11% of respondents said that crypto earnings had allowed them or someone they knew to quit their job. That figure is 44% for respondents earning less than $25,000 a year, and 75% for those earning between $25,000 and $50,000, the earnings bracket for jobs where shortages have been most acute. , such as retail, health and social care, travel and leisure. .

One of the reasons central bankers pump money into the economy during downturns is that having more dollars in circulation makes people richer, which, unsurprisingly, is what what the rise of cryptocurrencies seems to have done. More than half of respondents to the CivicScience survey said investing in cryptocurrencies increases their personal wealth. The highest percentage was in the $25,000-$50,000 cohort, where more than 60% said crypto made them rich.

If cryptocurrencies continue to crash or fall further, I suspect that respondents to new surveys will point to falling crypto prices as the reason they went back to work or cut back on spending or postponed buying. of a house. This will be another indication that cryptocurrencies could move the economy in a way that matters to economists and the Fed.

One of the recurring early warnings about cryptocurrencies is that they could potentially disrupt central banks’ efforts to stabilize the labor market and inflation. That day is probably already here. More Bloomberg Opinion Writers:

• The Need for Global Stablecoin Standards: Cunliffe & Alder

• Credits for Crypto’s Well-Timed Collapse: Editorial

• The Fair Value of Bitcoin Tied to Gold and Tech Stocks: Aaron Brown

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management company.

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