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What is a “soft” landing? – Crypto News

Good Morning. It was another terrible day for stocks yesterday. Re-examining the reasons for this would be superfluous after we combed through the charred remains of the bull market last week. Suffice it to say that a major oil sell-off and falling two-year yields suggest that fears of a slowdown in growth – as opposed to fears of inflation – dominated on Monday. As we gazed across the Red Sea, we were surprised to find this blob of deep green on the FactSet screen:

the green sea

Investors are literally buying canned goods, toilet paper and bleach, all in bulk. This tells you what you need to know about mood. If you have a nice, contrary, optimistic opinion, send it to us: robert.armstrong@ft.com and ethan.wu@ft.com.

From soft to soft

We and several others chuckled as Fed Chair Jay Powell hinted at the possibility of a “soft” landing for the economy if the central bank hikes rates. Jokes have been made about how unnerving it would be to hear the term from the pilot of your plane.

This was apparently not off-the-cuff or a slip-up by Powell. Several people have referred us to a presentation that Alan Blinder, former Fed Vice Chairman, gave in February. In it he makes the soft-soft distinction explicit.

The consensus view is that almost every Fed tightening in the past half-century has culminated in a recession, with the one notable exception of the 1993-1995 cycle. Blinder strongly disagrees. He counts 11 tightening cycles since 1965, noting that three were hard, three were soft, three were “soft” – meaning they were accompanied by fairly shallow recessions – and two were ambiguous. Blinder stars a Federal Reserve interest rate chart to mark the end of tightening cycles. I scribbled some notes:

What is a “soft” landing?  – Crypto News, Crypto Trading News

I have marked the cycles/stars that Blinder considers “hard” with red ticks. In these cases, Blinder says, the Fed wanted to induce a recession and succeeded. I have circled soft cycles (without an official recession) in green. The yellow circles mark cycles followed by GDP contractions of less than 1.5 percent. The last two cycles before the housing bubble and the pandemic are difficult to assess. Were the recessions caused by tightening – or by the financial crisis and Covid-19?

Here are the numbers as Blinder lays them out:

What is a “soft” landing?  – Crypto News, Crypto Trading News

Given that scorecard, Blinder argues, “soft landings can’t be too difficult to achieve.”

We may have seen last week that Powell moved the goalposts by signaling that while avoiding a recession will be very difficult, hopes for a shallow recession are more realistic. From a real economic growth perspective alone, a recession of the order of 1970, 1990 or 2001 would be a welcome outcome at this point.

But investors have more to worry about than GDP. All tightening cycles except 1993-1995 saw significant falls in stock markets. And the size of the recession from a GDP perspective does not always correlate with the size of the drawdown. The payment:

In this tightening cycle that’s only just begun, we’ve already seen sell-offs as big as ’66, ’80, and ’84. But the experience of the last three cycles and ’69 is important. While the landings may have been soft, the damage to stocks was severe. Recessions trigger sell-offs. The extent of these sell-offs depends on factors like valuation that go beyond the real economy.

El Salvador’s bitcoin experiment has failed

El Hodlador is at it again! After Bitcoin fell 50 percent from its peak, President Nayib Bukele tweeted Monday:

What is a “soft” landing?  – Crypto News, Crypto Trading News

Bukele’s embrace of bitcoin has come in three forms: outright purchases, a sale of bitcoin bonds, and declaring bitcoin the official currency. The first two were flops. While the government hasn’t said much, their bitcoin punts have almost certainly lost money. The bitcoin bond meanwhile remains in limbo as a debt crisis looms.

What remains is the official currency boost, the Bukele argued would lower the cost of remittances, which account for a quarter of GDP. In January I tried to find out if things were going well. What I found – a small one-time increase in referrals – was not encouraging. But data was scarce then.

Now, three economists — Yale’s Diana Van Patten, University of Chicago’s Fernando Alvarez, and Penn State’s David Argente — have published a remarkable study on Bitcoin adoption in El Salvador. Their findings, based on a representative in-person survey of 1,800 Salvadorans, suggest that enduring interest in Bitcoin has not materialized outside of young, educated, tech-savvy males.

One little thing the paper makes painfully clear is just how far the government went to get Salvadorans to adopt Chivo, their digital payments app, including:

  • A $30 installation bonus paid in Bitcoin. That is a reasonable flat rate of 8 percent of the monthly minimum wage

  • A discount at the country’s largest gas stations, only for Chivo users

  • A $150 million national fund to subsidize Bitcoin-related fees (the details are unclear)

  • Launched 200 Bitcoin ATMs in El Salvador and 50 more in America

  • A major marketing push across social and traditional media

  • Legal tender status, requiring businesses to accept cryptocurrency and allowing taxes to be paid in bitcoin

Covid has also spurred a global boom in contactless payments, Van Patten pointed out to me. Aside from a few technical hiccups, just about every imaginable obstacle to adoption has been minimized. The result? Here is the key table:

What is a “soft” landing?  – Crypto News, Crypto Trading News

The typical Chivo user was a young man with a high school degree and access to the internet and the formal financial system – belying Bukele’s claims that the technology would promote financial inclusion. The most common reason for using Chivo was to cash out the $30 bonus; 61 percent of users left the app immediately afterwards.

Even among Chivo users who took transfers, most did so in dollars, not bitcoin. Likewise, some businesses, around 20 percent, accept bitcoin. But these are mostly larger companies, and almost all convert them to dollars immediately after selling bitcoin.

The Bukele government distributed free money, and many Salvadorans took it. Some still use the Chivo app, but mainly for dollar transactions. The authors conclude:

We document that Bitcoin is not widely used as a medium of exchange [despite] the great pressure exerted by the government. . .

The most important reason [people who knew about Chivo did not download it] was that users prefer cash. Trust issues followed – respondents did not trust either the system or Bitcoin itself.

There were some silver linings for Bitcoin in the newspaper, highlighted by those close to the government. Felipe Vallejo, head of regulation at El Salvador’s crypto tech partner Bitso, told CoinTelegraph that the 20 percent of Salvadorans still using Chivo showed this is just the beginning:

We believe this is a relatively strong sign of adoption. As education about cryptocurrency and everyday use cases increases in the region, more users will stick with the application with a deeper understanding of the technology and the opportunities it presents.

Well no. This chart shows Chivo downloads since app launch. In 2022 they have flattened out near zero:

What is a “soft” landing?  – Crypto News, Crypto Trading News

This early adoption pattern is not normal, Alvarez explained. A far more common adoption pattern is to start slow, speed up, and then stop. Alvarez, Van Patten and Argente are currently investigating a central bank-run digital payments platform in Costa Rica, where 80 percent of the population sends 10 percent of GDP through the system. As Argente put it:

[Costa Rica is] an example of how technology can be used for financial inclusion once there is enough planning for implementation. But it took at least seven years.

Bukele’s gamble looks like a complete failure. (Ethan Wu)

A good read

The Tech/VC bubble has swelled and shrunk but never burst. Is this time different?


Source: Crypto News Austria

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