David Schwartz, CTO of Ripple, continues to explore the wider world of blockchain and digital assets on the Block Stars podcast. In the latest episode, he speaks with Professor of Economics and Political Science at the University of California at Berkeley, Barry Eichengreen, about the current state of the global economy and where digital assets fit into a post-COVID climate.
As an economic historian, Barry usually views the past as a guide to understanding today’s economic problems. However, he admits that the effects of the global pandemic in 2020 have few parallels with the past.
“We have never had a crisis caused by the need to shut down the economy,” he explains. “Usually demand collapses due to a financial crisis or a bank failure. [It’s] very fast. This is going to be kind of a slow motion crisis. I don’t think there are really good historical analogies for what we’re going to go through. “
While believing governments rightly provided funding to save businesses and save jobs, Barry admits that today’s incentives are likely to lead to tomorrow’s problems.
“This pandemic is synonymous with war,” he explains. “I think [governments have] do what it takes to keep financial markets working … by buying everything that moves. There will be a bill that pays off the street. “
Some people believe that increased liquidity in the market will lead to hyperinflation and are looking for investment opportunities that can maintain value when dollar prices rise. Gold has traditionally been viewed as a safe bet, while digital assets are increasingly viewed as a new inflation hedge.
“Gold actually has no intrinsic value,” says Barry. “People [believe] it will keep its value because other people appreciate it. From this point of view there is a parallel to cryptocurrencies. Bitcoin is no more used industrially than it is for gold. People are paying actual US dollars for it because they believe other people will appreciate it and will pay actual US dollars for it. “
Given the history of Bitcoin price volatility, some investors are studying stablecoins as a more reliable store of value. However, Barry notes that most of these coins are stabilized by being pegged to the US dollar. When the dollar loses its purchasing power due to high inflation, so does the stablecoin. Still, he remains optimistic that some digital assets will prove their worth over the long term.
“I don’t think thinking about crypto as a speculative investment is really a long-term business model,” predicts Barry. “Speculative investment has come and gone throughout history. Tulips came as a speculative investment and they left. [Digital assets] Those specific services like cross-border payments are likely the ones that have legs. “
Barry points to a recent example of where blockchain-based payments may have provided the U.S. government with a more effective way to raise economic funds for millions of people across the country. The debate over creating a central bank digital currency (CBDC) or other blockchain solution continues, especially given the ongoing global uncertainty caused by COVID. When David asked him about an economic outlook for the coming year, Barry replied:
“Better to ask an epidemiologist than an economist. The virus is still out there and as long as it does, states and countries that do open have to shut down regularly. It’s going to be a bumpy ride. “
Check out the latest episode of Block Stars for David’s in-depth conversation with Barry Eichengreen, which also includes his thoughts on regulating digital assets, why hyperinflation is unlikely, and whether he really thinks Facebook’s Libra project is a terrible idea.