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Economy

Out of the bunker: A new post pandemic world

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The media has emphasized the volatility of the global economy leading to sovereign defaults, surging financial uncertainty, economic activity contraction, investment bust and a financial crisis. Finance professionals rely on quarterly economic assessments oblivious to the fact that they do not provide insights into the future of economies. Contrary to the expert’s assessments the global economy will not lead to a systemic meltdown.

Recessions caused by economic crisis take longer to recover but the present recession is a non-economic crisis which will last for a brief period. Unlike natural disasters it has not resulted in massive destruction of infrastructure. In the past two decades, disasters caused direct economic losses worth $3 trillion globally.

The pandemic has disrupted and not destroyed the global economy. It hindered production and investments. Several sectors such as utilities and finance were unaffected while Mergers and Acquisitions (M&As) and foreign investments (FI) were taking place.

Countries and international organizations disbursed trillion dollar rescue packages. Advanced economies spent about 6% of their GDP on relief programs. US and India implemented measures to increase domestic demand and growth.  Pent-up demand for retail goods, travel and cars will spur consumption.

Historically, economies are not impacted by pandemics. Smallpox did not derail the Industrial Revolution. Smallpox declined sharply after vaccination was widely adopted. The 1918 Spanish Flu challenges were more daunting than today’s crisis.

Pandemics and the global economy

The Spanish Flu Pandemic

In 1918 the world witnessed geopolitical events such as the end of WWI, the Russian revolution and the US Senate’s rejection of the Versailles Treaty and President Woodrow Wilson’s plan to join the League of Nations. Spanish flu devoured more lives than WWI and WWII combined. F. R. Velde concludes that Spanish flu had a negligible effect on the US economy as it grew by 42% from 1921 to 1929. Economic activity increased by 1923 driven by consumerism, household appliances sales, growth of radios and cinemas, Ford model T car, Federal Highway Act of 1921 and country wide electrification projects.

The technological and macroeconomic conditions across the two time periods have significantly improved since 1918. The Spanish flu’s mortality effect dwarfed Covid 19. In 1918 a majority of the global population was economically poor, suffered from poor health and lived in low hygienic conditions. By comparison 2022 will be more settled and calmer despite huge disruptions. 

WW II

Economically, infrastructurally and socially WWII was more devastating as compared to Covid 19. Yet the post war US economic growth proved economists Paul Samuelson and Gunnar Myrdal both future Nobel Prize winners wrong. Samuelson mentioned an economic downturn while Myrdal wrote about societal turmoil. 

The US spent 42% of GDP due to an increase in the war budget by 1944. War rationing provided a boost to economic revival. Rationing led to an increase in US household savings of 40% of GDP. The expansion of the highway system led to the development of new suburban areas. Cars contributed to the flourishing of the entertainment and hospitality sectors as people had easy access to resorts and restaurants.

The post WWII world ushered in an era of international organizations. Container ships expanded global trade. The Golden Age of Capitalism witnessed the birth and flourishing of development economics. The Marshall Plan invested $22 billion or roughly $182 billion in 21st century dollars in European economic assistance. The US invested $2.2 billion in Japan’s reconstruction programs from 1946 and 1952. Contemporary Japan is a democracy, the world’s third largest economy and America’s significant security partner in the Indo Pacific region.

The US established its position as the world’s economic superpower by manufacturing airplanes, ships and refrigerators. Its economy grew by 37% and the GNP skyrocketed to $300 billion during the 1950s compared to $200 billion in 1940. By 1960, it had topped $500 billion.

The post war period was one of the finest eras of economic expansion in world history. US GDP increased from $228 billion in 1945 to under $1.7 trillion in 1975. By 1975, the US economy represented 35% of world industrial output.

Businesses during the pandemic

Stable capital expenditures has led to soaring cash balances. The cumulative global funds for long-term investment is approaching $3.5 trillion. The total firepower could exceed $10 trillion with the addition of private funds. The IHS Markit’s purchasing managers’ indices indicated expansion of the US services sector during the pandemic.

