Macro matters: crypto to thrive the middle of economic crosswinds

The macroeconomy has a significant influence on crypto markets. Many like to believe that crypto and main markets have decoupled, but that is not true. A more realistic perspective is that when $BTC is in a significant bullish trend, the influence of macro factors is temporarily reduced. But the counter is also valid: when $BTC is in a bearish trend, macro headwinds negatively affect price, while positive news does not.

Sustained macro volatility – whenever it re-emerges – will hurt crypto markets. Therefore, it is wise for crypto investors to learn about the catalysts that move markets and affect risk assets, such as crypto.

This article aims to provide some recent economic and political context for today’s macro-environment. Subsequently, the outlook for the US dollar, inflation, the US and global economy will be considered, and what that all might mean for crypto.

The global economy at the moment is a puzzle of crosswinds. More than a decade ago, central banks around-the-world printed money to keep the financial system afloat. It is easy to blame central banks and the government. Still, if you cast your mind back to 2008 when Lehman Brothers collapsed, governments and central banks were in a lose-lose situation: if they did not inject money into the banking system, financial institutions would not have money to lend to companies; many companies would not have sufficient working capital to run their business and pay workers; and many workers would not have enough income to repay their mortgages, bills and debt. Central banks were acting as the ‘lender of last resort’. In the intervening 13 years, central banks have struggled to ever end the stimulus. Europe has faced a litany of challenges: Greece’s near-collapse (followed by Italy and Spain), the immigrant crisis and a simmering eurozone crisis, underpinned by diverging power and wealth within the bloc (Europe’s North-South divide).

The macro backdrop was stubbornly low GDP and employment growth, as consequently, inflation, which all meant there was never a ‘good time’ to turn the money printing taps off. In the aftermath of the global financial crisis (GFC), the least well-off suffered the most and for the longest, while the most affluent working in lucrative sectors quickly returned to creating new wealth for their companies and themselves. Average wages among low- and middle-income earners were broadly flat for a decade, as austerity squeezed and stifled incomes and government spending. These frustrations gathered over the years and eventually found expression in the UK through Brexit, which ushered in a new era of populism. Legitimate economic grievances sparked a revolt from the political mainstream across Europe and the US, from Farage, Beppe, Le Pen, Wilders, Orban, to Trump. The rise of populism showed Western centralist governments how social economically dangerous rising wealth inequality is.

It is easy to see why governments and central banks remain willing to extend stimulus and ‘accommodative policies’ (i.e., low-interest rates and QE) for markets. Protect the economy, protect jobs, and increase opportunities for low- and middle-income earners. No president, prime minister, or central banker wants a recession on their watch; low- and middle-class earners always hurt the most, and a recession could lead to a resurgence in economic grievances, and with it, the embrace the kind of politics the status quo fears the most. This brief history of recent economic and political history reminds us of the motives of the key actors here.

And then Covid-19 happened. Mindful of the lessons from the GFC, governments and central banks around the world, led by the Federal Reserve, went big and went early. The combined arsenal of monetary (QE, interest rate policy, and loosening the rules around how much capital banks have to hold against their lending) and fiscal (stimulus for companies and citizens) levers were deployed in a coordinated assault. In the arena of bad options to choose from, injecting more money into economies was the only choice to be made. So, when people lament the idiocy of central bankers for devaluing fiat currencies through QE, remember that much (but by no means all) was a function of circumstances that forced a choice between bad options.

One of the primary consequences of QE is the devaluation of fiat currencies, often lauded as a catalyst for crypto. But the outlook for the dollar is equally a puzzle. Many assume that after more than a decade of QE, the US dollar is moribund. Not necessarily. In the near term, tailwinds are supporting a bullish dollar. More on that, next time.

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