Deflation and cryptocurrencies

Abstract

At the nadir of the Great Crisis of 2007-2009, the unconventional monetary policy employed by the central banks of the major western economies created a major split among economists, easily seen in their divergent predictions. Those of a more monetarist bent predicted rampant inflation as a result of central banks' "money printing", while others less ideologically opposed to state spending predicted that Quantitative Easing (QE) and other unconventional measures could effectively restore the economy to health.  However, few economists could foresee why a bank led crisis could not be resolved through monetary policy and how deflation would be the most important force to be contended with at the level of public policy.

Today, the same insistence of employing monetary policy instead of fiscal policy, coupled with a bank bailout that has not returned the financial system or the economy to health, has led to a critical inflection point in the design of world's financial systems. This paper will introduce a conceptual framework that is constructed upon Post Keynesian and Polanyian insights regarding the state, money and banking, that offers a different angle for understanding the asset-led deflation of the ongoing great crisis, the "liquidity trap" created in attempts to rescue the economy, and the current "war on cash", which has arisen in the wake of the failure of monetary policy and the onset of negative interest rates, and promises drastic changes to how finance operates. In this context, the large-scale appearance of cryptocurrencies will be discussed.