There are 1200 companies with a record $3.8 trillion in cash reserves. Assets under management of sustainable funds nearly doubled from roughly $900 billion in 2019 to over $1.7 trillion in 2020. TSMC announced an investment of $12 billion in a US chip factory. Amperex Technology declared an investment of $5.1 billion in Indonesia. Honeycomb Energy Technology invested $2.3 billion while Groupe PSA invested $2.2 billion in Germany. The top 5,000 non-financial listed companies increased their cash holdings by more than 25% to $8 trillion. Toyota increased cash holdings by more than $30 billion (up 68%) and Volkswagen by $22 billion. Suez Canal’s annual revenues in 2021 were $6.3 billion, the highest in the waterway’s history. The high levels of cash reserves will boost foreign investments in the next decade.

M&A

Low borrowing costs and buoyant financial markets are leading to M&A activities. Global M&As in the first four months of 2021 recorded higher value. M&A grew to $73 billion especially in the technology, financial services and consumer goods sectors while chemicals and information and communication sectors led to 24% increase. Notable deals include the purchase of Cypress by Infineon for $9.8 billion. The pandemic led to a revenue increase of 15% in the health care sector. One of the biggest deals was the acquisition of The Medicines by Novartis for $7.4 billion. Among the largest acquisition were the purchase of Carlton United Breweries by Asahi Group for $11 billion and Hitachi’s acquisition of ABB Power Systems for $9.4 billion.

Countries and the pandemic

Countries are liberalizing regulations and simplifying investment procedures. G20 announced fiscal packages exceeding $10 trillion while the WB provided $160 billion to developing economies. The US has proposed a multi-year infrastructure package and launched the American Rescue Plan of $1.9 trillion and $5 trillion in stimulus funding. Tax increases are likely to follow the present measures.

India’s $280 billion economic package is 10% of its’s GDP. India implemented the $24 billion social support plan. India has launched several reforms to attract organizations that are looking for an alternative to China. Several sectors such defense, aviation and insurance were liberalized. The easing of lockdowns in India led to a rise in economic activity. During Diwali 2020, e-commerce giants reported a 55% jump in sales in just one week to $4.1 billion, compared to $2.7 billion during the same period in 2019 according to CMIE.

The next decade

The global economy is poised to stage its most robust post-recession recovery in 80 years in 2022. Fewer barriers to investments is associated with lower macroeconomic volatility and smaller output falls during downturns. Productivity drives economic growth. US and India will experience lower crisis duration as they have higher productive capacities as measured by the Economic Complexity Index.

Fourth organizational revolution

Crises can spur the adoption of new technologies and business models. The pandemic has accelerated the fourth digital revolution. Digitization is implemented as automation and online services increase. The SARS outbreak is often attributed with the growth of online shopping in China, accelerating Alibaba’s rise. Organizations will invest in cloud computing, medical technologies and robotics.

Economic growth

The unprecedented global stimulus of 20% of GDP alongside the gradual reopening of economies will make this the shortest recession in post-war history. The recovery in global trade will be broad based with consumer goods and industrial supplies all back at or above pre-pandemic levels. Governments will implement macro policies to ensure financial stability in a prolonged environment of low interest rates and high liquidity.

Fiscal stimulus measures and consumer demand are expected to revive the US economy. US fiscal policy has strongly boosted business activity. US economic growth is expected to reach 6.8% in 2022, the fastest pace since 1984. President Joe Biden infrastructure plan, consumer demand and the implementation of 5G infrastructure will lead the economic recovery. The Federal Reserve’s monetary policy will remain accommodative with quantitative easing and zero interest rates for an extended period.

