Several important macroeconomic questions are perplexing economists, the Federal Reserve, and everyone else.
Why is inflation so high? What is causing the rise in home prices? And why is it so difficult for businesses to find workers?
Of course, there is no single correct answer, but there are some that are credible. Supply shortages, strong consumer demand, and the Russia-Ukraine war are all contributing to higher prices.
During the pandemic, a slowdown in home construction combined with renewed interest in suburbs resulted in housing shortages.
And the pandemic encouraged some workers to retire early while making it more difficult for others to return to work.
The economy by influencing businesses and consumers’ desire and ability to spend That is why the Fed printed trillions of dollars to help the US economy recover from the 2008 financial crisis and again during the pandemic.
It’s also why the Fed is now attempting to tighten the money supply to reduce spending and inflation.
Because the most popular cryptocurrencies, such as Bitcoin and Ethereum, are easily convertible into dollars, it’s reasonable to believe that they could have a similar impact on the economy.
For the majority of their brief existence, there was little danger of this happening.
According to crypto data provider CoinMarketCap, the global market value of cryptocurrencies was just $250 billion in mid-2020, roughly a decade after Bitcoin’s debut, a fraction of the $18 trillion in circulation at the time as measured by the so-called M2 money supply.
However, cryptocurrency’s footprint grew significantly in the months that followed, reaching a market value of close to $3 trillion in late 2021.
Here’s what happened to the economy at the same time: Inflation, as measured by the consumer price index, rose 9.4 per cent from June 2020 to the end of 2021, the highest rate since the early 1980s.
The S&P/Case-Shiller U.S. National Home Price Index increased by 29 per cent, far exceeding any comparable period since the index’s inception in 1987, including the run-up to the housing bubble in the mid-2000s.
Job openings more than doubled to nearly 11.5 million from 5.5 million, by far the largest increase in absolute numbers or percentage terms since the data series began in 2000.
Then came the crypto crash. Since late 2021, cryptocurrencies have lost $2 trillion in market value, with their global market cap falling by two-thirds to around $1 trillion.
While economic data is reported with a month or more lag, there are signs that inflation, housing, and the job market may be cooling.
Inflation expectations have fallen, as have the prices of some CPI components, most notably gasoline.
The rise in home prices appears to be slowing, and in some areas, prices may even be falling. Job openings fell by 1.7 per cent this year through May, and some employers say it’s becoming easier to find workers.
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I’m not claiming that cryptocurrencies are solely or even primarily responsible for these broader economic trends, not least because it’s difficult to determine how much of the global crypto gains and subsequent losses can be attributed to Americans.
But they are a factor, and possibly a significant one. In a Redfin survey conducted near the peak of crypto in December 2021, 11.6 per cent of first-time homebuyers said that at least some of their down payment came from crypto gains.
This was up from 8.8 per cent in 2020 and 4.6 per cent in 2019, reflecting crypto’s meteoric rise during that period.
Crypto profits appear to have also contributed to labour shortages. According to a survey conducted by consumer data provider CivicScience last October, 11% of respondents said cryptocurrency gains enabled them or someone they know to quit their job.
This figure is 44 per cent for respondents earning less than $25,000 per year, and a startling 75 per cent for those earning $25,000 to $50,000, the pay range for jobs where shortages have been most acute, such as retail, health and social assistance, travel and leisure.
