Yet the questions linger, suggesting other forces at play as well. There is a good chance one of them is cryptocurrencies.
It’s well accepted that the availability — or scarcity — of money affects the economy by changing businesses and consumers’ desire and ability to spend. That’s why the Fed printed trillions of dollars to bolster the US economy in the wake of the 2008 financial crisis and again during the pandemic. It’s also why the Fed now seeks to tighten the money supply to cool down spending and inflation. The most widely owned cryptocurrencies, such as Bitcoin and Ethereum, are easily convertible into dollars, so it’s reasonable to think that they could have a similar impact on the economy.
There was little danger of that for much of their short existence. In mid-2020, roughly 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 as measured by the so-called M2 money supply. But crypto’s footprint expanded considerably in the months that followed, reaching a market value of close to $3 trillion in late 2021.
Here’s what happened to the economy during the same time: Inflation, as measured by the consumer price index, rose 9.4% from June 2020 to the end of 2021, the highest over any comparable period since the early 1980s. The S&P/Case-Shiller U.S. National Home Price Index surged 29%, well higher than during any comparable period back to the index’s inception in 1987, including the run-up to the housing bubble in the mid-2000s. Job openings more than doubled to close to 11.5 million from 5.5 million, by far the biggest spike in absolute numbers or on a percentage basis since the data series begins in 2000.
Then came the crypto bust. Since late 2021, cryptocurrencies have given up $2 trillion of market value, their global market cap plummeting by two-thirds to about $1 trillion. While economic numbers are reported on a lag of a month or more, there are signs that inflation, housing and the job market may also be cooling. Inflation expectations have declined, as have prices of some CPI components, notably gasoline. The growth in home prices appears to be slowing, and in some places prices may actually be falling. Job openings declined by 1.7% this year through May, and some employers say it’s becoming easier to find workers.
I’m not suggesting that cryptocurrencies are solely or even mostly responsible for these broader economic trends, not least because it’s hard to pinpoint how much of the global crypto gains and subsequent losses can be attributed to Americans. But they are a factor, and possibly a big one. In a Redfin survey conducted near crypto’s peak in December 2021, 11.6% of first-time homebuyers said that at least some part of their down payment came from crypto gains. That was up from 8.8% in 2020 and 4.6% in 2019, tracking crypto’s meteoric rise during that 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 crypto gains allowed them or someone they know to quit their job. That number is 44% for respondents making less than $25,000 a year, and a shocking 75% for those earning $25,000 to $50,000, the pay bracket for jobs where shortages have been most acute, such as retail, health and social assistance, travel and leisure.
One reason central bankers inject money into the economy during downturns is that having more dollars sloshing around makes people feel richer, which, not surprisingly, is what the run-up in cryptocurrencies appears to have done. More than half of respondents in CivicScience’s survey said that investing in cryptocurrencies increased their personal wealth. The highest percentage was in the $25,000 to $50,000 cohort, where more than 60% said cryptos made them richer.
If cryptocurrencies continue to slump or fall further, I suspect respondents in new surveys will point to lower crypto prices as a reason they returned to work or cut back on spending or put off buying a home. That will be another indication that cryptocurrencies might be moving the economy in ways that are important to economists and the Fed.
One of the early and recurring warnings about cryptocurrencies is that they could eventually disrupt central banks’ efforts to stabilize the job market and inflation. That day is probably already here.More From Other Writers at Bloomberg Opinion:
• The Need for Global Stablecoin Standards: Cunliffe & Alder
• Giving Thanks for Crypto’s Well-Timed Meltdown: Editorial
• Bitcoin’s Fair Value Tied to Gold and Tech Stocks: Aaron Brown
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Nir Kaissar is a Bloomberg Opinion columnist covering markets. He is the founder of Unison Advisors, an asset management firm.
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