India is situated in the most volatile region of the world surrounded by two hostile nuclear powers. China and Pakistan have fought wars with India. Since the last 30 years various geopolitical events and crisis situations such as the 1991 economic crisis, Pakistan aiding terrorism, the Kargil war, scams between 2004 and 2014 and the Covid 19 pandemic have taken place.

Yet India is attracting foreign direct investment and foreign institutional investors and its citizens are investing in the India story. The $3 trillion Indian equity market is on a history making spree as it touched the 60,000 mark during the pandemic. India is projected to be the fastest growing economy in 2022. India will grow by 8.5% while China is projected to grow by 5.6% in 2022 according to the IMF. India is implementing structural reforms and public sector privatization. The e-commerce market in India is projected to expand by 150%. The opportunities in the next 25 years are greater as compared to the last 25 years. India will continue to grow.

China’s economy will lead to a downward trend and diminishing productivity in response to belligerent foreign and military policies, US trade wars and global decoupling from China.

FI will recover to pre-pandemic levels of about $1.5 trillion by 2022. In 2023, investments in developed economies are expected to increase by 20%. FI in the US is projected to increase by 15%. In 2022 emerging markets are expected to accelerate to 6% supported by high commodity prices.

Consumer Spending

Consumers will be excited to get back to shopping and socializing. During Covid the personal savings rates surged above 20% of disposable income. Consumer spending will increase due to higher savings as compared to the pre covid levels. US households saved $1.6 trillion according to Oxford Economics. Retail and travel sectors will benefit as consumers start spending, restrictions are lifted and people are vaccinated.

US retail sales could rise as much as 8.2% to more than $4.33 trillion in 2022.  In India the 2021 Diwali shopping sales broke the 10-year record as sales generated ₹1.25 lakh crore. Consumer spending will lead to gross tax revenues which will expand to the highest pace as compared to pre pandemic levels.

Organizations

Organizations will focus on portfolio optimization. It is a buyers market and deals will be the most consequential activity of this decade. The world should expect a rise in M&A as volumes and shareholder returns will likely reach or exceed pre-pandemic levels driven by plentiful cheap liquidity. The hunt for good assets will continue to be competitive with an estimated $3.1tn in dry powder globally, a low interest rate environment and promising new opportunities.

Fleet expansion plans by shipping companies means trade is picking up. Cargo growth has led to a $10 Billion buying spree for containerships. At least 47 ultra-large container vessels are expected to be delivered by 2024 according to research firm Drewry. CMA CGM has ordered 22 containerships while Ever Given’s Operator has placed an order for 20 New Ultra-Large Ships. Korea Shipbuilding & Offshore Engineering and Samsung Heavy Industries have won combined orders worth $3 billion for 25 container ships,. The Port of Los Angeles closed its fiscal year with volumes of 10,879,383 TEUs, setting a new Western Hemisphere record.

Conclusion

The 20th century witnessed several crises such as WWI, Spanish Flu, WWII, cold war, collapse of the Soviet Union and dot com bubble. The first decade of the new millennium brought a financial crash and the rise of global terrorism. Each of these historical crisis periods was succeeded by an economic revival. The aviation industry was not permanently affected by 9/11. Terrorist attacks have not prevented people from travelling to the Middle East and Europe. A similar pattern of renewal will emerge from the present crisis. 

Historically crisis events have spawned new trends that are favorable for the economy. The Spanish Flu led to research in infectious diseases and 9/11 led to a secure environment. The pandemic will eventually give way to commercial activity, innovation and global cooperation.

A century ago our predecessors did not have the benefits of technological and scientific advances and international organizations. Today governments are supporting their economies through the crisis. The world will be out of the bunker as the effects of the pandemic fade away.

Mangesh has a Masters in International Affairs Degree from Columbia University, New York where he concentrated in international security policy. He is a subject matter expert on country, political and geopolitical risk analysis. Mangesh has more than 19 years of experience in conducting research, policy analysis and formulation and developing case studies and lessons learned. He provides strategic advice to C Suite management on global risks. Mangesh’s articles have been published in Small Wars Journal, The National Interest, Eurasia Review, E-International Relations, Modern Diplomacy, Indian Defense Review, Security Management, Geopolitical Monitor, Internationale Politik, The Geopolitics, CISOMAG, The Diplomatist and the Journal of Indo Pacific Affairs.

