Another Bailout Round in 2023: Can this possibly impact the DeFI space?
If you look at the news lately it is always filled with a lot of fears for the next banking crisis or even worse a recession but will that become a reality? Looking at the past financial crash and recessions, we always learned that government intervention at times will be deployed to prevent this from happening, usually in the form of bailouts. With the recent announcement of another bailout round on the way, let’s explore what the term “Bailouts” is all about and its implications for the economy.
Bailout: A Measure Used too often
2023 might be a terrible year so far to all the hopeful as the economy might not be heading in the right direction of recovery with recession up in the air. While a recession can be a good thing as it stops the economy from overheating, it starts to be a little painful when you have two of them so close apart. Fresh from the Pandemic which sends the economy into a downward spiral with its lockdown and now we possibly have a banking crisis upon us.
The year started where 2022 has left off as intense government measures were adopted with the hope of combating inflation and recovering the economy. This measure was also done to undo much of the damage that originated from the coronavirus pandemic and lockdown. The lockdowns create massive trouble for businesses that are not able to operate but also pile pressure on the welfare of the people as unemployment is climbing. This then prompted governments from around the world to adopt new measures such as the stimulus check to increase confidence back in the major economy.
These measures were necessary as the side effects of the pandemic continue to deepen but essentially it also results in injecting more money into the economy which always usually causes more problems than not. The aftermath of all this is a money supply that has more than tripled its pre-pandemic figures with this “Bailouts” measure being utilized too often without a proper plan to reverse the effects.
So what is a bailout you may ask? The origin of the word “Bailout” comes from the maritime meaning of scooping water out of a sinking vessel to keep the ship afloat. It also has a history from the Navy in which the word is used for pilots to make an emergency descent when the airplane is in danger. In financial terms, it means to provide a cash injection of some sort to business or to the economy to prevent more financial turmoil down the road.
Bailouts are usually carried out by high-net-worth individuals, institutions, or in most cases governments through multiple ways to restore liquidity to the economy. These capital injections will then be dispersed throughout the economy in the hope of boosting spending in the country and generating growth in the economy. It generally has a good effect on the economy as long as it is done at a tolerable level and the rollback methods are in place for that additional money.
A bailout essentially acts as an IOU or a loan to the receiver and still proves a powerful tool in helping the economy from a post-recession era. One of the recent examples we can take a look at is the “Coronavirus Aid, Relief and Economic Security Act in early 2020 which amounts to a $2.2 Trillion stimulus package that was issued in the forms of student loan forgiveness, stimulus check, and interest rate subsidies. This amounted to the biggest bailout released by the US Government in its history and this was quickly followed by its second-biggest “The America Rescue Plan” which was signed off to an amount of $1.9 Trillion in 2021.
We can also look at past examples like the Troubled Asset Relief Program or “TARP” in short, which spent up to $443 Billion to eliminate troubled assets from the major financial institutions and rescue the economy from the Great Recession. So why does all this matter? If we roll back the history of our Money Supply, it took the USA more than 50 years to reach the 1 Trillion mark but it took less than 15 years for that figure to double. Essentially these “Bailouts” are speeding up the increase in our money supply and the money injected into the economy as relief was never rolled back.
The current M1 Money Supply in the USA currently stands at $18.9 Trillion, a slight decrease from its peak in May 2022. The problem with this ever-growing money supply is as mentioned before inflation as too much money chasing too few goods push prices to skyrocket. We can see from the end of 2022 the aftereffects of the massive relief package as inflation reaches an all-time high of 9.4% in the USA and other countries.
Part of the decrease in the money supply was due to the FED Tapering initiative released at the end 0f 2022 and the continuous increase of interest rates which rolled back some of the liquidity in the economy. This could change as the recent banking crisis that began with a crash of SVB could force the government to bail out its depositors to prevent the global tech space from collapsing. Although the government refuses to describe it as a “Bailout”, it still injects a huge amount of capital into the economy which creates the same problem over again.
A bailout is a necessary tool that should be administered at the right time and as a last resort when the other measures don’t work but it seems lately it is viewed as the easiest go-to solution that can be deployed anytime. Every crisis or crash requires a different solution that is economically sustainable for both the short and long term and pouring money into every problem that arises as an act of bailout is never the wisest solution.
A Good News for DeFI Space?
It is funny enough that DeFI through all these years has been seen as the inverse of traditional finance, especially during the Pandemic era. DeFI is seen as a new form of the financial ecosystem that was meant to be the replacement for the old system due to the transparency of blockchain technology. With this in mind, it is reasonable to see that when the stimulus system was introduced much of the money flowed to the DeFI space in the form of NFTs or Digital Assets. More bailouts in 2023 will also stand to benefit the DeFI space which desperately needs help through its sour 2022.
DeFI does represent a difference in ideology when we think of its traditional counterparts but bailouts do not always mean good in many ways. If we see the case in 2023 much of the economy is in a cautious state as interest rates remain high and the risk of a recession always looms large in people’s minds. This usually causes institutions or people to be wary of investment in digital assets which are considered risky at the moment.
This risk comes from the uncertainty of the space itself which seems to lose its course in the moment of its rise to glory. DeFI Space does have its potential but it does not help if every 3 months we need to witness one of the major players collapse and destroy people’s trust in it. One thing is for certain the recent bailout will help save Circle who are amongst the depositors in SVB and a major player in the DeFI Space.
Bailouts also should enable the space to gain the needed capital to help define and build the DeFI space for the better. This should be good news if the capital is concentrated on projects that have massive potential in the future with stable business concepts so it could bring more growth from the capital assigned. All in all, it is hoped that the measures adopted should be able to provide us with a path of recovery so these bailouts can be rolled back safely and sustainably.
We in Nagaya Technologies Pte. Ltd is well aware of the volatile nature of the crypto space and that is why we believe that a cryptocurrency should be more important than all to have an intrinsic value as a sustainable solution for the upswing in the market. That is why we decided to create the world’s first hybrid crypto asset called Nagaya with this idea in mind. Nagaya is a crypto asset that is backed by gold to strengthen its intrinsic value while also running subsidiary projects to continue to provide benefits to all our HODLers. For more information regarding the latest updates on Nagaya and our whitepaper, you can visit us at nagaya.co
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