For decades, the velocity of money, which is a measure of the times that a unit of currency is spent, has fallen due to what some economists have termed the “safe asset shortage.” This has occurred for a variety of reasons, including aging demographics in advanced economies and lack of trust in governmental institutions in emerging economies.
The safe asset shortage could be described, in simple terms, by saying that the demand for safe assets (cash and government bonds) is not keeping pace with the growth of overall wealth. As a result, demand for these assets has driven down global interest rates for decades (see chart below) creating a liquidity trap — a condition where yields on government bonds and cash are so close that many prefer to hoard cash. This means that, as money is created by central banks, much of it essentially becomes locked away on private balance sheets (bank, corporate and individual) to satisfy the demand for liquid savings. Failure of governmental institutions to produce enough safe assets has contributed to the falling monetary velocity, slow growth in the Eurozone and Japan and structural lack of labor in the United States.
But what if this demand for savings could be satisfied by something other than government bonds or currency? Enter Bitcoin.
As cited by David Andofatto of the St. Louis Federal Reserve in his blog post entitled “Is Bitcoin A Safe Asset?,” bitcoin “…could be the world’s next great safe asset. At least, it certainly seems to have all the properties that are desired in a safe asset.”
The blog goes on to describe some of Bitcoin’s attributes, including its simple monetary policy and fixed supply, with the implication being that this is a role that bitcoin could serve.
But to be clear, it is not there now, so this is a stretch goal for bitcoin. But if we zoom 20 years into the future and assume tht the bitcoin market capitalization reaches maturity ($20 trillion-plus), its volatility will likely…