Chief Economist of Yongxing Securities: Bitcoin speculation craze exposes financial drawbacks in the US and Europe

Source: Global Times, author: Xu Weihong, Chief Economist of Yongxing Securities

Bitcoin is a virtual asset that cannot be seen or touched. It is a bit like the "indulgence" issued by the Catholic Church in the Middle Ages, which is said to bless you to achieve the illusory "financial freedom". For ordinary people, seeing rich people spend a lot of money to buy this kind of virtual wealth, some people always feel itchy in their hearts; although they know that this is just a carnival for the rich, they are often destined to "pay the bill" for the carnival. Financial bubbles in history generally follow this pattern. For example, the tulip speculation wave in the Netherlands 400 years ago, in the end, the people who suffered the most losses were ordinary investors, not the initial speculators.

Bitcoin speculation is more serious than tulips. There are many reasons, the two most important of which are: first, the global financial infrastructure and information construction, that is, the "interconnection" of the US dollar as the main currency asset trading platform, which allows financial institutions and individual investors to conduct virtual economic transactions around the world at low cost and conveniently. Another important reason is that the wealthy people in developed countries generally have a fear mentality - traditional industrial capital sees that the European and American central banks continue to print money to stimulate the economy, and they are worried about the depreciation of their currencies, so they look for asset havens around the world. This "asset shortage" has created a Bitcoin speculation frenzy.

Trading facilitation is a double-edged sword. For speculation, the global real-time trading system will greatly accelerate the accumulation of bubbles, just like the price of Bitcoin has risen much faster than the tulip "onion" 400 years ago; however, when the bubble bursts, it will only swallow up wealth more quickly. There is no asset in the world that only rises and never falls, and Bitcoin is no exception. Therefore, global financial institutions are predicting when the Bitcoin bubble will burst? To be more direct, when will the central banks of the developed economies of the United States, Europe and Japan change their policies? When will these central banks, which have "tasted the sweetness", stop their overly loose monetary policies?

In terms of traditional monetary banking, the only necessary condition for tightening monetary policy is inflation. You know, in addition to Bitcoin, the prices of basic industrial metals such as copper and aluminum have also skyrocketed in the past year: the prices of copper and iron ore have risen by 100% from the bottom in March last year; the price of aluminum has also risen by more than 50% this year, and around the Spring Festival, the rise in iron ore, copper and aluminum prices has accelerated. Global central banks attach great importance to: Is the shadow of inflation coming?

In 2021, inflationary pressure is indeed huge, and the monetary policy environment for financial investment is not suitable for investors to leverage and speculate for profit. As a financial veteran who experienced the 2008 subprime mortgage crisis, the risk of financial crisis that I feel is just like 14 years ago: continued loose monetary policy, the myth that wealth can only rise but not fall, the optimistic atmosphere that everyone makes money, and mainstream financial institutions with "forced consistency" trading styles.

The speculation surge of Bitcoin is caused by these mainstream financial institutions in the "prisoner's dilemma", just like the tulip "onion" and the US real estate junk bonds in 2007. In order to save the crisis, developed economies did not fundamentally split the too-big-to-fail financial system, but overdrew their own national legal currency credit and covered up financial bad debts by issuing more US dollars and euros. Therefore, many knowledgeable people in Europe and the United States continue to question the US government and the central bank of the eurozone. After the financial tsunami in 2008 and the European sovereign debt crisis in 2011, why are systemic financial institutions more monopolized in the financial markets of European and American countries? Why can several large US financial groups hijack the US economy more?

The US government over the past four years is to blame. As a speculative politician, Trump relied on the isolationism of "America First" and upheld trade protectionism to try to transform the internal contradictions of the US financial bad debts; and the sudden outbreak of the new crown epidemic gave the Federal Reserve an excuse to continue printing money. You know, the national debts of Germany and France have long had negative interest rates, and banks have been forced to borrow money from the government for transfusions. The rampant currency and "asset shortage" ultimately made Bitcoin stand out.

Everyone knows that Bitcoin is not a real currency and cannot replace legal tender, but it is highly recognizable, a bit like a well-known contemporary artwork. It is a carnival for wealthy collectors and a carnival for developed economies whose currencies have global credibility. This "Ponzi scheme" is just waiting for someone to pay the bill.

So, how should the Chinese economy, which has also suffered from the impact of the epidemic and is in the recovery and rising stage, deal with this speculative frenzy of global currency flooding in 2021? In my opinion, China's response should be rational and should be based on its own comprehensive global competitiveness. In other words, although "Made in China" has become famous all over the world, the Chinese government's decisive response to the sudden epidemic has made China the only major economy in the world with positive economic growth in 2020, but the global competitiveness of Chinese financial institutions is still limited, and the process of RMB internationalization still faces many challenges. It is far from the time for RMB to challenge the hegemony of the US dollar. Moreover, due to the need to "stabilize growth and fight the epidemic", the Chinese economy has been forced to accumulate a lot of hidden debts. Whether it is local governments or the pan-real estate financial sector, the debt risks of these "shadow banks" are accumulating.

Therefore, 2021 is a rare window of opportunity for China's finance. We should learn from the lessons of the US subprime mortgage crisis and advance the reform of the financial market in a down-to-earth manner: allow more hidden debts and bad debt institutions to "explode", and then straighten out the transmission mechanism of the central bank's monetary policy, promote the unification of the bond market, and liberate those financial institutions that can only "serve themselves and earn money from the central bank" in the gap of credit risk, so as to achieve the strategic goal of supply-side structural reform of financial deleveraging. On the regulatory side, we should strengthen the cross-border settlement risk control of virtual digital currency transactions, prudently respond to the irrational frenzy of global capital, and resolutely prevent the Chinese people from paying the bills for the Bitcoin "Ponzi scheme".