Economy

2022: Small Medium Business & Economic Development Errors

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Calling Michelangelo: would Michelangelo erect a skyscraper or can an architect liberate David from a rock of marble? When visibly damaged are the global economies, already drowning their citizenry, how can their economic development departments in hands of those who never ever created a single SME or ran a business, expect anything else from them other than lingering economic agonies?

The day pandemic ends; immediately, on the next day, the panic on the center stage would be the struggling economies across the world.  On the small medium business economic fronts, despite, already accepted globally, as the largest tax contributor to any nation. Visible worldwide, already abandoned and ignored without any specific solutions, there is something strategically wrong with upskilling exporters and reskilling manufacturers or the building growth of small medium business economies. The SME sectors in most nations are in serious trouble but are their economic development rightly balanced?   

Matching Mindsets: Across the world, hard working citizens across the world pursue their goals and some end up with a job seeker mindset and some job creator mindset; both are good. Here is a globally proven fact; job seekers help build enterprises but job creators are the ones who create that enterprise in the first place. Study in your neighborhoods anywhere across the world and discover the difference.

Visible on LinkedIn: Today, on the SME economic development fronts of the world, clearly visible on their LinkedIn profiles, the related Ministries, mandated government departments, trade-groups, chambers, trade associations and export promotion agencies are primarily led by job seeker mindsets and academic or bureaucratic mentality. Check all this on LinkedIn profiles of economic development teams anywhere across the world.

Will jumbo-pilots do heart transplant, after all, economic performance depends on matching right competency; Needed today, post pandemic economic recovery demands skilled warriors with mastery of national mobilization to decipher SME creation and scalability of diversified SME verticals on digital platforms of upskilling for global age exportability. This fact has hindered any serious progress on such fronts during the last decade. The absence of any significant progress on digitization, national mobilization of entrepreneurialism and upskilling of exportability are clear proofs of a tragically one-sided mindset.

Is it a cruise holiday, or what? Today, the estimated numbers of all frontline economic development team members across 200 nations are roughly enough to fill the world-largest-cruise-ship Symphony that holds 6200 guests. If 99.9% of them are job-seeker mindsets, how can the global economic development fraternity sleep tonight? As many billion people already rely on their performances, some two billion in a critical economic crisis, plus one billion starving and fighting deep poverty. If this is what is holding grassroots prosperity for the last decade, when will be the best time to push the red panic button? 

The Big Fallacy of “Access to Finance” Notion: The goals of banking and every major institution on over-fanaticized notions of intricate banking, taxation are of little or no value as SME of the world are not primarily looking for “Access to Capital” they are rather seeking answers and dialogue with entrepreneurial job creator mindsets. SME management and economic development is not about fancy PDF studies of recycled data and extra rubber stamps to convince that lip service is working. No, it is not working right across the world.

SME are also not looking for government loans. They do not require expensive programs offered on Tax relief, as they make no profit, they do not require free financial audits, as they already know what their financial problems are and they also do that require mechanical surveys created by bureaucracies asking the wrong questions. This is the state of SME recovery and economic development outputs and lingering of sufferings.

SME development teams across the world now require mandatory direct SME ownership experiences

The New Hypothesis 2022: The new hypothesis challenges any program on the small medium business development fronts unless in the right hands and right mindsets they are only damaging the national economy. Upon satisfactory research and study, create right equilibrium and bring job seeker and job creator mindsets to collaborate for desired results. As a start 50-50, balances are good targets, however, anything less than 10% active participation of the job creator mindset at any frontline mandated SME Ministry, department, agency or trade groups automatically raises red flags and is deemed ineffective and irrelevant. 

