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Monetary Policy

Monetary Policy and why it is a necessity!

📄️ Bretton-Woods: UK's IMF Crisis

The current stability in the monetary systems of most of the advanced economies belies the very turbulent recent past that saw the Bretton-Woods system of internationally fixed exchange rates abandoned after only 15 years, and at a great cost to many nations. The cost to the U.K. was a $3.9bn emergency loan obtained from the International Monetary Fund (IMF) in September 1976, which at that time was the largest amount ever secured from the IMF. Although the loan was never fully drawn, it shows the scale of the crisis the U.K. was grappling with at the time. The Bank of England raised its policy rate to 17% in 1979 in order to combat inflation which had earlier peaked at 26.7% during a period when unemployment was hovering around 12%. This marked the beginning of the deployment of interest rate as a tool for inflation targeting, and effectively ended the regime of economic growth and full employment as anchor for policymaking in the U.K.

📄️ Volcker Era: U.S. Inflation Focus

Many countries, including the U.S., were still unconvinced about the merits of the U.K.’s approach, but once Paul Volcker, a strong proponent of using monetary policy to control inflation, took over the mantle of leadership at the Federal Reserve, it was only a matter of time before the focus of policymakers shifted from economic growth and full employment to inflation control. The Federal Funds rate reached an unprecedented level of 19% in June 1981, which incidentally reined in inflation from its peak of 15% the previous year. Since then, monetary policy has come full circle, with inflation targeting now the widely accepted norm.

📄️ Cryptocurrency's Volatility Challenge

Developments in the cryptocurrency space are still at their infancy, and there are many fault lines in the current design. In its successful bid to rid the world of any centralized monetary authority, cryptocurrencies’ default template elected to implement deterministic inelastic supply, invariably creating its own Achilles heel in the form of volatility and instability. Imagine taking out a loan in Bitcoin or earning salaries in Ethereum? The inability of cryptocurrencies to function as a unit of account with preserved purchasing power, meant the abdication of any possibility of being accepted as a true medium of exchange. Not much was learnt by the cryptocurrency world from the evolution of monetary policy.

📄️ Kelp's Solution: Elastic Crypto Supply

Just like the present stage of monetary policy maturity was not attained overnight, cryptocurrency adoption will not grow at a steady rate, and to ensure longevity, evolution must continue to take place. For one, the supply mechanism, which is inelastically fixed at a predetermined rate, and so unable to adapt, needs to be revisited. The inability to control demand dynamics with resultant volatility, leaves elastic supply as a viable lever for adjustment. In order to target purchasing power stability, cryptocurrencies should be designed using fully automatic algorithms with rules based elastic supply. This is the essence of Kelp’s Monetary Policy strategy and implementation.