Agne Linge, WeFi’s head of growth, has contributed a guest blog.
In the past few months the crypto space has seen a clear shift towards supporting cryptocurrency in US regulation. The optimism is well founded – the US president has his own meme coin, the SEC has already vowed to lower crypto enforcements, and earlier last month, White House released its crypto executive order to establish regulatory clarity.
Under Trump’s term, the Securities Exchange Commission has also implemented SAB 122 — which is said to pave the way for crypto adoption. There’s also a strong push towards a Bitcoin reserve – not just in the US but globally.
The past week, despite this optimism has shown that the crypto market is more susceptible to macroeconomic forces than it ever was before. Coinglass reported that the cryptocurrency market dropped $2 billion on the same day as President Trump’s announcement of tariffs for China, Canada, Mexico.
Some experts indicate that original liquidations exceeded $10 billion – far worse than the liquidations during the FTX fallout. Factors such as “buy the rumour, sell the news,” The crypto market may have been affected by a number of factors.
Trump has decided to put a temporary halt on tariff implementation. He agreed that tariffs against Canada and Mexico would be delayed by one month. Tariffs that are implemented could lead to a recession because they would reduce consumer spending, and increase economic uncertainty.
Tariffs and Economic Contraction
Tariffs are essentially a tax on imports. The purpose of tariffs is to increase the cost of imported goods in order to boost domestic industry. This protectionism is not without cost. As tariffs increase prices, the consumer tends to cut back their spending.
Consumption accounts for approximately 68% (or more) of U.S. Gross Domestic Product. Therefore, any reduction in consumption could push the economy below the level necessary to avoid recession.
Employment on both sides would be affected. Tariffs of 25% could cause a 0.25 percent loss in US jobs. Canada and Mexico are expected to lose up to 3 percent of their workforce.
I believe that the tariffs could cause serious spillover effects. Deutsche Bank analysts have also argued that sustained tariffs against Canada and Mexico—two of the United States’ largest trading partners—will be “far larger in economic magnitude” Brexit’s repercussions on the United Kingdom are far more significant.
The 25% tariffs will have a significant impact on the economies of Canada and Mexico.
Trade War Escalation – Its Wider Impact
Many parties expected that the moves they made would have a negative impact on international trade and production, as well as increase costs. While domestic and international firms scramble for supply chain adjustments, the uncertainty associated with such policy shifts may further dampen economic activity.
The crypto market volatility was evident last week. Trump agreed to defer Canada and Mexico’s tariffs by one month. Bitcoin recovered its price from $92,000 up to more than $100,000.
But the relief was brief, as China’s retaliation with tariffs of its own pushed the price down to about $96,000 in just a few hours. The rapid ups and downs of the market show how sensitive they have become in response to news about tariffs.
Federal Reserve dilemma on inflation risks
Federal Reserve officials expressed concern about the inflationary effects of high tariffs. Although they did not link these policies directly to their future monetary decisions, warnings about inflation are important.
Austan Goolsbee, the Chicago Fed president, had earlier warned of a variety of threats to supply chains posed by tariffs. Tariffs drive up import prices, which are then passed along to the consumer, causing inflation.
This is a very worrying scenario, because inflation can lead to a recession by decreasing consumer spending. This is an acute dilemma.
One hand, central banks tighten their monetary policies to try and control inflation.
An overly aggressive approach to interest rates, however, could exacerbate the adverse effects of tariffs-induced economic downturns.
The primary safe-haven asset is gold
While Bitcoin and other digital assets struggle to stay stable amid increasing trade tensions in the face of rising prices, safe-haven traditional assets are experiencing a new surge in popularity. Data from The Kobeissi Letter shows that gold hit an all-time record on February 3, 2019.
Gold prices are rising because investors seek shelter from the increased market volatility. Simple dynamics are at work behind this change. Tariffs have pushed up prices for consumers and affected global trade. This has made investors wary of long-term prospects.
With the risk of recession and the possibility of further monetary tightening, gold’s relative stability makes it an attractive asset.
Look Ahead
It will be a decisive few weeks. The coming weeks will be decisive.
We also could predict that key economies would be in recession. Policymakers—and investors alike—must recognize that the costs of trade protectionism extend far beyond the immediate sphere of international commerce.
Ultimately, while some may argue that these tariffs could eventually force a renegotiation of trade terms, the evidence suggests that the risk of recession—and the attendant damage to consumer confidence and global liquidity—is too great to ignore.
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