The accidental economists: The hypothesis, further challenges, around the world, economic institutes of sorts, already, focused on past, present and future of local and global economy. Although brilliant in their own rights and great job seekers, they too lack the entrepreneurial job creator mindsets and have no experience of creating enterprises at large. Brilliantly tabulating data creating colorful illustrative charts, but seriously void of specific solutions, justifiably as their profession rejects speculations, however, such bodies never ready to bring such disruptive issues in fear of creating conflicts amongst their own job seeker fraternities. The March of Displaced cometh, the cries of the replaced by automation get louder, the anger of talented misplaced by wrong mindsets becomes visible. Act accordingly

The trail of silence: Academia will neither, as they know well their own myopic job seeker mindset. In a world where facial recognition used to select desired groups, pronouns to right gatherings, social media to isolate voting, but on economic survival fronts where, either print currency or buy riot gears or both, a new norm; unforgiveable is the treatment of small medium business economies and mishmash support of growth. Last century, laborious and procedural skills were precious, this century surrounded by extreme automation; mindsets are now very precious.  

Global-age of national mobilization: Start with a constructive open-minded collaborative narrative, demonstrate open courage to allow entrepreneurial points of views heard and critically analyze ideas on mobilization of small mid size business economies. Applying the same new hypotheses across all high potential contributors to SME growth, like national trade groups, associations and chambers as their frontline economic developers must also balance with the job creator mindset otherwise they too become irrelevant. Such ideas are not just criticism rather survival strategies. Across the world, this is a new revolution to arm SME with the right skills to become masters of trade and exports, something abandoned by their economic policies. To further discuss or debate at Cabinet Level explore how Expothon is making footprints on new SME thinking and tabling new deployment strategies. Expothon is also planning a global series of virtual events to uplift SME economies in dozens of selected nations.

Two wheels of the same cart: Silence on such matters is not a good sign. Address candidly; allow both mindsets to debate on how and why as the future becomes workless and how and why small medium business sectors can become the driving engine of new economic progress. Job seekers and job creators are two wheels of the same cart; right assembly will take us far on this economic growth passage. Face the new global age with new confidence. Let the nation witness leadership on mobilization of entrepreneurialism and see a tide of SME growth rise. The rest is easy.

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Economy

Rebalancing Act: China’s 2022 Outlook

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Authors: Ibrahim Chowdhury, Ekaterine T. Vashakmadze and Li Yusha

After a strong rebound last year, the world economy is entering a challenging 2022. The advanced economies have recovered rapidly thanks to big stimulus packages and rapid progress with vaccination, but many developing countries continue to struggle.

The spread of new variants amid large inequalities in vaccination rates, elevated food and commodity prices, volatile asset markets, the prospect of policy tightening in the United States and other advanced economies, and continued geopolitical tensions provide a challenging backdrop for developing countries, as the World Bank’s Global Economic Prospects report published today highlights.

The global context will also weigh on China’s outlook in 2022, by dampening export performance, a key growth driver last year. Following a strong 8 percent cyclical rebound in 2021, the World Bank expects growth in China to slow to 5.1 percent in 2022, closer to its potential — the sustainable growth rate of output at full capacity.

Indeed, growth in the second half of 2021 was below this level, and so our forecast assumes a modest amount of policy loosening. Although we expect momentum to pick up, our outlook is subject to domestic in addition to global downside risks. Renewed domestic COVID-19 outbreaks, including the new Omicron variant and other highly transmittable variants, could require more broad-based and longer-lasting restrictions, leading to larger disruptions in economic activity. A severe and prolonged downturn in the real estate sector could have significant economy-wide reverberations.

In the face of these headwinds, China’s policymakers should nonetheless keep a steady hand. Our latest China Economic Update argues that the old playbook of boosting domestic demand through investment-led stimulus will merely exacerbate risks in the real estate sector and reap increasingly lower returns as China’s stock of public infrastructure approaches its saturation point.

