As the 2007-2008 Global Financial Crisis (aka The Great Recession) taught us, domains are currently risk assets. In other words, if the economy crashes, domains will crash too.

Will things always stay this way?

To answer this question, we need to understand some basic human psychology.

An economic crash such as the 07-08 one makes people scared. What do us humans tend to do when we’re scared? Well, we run to safety.

But the thing is, “safety” is a relative term… what is safety anyway?

After the Great Recession, people abandoned stocks/real estate/domains/etc. and moved towards strong government bonds. Such as US Treasuries, German government bonds and so on.

This is what they perceived as “safe” at that point in time.

Will this happen again once the next crisis hits?

Well, it might but at one point or another, government bonds might lose their luster.

In other words: maybe after the next global financial crisis, maybe after the one after that, people might no longer have confidence in government bonds.

Why?

Well, let’s take one step further and think about it.

Let’s start by referring to the big economic crisis which occurred prior to the 2007-2008 one… in other words, let’s refer to the Dot Com Bubble of 1997-2002.

Once that bubble burst, the Federal Reserve had to use some serious ammunition to revive the economy, taking interest rates all the way down to 1%. Extremely low.

The years passed, growth resumed and gradually, interest rates climbed back to 4%-5%. In other words, central banks gradually re-built their ammunition stockpile.

Then the 2007-2008 crisis came and more ammunition than for the Dot Com Bubble was required. This time, interest rates went all the way to 0% AND money was pumped into the system through multiple rounds of Quantitative Easing, up to a maximum of $85 billion per month. To put things in perspective, more money was pumped into the system in one year than was created throughout the entire history of the United States prior to the crisis. And make no mistake, the Federal Reserve wasn’t the only central bank with aggressive policies. The central bank of Japan for example was even more aggressive relative to its GDP than the Federal Reserve, the European Central Bank did the same (just the terminology changed: LTRO, OMT, etc.)… everyone did it.

In other words, a LOT of ammunition was required on a worldwide basis.

Everyone did it.

However, the troubling thing is something different. After the Dot Com Bubble burst and interest rates were lowered to 1%, they gradually went up to 4%-5%.

Yet after the Great Recession of 2007-2008, the same thing didn’t happen. On the contrary. Here we are, 8 or so years after the crisis and the Federal Reserve barely managed to increase rates one time, a very small 0.25% increase which isn’t exactly spectacular. Other central banks are in even worse shape. Not only did they not re-build their ammunition stockpile, they had to recently use up even more ammunition. The Japanese central bank took rates BELOW ZERO recently. The European Central Bank did this too and they started an aggressive easing program which surpasses the Fed’s $85 billion per month record.

My question to you is this: what will happen after the next crisis hits?

As far as I can see, there’s little to no ammunition left.

The Federal Reserve may be in bad shape but it’s in better shape than everyone else. At least they’re no longer pumping money into the system (they stopped their Quantitative Easing program last year) and had one measly rate increase. So technically, after the next crisis, they can take rates slightly negative and start a QE program again… at least there’s something there.

But the Japanese central bank? Or the European one?

What could they do if another crisis were to start? Rates are already negative and they’re already pumping billions upon billions into the system each month. In theory, they too could take rates even more negative and pump even more money into the system but they can only take this strategy so far.

If interest rates are at let’s say -0.3%, the average depositor probably won’t go through the trouble of taking money out of the bank.

If however they drop to -1% per year, some depositors might. Let’s say, I don’t know, 2 out of 100 depositors might pull their money out.

If they drop to -2% per year, maybe 7 out of 100 depositors might do it.

At -3%, perhaps let’s say 15% and in such a scenario, I don’t think the financial system would withstand the shock.

The same way with pumping money into the system.

At one point or another, the market might lose confidence in the ability of governments and central banks to keep things under control.

I don’t know when this will happen but simple logic tells us that it might.

If it does, investors might no longer consider bonds safe and instead, move to other asset classes.

As hard as it may seem in this current deflationary environment, inflation could actually become a big problem, with people scrambling to buy for example assets such as real estate, precious metals (and this coming from someone who is definitely NOT a gold bug), art… and yes, perhaps even domain names.

What I’m trying to say is that if central banks aren’t careful, people might lose confidence in them at one point or another.

Should that happen, investors will no longer consider bonds and currency as safe as they’ve considered them so far and something else will replace them as “safe haven” assets.

In such a scenario, domains might no longer represent risk assets.

Now again, these are just assumptions but you do have to admit that there is some sound logic behind them.

Lowering interest rates and pumping money into the system can work once, twice, three times, four times and so on. But they cannot work indefinitely. I hope central banks understand this and don’t complacently consider their current weapons foolproof because they’re not. Confidence is at the heart of human economic action and if that confidence is lost, getting it back would be an uphill battle… to put it mildly 🙂