Receding economic output is the hallmark of a recession, which occurs naturally as part of the economic cycle. In other words, a recession occurs when the domestic output of goods and services drops. Recessions have occurred in every country to varying degrees of severity, from small slowdowns to the most severe kind of Recession, a depression. About every nine years, a country’s economy goes through a slump. The Greeks, for example, have been in a technical recession for a quarter of their history since the 1960s. Regardless of the distinctions, it is a certainty that recessions have a detrimental effect on society, contributing to unemployment, decreased income, growing inequality, and an increase in poverty in totality.
Governments are continuously on the watch for indicators of Recession and will use all instruments at their disposal to avert recessions from arising or to mitigate the destructive impact of a recession if one does arise. However, there has been a lot of discussion about whether or not public investment can be beneficial. Recessionary attempts by the government have often backfired, resulting in a worsening economic situation. As a potential alternative to the global financial system, the viability and effectiveness of blockchain-powered cryptocurrencies will be examined in this article.
But first, we must look at the existing countermeasures governments usually employ to battle recession.
The Usual Tools Against Recession
Since recessions are a natural component of the economic cycle, little can be done to prevent them. However, governments and central banks may help reduce the impact of a recession by doing the following:
Fiscal Policy that promotes growth
In order to boost the economy during a recession, the government will either increase government spending or lower tax rates. Both techniques aim to boost economic activity and increase individuals’ disposable income in order to enable aggregate demand in the economy.
Expansionary Monetary Policy
In a recession, the central bank will try to increase the money supply by lowering interest rates and printing more money (officially known as ‘Quantitative Easing’). People will be able to spend more money on products and services, which will lead to economic development as a result of the “flooding”. There are drawbacks to this strategy, as a country with low-interest rates already has very little room to maneuver in terms of monetary policy, especially if printing more money devalues the native currency and hurts foreign commerce. Lately, banks have also been warming to the concept of charging depositors for holding money in the bank rather than paying them with interest growth.
This comprises the use of public funds to avert an institution from collapsing or closing down, owing to the potentially detrimental repercussions. A good example would be the Federal Reserve’s intervention in the subprime mortgage crisis in 2007.
Depending on the International Monetary Fund (IMF) for, assistance may be the final choice for governments who cannot grow their own resources to alleviate the suffering of their citizens.
Effects of Monetary Policies
Monetary policy is the most often used instrument by central banks and governments since it is the quickest to implement. To jumpstart the economy, central banks lower interest rates. This occurred in the years preceding the subprime mortgage crisis, when the Federal Reserve lowered interest rates, producing a low-interest environment that supported huge borrowing and over-leveraging, both of which contributed significantly to the crisis’s onset. When the global financial crisis struck, the Federal Reserve was forced to lower interest rates even further to virtually zero percent, leaving it with little space to maneuver in terms of monetary policy.
Many nations have considered using negative interest rates to stimulate the economy in the wake of the financial crisis. Among the first to do so after 2014 are Denmark, Japan, Hungary, Sweden, and Switzerland. This ‘penalty’ on consumer savings is designed to spur growth and raise inflation. For all practical purposes, preventing the home currency from increasing excessively is intended to raise its competitiveness against foreign currencies. As bad as it may be for those who have funds in a bank, it is regrettable that they endure the weight of it.
Taking note of all the instances described above, we can see these measures are hardly effective and, in turn, hurt the everyday people who are caught in the crossfire. This compels us to ponder whether cryptocurrencies can act as lifeboats during times of economic Recession.
Before coming to any sort of conclusion, let’s take a look at the characteristics of blockchain-powered cryptocurrencies like Bitcoin.
The Bitcoin Lifeboat to survive Recession
Because of the existing monetary system’s inherent flaws and inefficiencies, the advent of Bitcoin in the wake of the global financial crisis has given it a fresh identity as a viable alternative. The properties of Bitcoin and other cryptocurrencies appear better than fiat currency.
As a result of rising prices, inflation is the greatest threat to society’s financial well-being. Inflation, on the other hand, diminishes the long-term purchasing power of our money. 100 years ago, $100 in fiat currency bought a lot more than $100 now. Fiat currency’s value depreciates over time because of the infinite supply and the capacity of central banks to generate additional money at will. However, with cryptocurrencies, the supply is usually fixed. The total number of Bitcoins in circulation is strictly limited to 21 million (BTC). Fixed-supply money is immune to inflation since its value rises in proportion to an increase in demand and velocity.
The decentralization of cryptocurrencies empowers the public, as anybody may participate in the financial system. The criteria for entering and participating in the global financial system are clear and open, with every increment in the money supply being recorded on the public ledger. To put it another way, this is a far cry from the fiat system, where only those at the top of the government and banking organizations know how the money supply grows or shrinks.
Because they are based on blockchain technology, cryptocurrencies may be accessed by anyone, anywhere in the world, at any time, with no fees or restrictions. This safeguards the financial system against any manipulation or deception.
There is no difference in the value of a US dollar in France and China. But it’s still the currency of the United States, which means it has all the advantages and disadvantages of the American economy. Furthermore, in many nations, it’s difficult to obtain, store, and utilize in any capacity other than cash.
Because Bitcoin isn’t tied to a single economy’s success or failure, it is organically diverse. Rather, it represents wealth without boundaries.
Recessions may spread across countries with common economic interests, as we witnessed in 2008. Although the United States, the European Union, Japan, and many other affluent nations saw economic declines in 2008, several developing countries did grow from 2007 to 2009.
Apart from macroeconomic trends, the price of Bitcoin might fluctuate due to legislation, environmental concerns, government crackdowns on mining, changes in institutional usage, or any number of other variables. However, each of these elements is unique, guaranteeing that the value of bitcoin is not at risk from a single incident.
For instance, the US Securities and Exchange Commission (SEC) cracking down on cryptocurrency exchanges like Coinbase (NASDAQ: COIN) as it strives to regulate financial products connected to cryptocurrencies. This news has a direct impact on Coinbase’s stock price. However, the price of bitcoin is less likely to fluctuate as a result of such news because the future of bitcoin is not dependent on any one country’s regulatory policies, not even the United States.
Secure and globally movable store of wealth
The scarcity, safety, and portability of Bitcoin all contribute to its value. Bitcoin, like gold, has the qualities of a commodity in that it retains its value regardless of the state of the economy. When compared to stock, Bitcoin’s growth is not immediately linked to strong industry tailwinds, technical advantages, innovation, financial discipline, or a good management team. Instead, it’s effective in both booms and busts in the economy.
While Ethereum has more practical uses and perhaps greater upside than bitcoin, bitcoin is better positioned to perform during a recession since it is less volatile. Its objective is not to accelerate the adoption of smart contracts, non-fungible coins, or other applications of blockchain technology. Instead, bitcoin serves as a means of preserving wealth.
Considering these factors, it’s safe to assume cryptocurrencies like Bitcoin, powered by the immense potential of Blockchain technology, could shine as a shelter for the common people looking to shield themselves from the wrath of economic recessions.
The Bitcoin-led cryptocurrency movement has shown that it is a viable alternative to the fiat currency system. As a means of countering the inherent shortcomings of fiat money and the governments’ inability to manage their own economic and monetary policies properly, cryptocurrencies were developed with qualities like transparency, empowerment, and inflation resistance.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn’t represent any investment advice or WazirX’s official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.