Review on the Global Economic Situation and How It May Impact Tokenized Assets part 1 — Debt
By: Posts For Ideafex, Defunct
Tags: Blockchain, Central Bank, Tokenization, Macroeconomics, Debt

In our previous post, we mentioned that major economies are facing a series of lingering or new-found difficulties:

“… a decade of #stagnation across the Eurozone despite record-setting bond purchases and negative interest rates, Japan in its third “#LostDecade”, and the United States rushing to raise interest rates to brace for the upcoming downturn towards the end of the soon-to-be longest economic expansion since the Great Depression…”

While it is always difficult to time the next #recession, any level-headed observer would see that after a decade of #expansion a #downturn is likely inching closer. In this context, it is interesting to look at some of the structural problems in the global economy and assess how, with consideration of these issues, would the next global economic downturn impact #tokenized assets.

First, an obvious problem that haunts many is #debt. Too many economies have seen debt level rise too fast for too long. #IMF has an overview with the latest data. It is easy to see that debt is plaguing most advanced economies and #China, all with significant levels of public as well as private debt. An interesting dynamic here has to do with interest rates: Simply put, due to the rapid growth of debt in recent years, when interest #rates are low, some debtors may find it difficult to service their debt if interest rates rise. Before central banks tighten monetary policies and raise interest rates, therefore, they have to take into account the effects on debt servicing.

At the same time, we see that interest rate below inflation has not stimulated much lending and growth. The #Eurozone serves as a prime example. The #ECB has resorted to actively buying corporate bonds in the hope of injecting #liquidity to the economy. An increase in interest rates may not be in sight. The US #FederalReserve, on the other hand, has been carefully increasing interest rates, as central bankers prepare for the next downturn.

Our view is that the Federal Reserve is generally correct in taking proactive rate hikes, though some leading economists suggest that this should have taken place earlier, when the US economy already recovered and was booming during #Obama’s second term. As others have suggested, however, this is a very delicate matter, and it is probably a matter of time when the Federal Reserve will misstep. When that happens, the #Fed will be in a relatively strong position, because of the rate increase, the reserve status of the dollar, and the strength of the US economy. The Eurozone will be ill-prepared, defaults under negative interest rate may happen, and the decade of stagnation can devolve into contraction.

A related observation concerns why persistent low interest rates have failed to stimulate lending and growth in a satisfactory manner, particularly within Eurozone. Our view is that this reveals the limitation of regional monetary policy in a global economy: Simply put, due to deeper structural problems, Eurozone economy is not competitive. We will cover these problems in the coming parts of this review.

What does the debt situation mean for tokenized assets? We see two opposing effects:

On the one hand, when the next economic downturn hits, we can expect growth-related problems. Revenues will likely decline, and productions will likely be scaled back. Tokenized traditional financial instruments (such as the much hyped #STOs) will experience some difficulty, as will the global stock market. #Inventory assets will likely see lower volume and perhaps valuation.

On the other hand, at @IdeaFeX we have much optimism in tokenized assets in general. #ExoticAssets are relatively independent from the global financial markets. On IdeaFeX, exotic assets encompass #collectibles, #BusinessAssets, #CommercialRealEstate, and #infrastructure. In an economic downturn, collectibles and infrastructure may become safe havens for funds escaping more volatile investments. Business assets may be temporarily undervalued, but since our marketplace is launches in late 2019, investors may deem the timing interesting for an entry. After all, the right business assets will appreciate once recovery kicks in.

Moreover, live trading of tokenized assets on IdeaFeX makes it possible to inject liquidity more directly into the economy. Inventory, products, business assets, and infrastructure (in a fashion that improves upon #PPP) classes of tokenized assets can drastically broaden the access to liquidity. For economies where investment and liquidity have been a lingering problem, tokenized assets may be a solution: Effectively, we carve out the efficient parts of the economy and inject liquidity directly to them. Tokenized infrastructure has additional appeal to debt-laden governments who want to have the stimulating effects of infrastructure investment but cannot safely raise more debts.

In sum, while tokenized real-world assets aren’t a panacea, we believe an economic downturn in a period of unsustainable debt levels will be the opportunity for tokenized assets to shine.

This post reflects the opinions of the IdeaFeX team on the economy and our product. It is not meant to be instructional. IdeaFeX does not offer investment advice, nor are we qualified to do so.