Well, 2020 has certainly been a stinker, hasn’t it? The Coronavirus pandemic spread across the world, shutting down industry, restricting commerce, hindering travel and intensified a brutal oil price war between Saudi Arabia and Russia. All the while, sending the stock market crashing and bursting the corporate debt bubble.

And now, my friends, while we attempt to return to some level of normality (or should I say a different version of normality) we find ourselves in the throes of a grave economic crisis - one potentially more catastrophic than the Great Recession of 2008/2009.

But what exactly is an economic recession, and how does it happen? How does modern monetary policy impact a recession? Can Bitcoin ease recession pressures?

These are precisely the kind of questions we should be asking, so let’s dive in.

What is an Economic Recession?

There are a few definitions of an economic recession, depending on your location and who you ask.

In the United Kingdom, an economic recession is generally defined as two successive quarters of negative economic growth. What this means is that the total amount of goods and services being produced (known as the gross domestic product, or GDP) would be a negative value each quarter for 6 months. As it currently stands the 2020 Q1 GDP figures indicate a 2% decline (-2%) on Q4 of 2019, which had reported a stagnant 0%.

In the United States, the National Bureau of Economic Research (NBER) is tasked with declaring a recession, and they tend to take a broader look at economic activity monthly. As a result, their definition is more encompassing.

The NBER defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Basically, if the economy contracts sufficiently, even in one area, the NBER may declare it to be a recession, without relying on the quarter-on-quarter GDP measure.

Irrespective of the nuances of the official definitions that have kept economics at loggerheads for decades, one undeniable fact remains: a recession, even a mild one, is going to have a direct impact on your finances.

How Does an Economic Recession Happen?

There’s no single cause of a recession, and often it’s a case of several contributing factors that when combined, can create a vicious cycle of gloom. Let’s have a look at a few of the primary causes.

Disruptions in Supply and Demand

One of Economics’ core rules focuses on the relationship between supply and demand. A sudden or drastic change in this equilibrium - when either supply surpasses demand or demand outweighs supply - can trigger a downturn in the economy.  

As in the case with the Coronavirus (what economists term a ‘black swan event’), many businesses came to a standstill as lockdown came into effect, resulting in massive breaks in the supply chain, while simultaneously diminishing demand.

Stock Market Crashes

Some level of volatility in the stock market is to be expected. But when a major cross-section of stocks experience a sudden, dramatic decline (10% or more), it’s usually a precursor to a spiral of panic selling and plummeting prices.

Rising Production Costs (Oil Prices)

As one of the largest traded commodities in the world, and a key contributor in production costs, changes in the oil price can have a far-reaching (and long-lasting) impact. Ordinarily, a higher oil price would set off alarms for potential financial strains and an impending recession, however, more recently, we’ve witnessed unprecedented lows in the futures trading of oil, bottoming out at a negative $37.00 a barrel back in April this year.

While you’d imagine that a lower oil price may bring some good news - think cheaper transport and manufacturing costs - the ramifications are potentially even worse than a price surge, especially against the backdrop of Coronavirus and the global slowdown of industry. With many oil producers now on the brink of closure or total collapse, there are significant knock-on effects: increases in bad-debt, decreased investment and ultimately massive job losses.

Increased Unemployment Rates

The unemployment level of a country will have a significant impact on spending. When the unemployment rises, naturally disposable income will drop, resulting in less spending and therefore lower demand.

Interest Rate Hikes

The interest rate will determine the appetite for both individuals and corporations to take on credit. Higher interest rates will deter would-be lenders from borrowing and spending, having a knock-on effect on driving the demand for general goods and services down. (More on this in a bit…)

Bubbles Bursting

When the prices of assets such as stocks, real estate or other commodities rise quickly without the underlying fundamentals increasing at the same rate. In other words, there’s an imbalance between the price and value.

The primary catalyst of the 2008 financial crisis was an overvalued property market, spurred by low-interest rates and lenient lending rules. Eventually, the cards came crashing down, sending some of the largest corporations - the likes of Lehman Brothers et al. - into collapse, while others narrowly escaped by being acquired or bailed out.  

The Impact of Modern Money Policy on Recessions

Money policy, also known as fiscal policy, is essentially the use of money mechanisms, such as interest rates, to move the market in a particular direction. Central Banks are predominantly responsible for setting interest rates and controlling the money supply of a country. Therefore they play a rather important role in the prevention and management of economic recession.

The Role of Interest Rates

The interest rate is controlled by the Central Bank and is used to stimulate or dampen spending and saving. Interest rates on loans will be the percentage you have to pay back on top of your capital, while the interest rate on a savings account is the amount of additional money you will earn for keeping your funds in savings.

When the Central Bank lowers the interest rate, people will be more open to accepting credit and, as a result, spend a greater amount. Conversely, a higher interest rate will cause people to be more cautious with spending, as they’re more incentivised to save their money. In other words, by amending interest rates, a Central Bank can effectively counteract ‘normal’ market forces and sway spending behaviour. (Still think you have control of your own money?)

