Ukraine, the Fed, and Cryptocurrencies
2/25/22
I’m watching with horror as thousands of Ukrainians are abandoning homes, possessions, and livelihoods. Rather than risking their lives by remaining under a state of siege, thousands of people are choosing statelessness, where their very existence will hang on the goodwill of strangers. The world turned upside down for these people in an instant.
What would I do in their place? What would I carry with me seeking refuge? Where would I go? How would I live? It’s unfathomable. Only it’s not. It’s real. And while this is happening, I hear some commentators expressing indifference about Ukraine and it’s sanctity or otherwise praising Putin for his smarts and savvy. Putin has inflicted terror on a massive scale, making these reactions beyond comprehension. How is it possible that these sentiments can be embraced by anything beyond the tiniest fringe minorities? How is it possible that proponents of these views have the political clout and following that allows them to run for office and possibly win? God help us.
I don’t claim any expertise as an historian, but as a baby boomer, the current situation seems to me to be the most precarious of my lifetime — at least for the US citizenry — and that’s because the potential for cross-border cyber sabotage has never been greater. Given the US policy to use sanctions to cripple the Russian economy, it’s reasonable to expect that Russia will be working diligently to respond. In all likelihood, our infrastructure — both real and financial — is at greater risk now than ever before. The unthinkable is becoming thinkable.
With my economics hat on, I have two immediate reactions to the developments in Ukraine. First, the consequent uncertainty as far as the future path of world economic activity has ratcheted up considerably. With Russia’s overwhelming military advantage over Ukraine, it seems almost inevitable that Putin’s desire for regime change will win out, possibly in short order. The commitment to exact punishment for his actions, on the other hand, seems likely to be carried out over a more extended period — i.e., for as long as our allies remain unified. The sanctions that have been imposed, however, aren’t a one-way street, in that those who are imposing these sanctions will necessarily bear adverse consequences from them, as well. The costs to the US economy and those of our allies remain to be seen.
This change in calculus puts the Fed in a bit of a bind. I can’t imagine that the Fed is all that anxious to raise interest rates just yet, not knowing how hard the economies of the US and our allies will be hit by the fallout from the invasion into the Ukraine. In the face of the invasion, though, the Fed needs to present a reassuring stance. Any public statement marking a substantive change in the Board’s thinking could be destabilizing in its own right. With that in mind, moving ahead with a 25-basis point increase in the Federal Funds Rate target this coming month seems built in; but I’d expect decisions about further rate increases to be deferred until the Board has a better sense as to the damage that our economy will suffer as the conflict in Ukraine evolves.
The other immediate reaction I have pertains to cyber currencies. I’ve argued in earlier columns that the “best” use of digital currencies was in connection with illegal activities. In my wildest dreams, however, never did I think of criminal activity as being state-sponsored with the consequent illegalities being as consequential as they are in this case. By his actions, Putin has transformed Russia into a criminal state. And now, cybercurrencies offer Russia a mechanism to escape or at least mitigate the sanctions that the US and its allies are in the process of imposing.
Let’s not confuse blockchain and digital currencies. Blockchain is a technology that potentially can serve many useful and laudable purposes. Cryptocurrencies, however, aren’t among them. The geniuses who thought these things up have created a monster that may end up perpetuating the most serious violation of international law since World War II. They bear that responsibility, and they shouldn’t be permitted to profit from it. China banned these currencies, and we should, too.