Instead, to achieve sustained growth, China needs to stick to the challenging path of rebalancing its economy along three dimensions: first, the shift from external demand to domestic demand and from investment and industry-led growth to greater reliance on consumption and services; second, a greater role for markets and the private sector in driving innovation and the allocation of capital and talent; and third, the transition from a high to a low-carbon economy.

None of these rebalancing acts are easy. However, as the China Economic Update points out, structural reforms could help reduce the trade-offs involved in transitioning to a new path of high-quality growth.

First, fiscal reforms could aim to create a more progressive tax system while boosting social safety nets and spending on health and education. This would help lower precautionary household savings and thereby support the rebalancing toward domestic consumption, while also reducing income inequality among households.

Second, following tightening anti-monopoly provisions aimed at digital platforms, and a range of restrictions imposed on online consumer services, the authorities could consider shifting their attention to remaining barriers to market competition more broadly to spur innovation and productivity growth.

A further opening-up of the protected services sector, for example, could improve access to high-quality services and support the rebalancing toward high-value service jobs (a special focus of the World Bank report). Eliminating remaining restrictions on labor mobility by abolishing the hukou, China’s system of household registration, for all urban areas would equally support the growth of vibrant service economies in China’s largest cities.

Third, the wider use of carbon pricing, for example, through an expansion of the scope and tightening of the emissions trading system rules, as well power sector reforms to encourage the penetration and nationwide trade and dispatch of renewables, would not only generate environmental benefits but also contribute to China’s economic transformation to a more sustainable and innovation-based growth model.

In addition, a more robust corporate and bank resolution framework would contribute to mitigating moral hazards, thereby reducing the trade-offs between monetary policy easing and financial risk management. Addressing distortions in the access to credit — reflected in persistent spreads between private and State borrowers — could support the shift to more innovation-driven, private sector-led growth.

Productivity growth in China during the past four decades of reform and opening-up has been private-sector led. The scope for future productivity gains through the diffusion of modern technologies and practices among smaller private companies remains large. Realizing these gains will require a level playing field with State-owned enterprises.

While the latter have played an instrumental role during the pandemic to stabilize employment, deliver key services and, in some cases, close local government budget gaps, their ability to drive the next phase of growth is questionable given lower profits and productivity growth rates in the past.

In 2022, the authorities will face a significantly more challenging policy environment. They will need to remain vigilant and ready to recalibrate financial and monetary policies to ensure the difficulties in the real estate sector don’t spill over into broader economic distress. Recent policy loosening suggests the policymakers are well aware of these risks.

However, in aiming to keep growth on a steady path close to potential, they will need to be similarly alert to the risk of accumulating ever greater levels of corporate and local government debt. The transition to high-quality growth will require economic rebalancing toward consumption, services, and green investments. If the past is any guide to the future, the reliance on markets and private sector initiative is China’s best bet to achieve the required structural change swiftly and at minimum cost.

First published on China Daily, via World Bank

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Economy

The US Economic Uncertainty: Bitcoin Faces a Test of Resilience?

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Is inflation harmful? Is inflation here to stay? And are people really at a loss? These and countless other questions along the same lines dominated the first half of 2021. Many looked for alternative investments in the national bourse, while others adopted unorthodox streams. Yes, I’m talking about bitcoin. The crypto giant hit records after records since the pandemic made us question the fundamentals of our conventional economic policies. And while inflation was never far behind in registering its own mark in history, the volatility in the crypto stream was hard to deny: swiping billions of dollars in mere days in April 2021. The surge came again, however. And it will keep on coming; I have no doubt. But whether it is the end of the pandemic or the early hues of a new shade, the tumultuous relationship between traditional economic metrics and the championed cryptocurrency is about to get more interesting.

