Opposing Defi Perspective
The decentralization of finance is a crucial topic in the 21st century, often hailed as a revolutionary concept. However, it is important to recognize that centralized money is a relatively recent development compared to decentralized systems. Before the establishment of banks, our ancestors faced challenging lives plagued by famine and poverty. While it is easy to romanticize the past, the reality is far from idyllic.
To comprehend the future of finance, we must delve into its history. The advantages of decentralization are apparent, yet well-supported arguments from the opposition are seldom heard. When examining the United States as a case study, we see the country that has benefited the most from centralization. In this research report, we will explore a series of data on the pre-and post-Federal Reserve U.S. economy.
PRE-FEDERAL RESERVE ECONOMICS
The Federal Reserve, commonly known as the Fed, was established in 1913, but it wasn’t until after the Great Depression that it began to function as it does today. Some argue that the Fed’s limited capabilities at the time actually prolonged the recession. In contrast, the modern-day Fed has the ability to shorten downward cycles and prolong periods of economic growth.
Before the creation of the Federal Reserve, the United States experienced approximately 48 recessions since its formation in 1776. Out of these, 34 occurred in the 1800s. There was a clear correlation between the centralization of the economy and the frequency and duration of recessions. Over the past century, we have witnessed only 12 recessions, none of which were as severe or lengthy as the Great Depression.
Critics of centralization often point to the United States national debt, which has surpassed 30 trillion dollars. At first glance, this debt may seem unsustainable. However, it is crucial to consider the benefits derived from having the world reserve currency.
HISTORICAL INFLATIONARY CYCLES
Inflation is another aspect that has shaped discussions around centralization. In 2021, the Consumer Price Index (CPI) showed an inflation rate of approximately 7%, the highest since the 1980s when it reached 15%. Comparing this to the inflation experienced in pre-Federal Reserve America, such as during the American Civil War and the period from 1900 to 1920, we can see significant fluctuations, reaching as high as 27% in some years. The Fed’s adoption of an open market policy in 1921 helped normalize inflation, and it took another 45 years for it to surpass 98%. These historical periods demonstrate the detrimental impact of prolonged deflation, which leads to falling wages and asset prices.
Controlling inflation is part of the Federal Reserve’s mandate. While inflation is beneficial up to a certain level that aligns with GDP and wage growth, excessive inflation can be detrimental. Over the past 50 years, total inflation was around 200%, yet real GDP grew by 350%. The average household income in 1969 was $9,400, whereas today it stands at approximately $64,000. Overall, GDP per capita expanded from $5,000 to $65,000. During this period, the markets have become more controlled and centralized.
ECONOMIC STABILITY BASED ON TRUST
Economic stability is built on trust, and the parties involved in controlling the currency or financial system matter more than the specific vehicle used. The continuous recessions and inflation cycles in the 18th century led to various attempts to establish the Federal Reserve, which eventually succeeded due to the founding fathers’ understanding of the importance of economic stability for sustained growth. Witnessing the U.S. GDP grow from 1 trillion to 20 trillion in just 50 years, it becomes challenging to refute the positive outcomes of centralization.
IMPACT OF FED LIQUIDITY
One of the primary arguments against total decentralization of finance is the role of injected artificial government liquidity in saving the U.S. economy. This liquidity injection has significantly reduced currency volatility. The worst drop in the value of the dollar in recent times is around 30%, whereas Bitcoin has experienced drops exceeding 35% multiple times since 2018. Moreover, the lack of liquidity in decentralized markets, coupled with the fragmentation caused by the creation of numerous cryptocurrencies, presents challenges. Centralization becomes a crucial mechanism for solving these liquidity issues. Extreme volatility in cryptocurrencies makes it difficult to rely on them as long-term stores of value, as sudden price fluctuations can lead to significant losses.
In conclusion, the decentralization of finance is a critical topic of the 21st century. Understanding its history provides valuable insights into its future. While centralization has contributed to economic stability and growth, concerns regarding national debt and volatility suggest areas where decentralization can offer alternative solutions. Striking the right balance between centralization and decentralization is key to building a robust and inclusive financial system for the future.
Vincent Haliburton
Chief Investment Officer at Haliburton Capital Group & CEO at Knowit Owlz.
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