Ted Cruz (R-TX) – a crypto-supportive Republican senator – believes a US Central Bank Digital Currency (CBDC) is likely to become a reality. The politician believes both the Federal Reserve and the White House currently want one, and that the Democratic party won’t vote against its issuance. In an interview published by What Bitcoin Did on Friday, Cruz discussed the current political climate surrounding crypto. In general, the senator believes Democrats are more opposed to the industry than Republicans, due…
An economic recession is a period that is characterized by a slowdown in the level of economic activities. There is a massive fall in both individual and government spending, and the situation can last for more than a few months.
According to the macroeconomic view of a recession, it occurs when a negative GDP records for two consecutive quarters. Business cycles contract and there is a general excess in supply of goods, increased unemployment levels as firms scale down expenses, and reduced production.
Case Examples of Economic Recessions
History has recorded several economic recessions. For example, the United States experienced a period of economic slowdown following the 9/11 attack. The recession lasted between March and November. The worst of all was the great recession of 2008-2009 when real GDP declined for four consecutive quarters. The GDP dropped by 0.3 % during the first year, and 2.8% in 2009.
The country is experiencing the same economic situation following the coronavirus pandemic. The National Bureau of Economic Research announced the end of economic expansion in February 2020, and the COVID-19 outbreak continues to hamper economic growth into July 2020.
Role of Digital Currencies in Thwarting Economic Recessions
The economy reacts to recessions by softening monetary policies to increase the money supply into the system. All countries run their economies by the traditional currency. Therefore, adopting digital currency could be the solution for these economic cycles, given that no global recession ever occurred in the cryptocurrency market.
Digital currencies have a set of weaknesses and inefficiencies. However, they come with a couple of unique characteristics that make them a viable solution to fiat money’s economic recessions.
Cryptocurrency’s Decentralized Nature
Unlike traditional money, Bitcoins and other digital currencies are decentralized and thus free from government control. Therefore, they are detached from any economies. In the event of a financial crisis in one country, fellow countries tend to strengthen their currencies against the country’s currency, which ultimately depreciates.
However, if the country facing harsh economic times was running under digital currencies, its monies would not depreciate since fellow states would not have the power to strengthen their currency against a global medium of exchange.
Cryptocurrency can keep countries safe from the causes and the harsh effects of a financial crisis. Countries like Venezuela have begun turning to digital currencies to help with the high inflation rates of their local currencies.
Bitcoin and Cryptocurrencies are Inflation Proof
Central banks have the mandate to print money at any instance, which keeps the supply of fiat currency unlimited. As a result, there’s always the risk of inflation, should the quantity of the fiat money be more than the demand. Inflation is one of the worst things that could happen to an economy. It hampers the productivity of a country’s population and can result in a negative gross domestic product.
On the other hand, the market supply of digital currency remains fixed, making it safe from inflation. For instance, there is only a fixed supply of 21 million bitcoins, with its value increasing with demand.
Digital Currencies Have a High Degree of Transparency
Some economic recessions result from the inefficiencies of the individuals in government and financial institutions who control the metrics of important financial system aspects such as the supply of money and stock markets.
With digital currencies, all transactions appear in public ledgers based on blockchain technology. All relevant information is available, and anyone can access it around the globe. As such, there is no potential for individuals tampering with the financial system and lead the country into an economic crisis.
Bitcoin Empowers the Masses
In an economy running on traditional money, most of the population does not understand the financial system. Only the governments and financial institutions detect expansions and contractions in monetary supply and take the mantle of being the solution during phases of economic recessions. However, digital currency makes everyone part of the financial system.
The players in a crypto-economy follow clear and transparent rules for joining and participating, and monetary expansions are visible to everyone. Bitcoin and cryptocurrencies connect the global economy even in poorly banked states, providing a perfect solution for economic recession problems such as personal finance. It is easy to exchange currency across borders and borrow at lower costs. The traditional monetary system exposes the already financially disadvantaged people to unfair lending practices. Consequently, the population ends up in more financial instabilities after taking out conventional loans.
All in All
Economic recessions result from a range of occurrences, all of which revolve around the country’s currency. The centralization of money is a significant contributing factor to declining economies. Government control and inefficiency in controlling the monetary aspect of the economy make or break a country’s currency. They also play a significant role in permanent or temporary economic recessions.
Cryptocurrency is yet to undergo tests in an economic crisis. However, its features meet the criteria for a perfect medium of exchange for averting financial crises. Digital monies ensure money market stability, thus eliminating economic problems such as the balance of payments due to devaluation of currency and exchange rate differences. It also empowers users, including small entrepreneurs, and gives them access to loans at low costs, thereby increasing productivity. As a result, the gross national product will most probably record growth, and there will be the least likelihood of an economic recession occurring.