Bitcoin has been going through extraordinary exchange rate fluctuations: a day after it crossed the ambitious 10000-dollar line, it reached 11000 dollars and then, it crashed back to 9000 dollars right away. Currently, it is over 10000 dollars again. The famous speculator, Jesse Livermore said that in a proper mania, only in the last 48 hours can someone make a good profit, and the haphazard actions raise the suspicion that we are seeing the peak of the Bitcoin mania. However, this is not the only indicator. Bitcoin is only the most spectacular projection of the central bankers’ bubble.
After economic-policy makers, in their fear of recession/deflation, decreased interest rate to zero/negative and flooded the financial system with liquidity by increasing the money supply (alias QE), this money did appear. Everywhere. Savers had no other option: if they wanted to keep the value of their money, they had to buy something. Anything. And they did. Property, shares, corporate bonds, Bitcoin, paintings, anything they could come up with.
The situation is quite similar to the internet-bubble (1999-2000) and the property/sub-prime mortgage bubble in the mid-2000s. Even back then too, central bankers had gone to the extremes with decreasing interest rates because of the previous crises (the emerging Russian crisis of 1997/98 and the global slowdown-recession-disinflation of 2001-2003), which later did appear and created a bubble. The same is happening now, but exponentially and the ‘results’ speak for themselves: EVERYTHING BECAME EXPENSIVE. This is the everything-bubble, the central bankers’ bubble, and Bitcoin is its most accurate ‘thermometer’.
However, the underlying picture has become somewhat problematic lately, yet markets do not acknowledge it – for now. Labour markets are becoming tighter and generate upwards wage pressure: probably it is the most evident in our region (Central and Eastern Europe), where wage growth of above 10% has become natural (clearly, it will be followed by rising prices), but there are also other places where the signs can be seen, like in the just-released Fed Beige Book.
„Most Districts reported employers were having difficulties finding qualified workers across various skill levels…Many Districts reported that employers were raising wages as well as increasing their use of signing bonuses and other nonwage benefits to retain or attract employees” and this started to have an impact on prices: „Price pressures have strengthened since the last report…several Districts noted input cost increases in manufacturing. In many cases, these increases in transportation and manufacturing were passed through to consumers.”
This means that the low interest rate level is not sustainable for too long. And since everything is expensive because of the low interest rates (just like pearls on a thread, prices depend on interest rates, so if they change, everything has to be re-priced!), that is why if/when the global growth reaches the point where interest rates can begin to rise, then these bubbles will deflate. And it seems that this process has already started. In the last 3 months, the yield of the 2-year American government bond has increased from 1.25% to 1.75%, and from 0.15% to 0.51% of the UK and Germany too (despite the ever-late ECB); they have not had such a high yield since August. But it is also apparent in our region too: the Romanian 2-year grew from 1.2% to 3%, and the Czech has a stable positive yield for the first time since May 2015.
There seems to be a shift unfolding in the global monetary policy, and even though it is not necessarily a fast process but it will certainly have an impact. Whether or not the insane fluctuation of Bitcoin reflects the peak of the asset bubble generated by central banks, the point is that the global tendency of interest rate decreasing is about to turn around and will have an impact on every asset price.