The job market is at the most confusing crossroads in recent times. The hiring rate in the US has slowed down in the past two months, with employers adding only 199,000 jobs in December. The numbers reveal that this is the second month of depressing job additions compared to an average of more than 500,000 jobs added each month throughout 2021. More concerning is that economists had predicted an estimated 400,000 jobs additions last month. Nonetheless, according to the US Bureau of Labour Statistics, the unemployment rate has ticked down to 3.9% – the first time since the pre-pandemic level of 3.5% reported in February 2020. Analytically speaking, US employment has returned to pre-pandemic levels, yet businesses are still looking for more employees. The leverage, therefore, lies with the labor: reportedly (on average) every two employees have three positions available.

The ‘Great Resignation,’ a coinage for the new phenomenon, underscores this unique leverage of job selection. Sectors with low-wage positions like retail and hospitality face a labor shortage as people are better-positioned to bargain for higher wages. Thus, while wages are rising, quitting rates are record high simultaneously. According to recent job reports, an estimated 4.5 million workers quit their jobs in November alone. Given that this data got collected before the surge of the Omicron variant, the picture is about to worsen.

While wages are rising, employment is no longer in the dumps. People are quitting but not to invest stimulus cheques. Instead, they are resigning to negotiate better-paying jobs: forcing the businesses to hike prices and fueling inflation. Thus, despite high earnings, the budget for consumption [represented by the Consumer Price Index (CPI)] is rising at a rate of 6.8% (reported in November 2021). Naturally, bitcoin investment is not likely to bloom at levels rivaling the last two years. However, a downfall is imminent if inflation persists.

The US Federal Reserve sweats caution about searing gains in prices and soaring wage figures. And it appears that the fed is weighing its options to wind up its asset purchase program and hike interest rates. In March 2020, the fed started buying $40 billion worth of Mortgage-backed securities and $80 billion worth of government bonds (T-bills). However, a 19% increase in average house prices and a four-decade-high level of inflation is more than they bargained. Thus, the fed officials have been rooting for an expedited normalization of the monetary policy: further bolstered by the job reports indicating falling unemployment and rising wages. In recent months, the fed purview has dramatically shifted from its dovish sentiments: expecting no rate hike till 2023 to taper talks alongside three rate hikes in 2022.

Bitcoin now faces a volatile passage in the forthcoming months. While the disappointing job data and Omicron concerns could nudge the ball in its favor, the chances are that a depressive phase is yet to ensue. According to crypto-analysts, the bitcoin is technically oversold i.e. mostly devoid of impulsive investors and dominated by long-term holders. Since November, the bitcoin has dropped from the record high of $69,000 by almost 40%: moving in the $40,000-$41,000 range. Analysts believe that since bitcoin acts as a proxy for liquidity, any liquidity shortage could push the market into a mass sellout. Mr. Alex Krüger, the founder of Aike Capital, a New York-based asset management firm, stated: “Crypto assets are at the furthest end of the risk curve.” He further added: “[Therefore] since they had benefited from the Fed’s “extraordinarily lax monetary policy,” it should suffice to say that they would [also] suffer as an “unexpectedly tighter” policy shifts money into safer asset classes.” In simpler terms, a loose monetary policy and a deluge of stimulus payments cushioned the meteoric rise in bitcoin valuation as a hedge against inflation. That mechanism would also plummet the market with a sudden hawkish shift.

The situation is dire for most industries. Job participation levels are still low as workers are on the sidelines either because of the Omicron concern or lack of child support. In case of a rate hike, businesses would be forced to push against the wages to accommodate affordability in consumer prices. For bitcoin, the investment would stay dormant. However, any inflationary surprises could bring about an early tightening of the policy: spelling doom for the crypto market. The market now expects the job data to worsen while inflation to rise at 7.1% through December in the US inflation data (to be reported on Wednesday). Any higher than the forecasted figure alongside uncertainty imbued by the new variant could spark a downward spiral in bitcoin – probably pushing the asset below the $25000 mark.

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