At the time of writing, the UK interest rate is set at a palsy 0.1%, the lowest rate it has ever been, with whispers of a possible slash in the future to usher in negative interest rates. Yes, you read that correctly - negative interest rates. Meaning that you essentially pay the bank for the privilege of holding your money with them.

But moving on …

Quantitative Easing (aka Money Creation)

If you think that negative interest rates are the least of our worries, my friends, think again. Enter quantitative easing. I’ll let an exact copy-paste from the Bank of England’s website lead here.

“Quantitative easing is a tool that central banks, like us, can use to inject money directly into the economy.

Money is either physical, like banknotes, or digital, like the money in your bank account. Quantitative easing involves us creating digital money. We then use it to buy things like government debt in the form of bonds. You may also hear it called ‘QE’ or ‘asset purchase’ – these are the same thing.

The aim of QE is simple: by creating this ‘new’ money, we aim to boost spending and investment in the economy.” - Bank of England 

Ringing any alarm bells? I particularly enjoy how the word ‘new’ has inverted commas, don’t you? But let me put my sarcasm aside for a moment, and do my best to break this down for you.

You see, when a Central Bank has to prop up a failing economy, it looks to purchase Government bonds. The theory here is that if they buy large enough quantities of the bonds, this will create a natural demand for them and increase their value. So, the Government offers the Central Bank bonds on its potential future earnings (meaning the taxes they intend to charge us) in exchange for an increase in the money supply.  

And this is where it gets super interesting ... and disturbing.

The Central Bank creates this ‘new’ digital money, basically from thin air. They go off to their computer and ‘mint’ a fresh batch of £££’s with a simple computer entry. The latest UK quantitative easing effort, in June 2020, injected £100 Billion of ‘new’ money into the economy for the Government to spend (totalling £745 Billion since 2009).

The Value of Currency

At this point, you have to ask yourself: If the Central Bank is expanding the supply of money with this computer entry, where does it get its value from? Technically speaking, fiat currency (which is what the Pound or any other Government-issued currency is) only holds value because the Government promises that it holds value. It’s not backed by anything tangible like it was in the days of the gold standard.

Instead, because it can be expanded at whim, the fresh batch of currency siphons its value from the existing supply. We experience this as inflation or the inevitable rise in prices of our everyday living.

Well, that’s the story we’re told, anyway.

The reality is that it’s not the price of the goods and services increasing, but rather the currency in which they are valued has been devalued (or debased) as a result of this quantitative easing.

Inflation is an ever-present erosion of the value of our hard-earned money. So while an injection of new currency into supply may offer a short-term boost, the long term ramifications are far more significant.

And if you think the Pound fairs any better, I’m afraid I have some more bad news. Albeit considered a strong contender in the currency arena, the grand Pound Sterling has lost 99.5% of value since its inception 3 centuries ago. In fact, history tells us that of the more than 4,000 established fiat currencies that have ever existed, the average lifespan is a mere 27 years. Ultimately, fiat currency has a notorious track record of eventually returning to its intrinsic value: absolutely ZERO!

But what are we to do with this understanding? In times of economic recession, what options do we have? How do we protect our finances? Is there any safe hedge?

Simply, yes.

Bitcoin as a Hedge Against Economic Recession and Political Instability

Rewind to the inception of Bitcoin.

Bitcoin was birthed in the wake of the 2008 recession and the public narrative that emerged focussed on a new global currency; decentralised and uncoupled from the economic and political instability of the time.

Sadly, it didn’t take long for a small group of people to hijack the project, imposing technical restrictions that essentially eliminated the true power of the Bitcoin technology. Bitcoin Core (BTC) as it became known, was ‘dumbed-down’ to an asset that held little in terms of utility and fuelled a spectacular asset bubble at the back end of 2017, driven by pure speculation.

Naturally, that bubble burst, taking a great deal of cash along with it.

Fortunately, this triggered the rebirth of Bitcoin in the form of Bitcoin Satoshi Vision (BSV). Dr Craig Wright, the mastermind behind Bitcoin technology and author of the original Bitcoin Whitepaper, could no longer sit back and watch the project be so horrendously derailed and vowed to reinstate the original Bitcoin.

Read more on the Bitcoin Myths that have driven mainstream narratives, and ultimately why Bitcoin SV is the true and original Bitcoin. (link)

And so, with the true potential of Bitcoin restored and the ability to shine a light on the shadows of the existing financial system, we should reignite the conversation around bitcoin as a hedge. Not only as an asset with vast utility, untapped potential and an undervalued price but moreover as the technology capable of providing the sight and transparency we so desperately need to repair and restore humanity on every level, including but not limited to our economic and political structures.

New call-to-action

You may also be interested in