Tightening. How much tightening can the economy withstand before a recession? Not much appears to be the resounding answer. Interest-sensitive segments of the US economy – housing and autos – are already contracting despite strong job market conditions. Credit conditions in Europe are seizing in anticipation of the end of ECB asset purchases before the central bank has even had a chance to hike rates. It was enough for an ‘emergency ECB meeting’ to reassure markets that aggressive rate hikes and ECB buying of peripheral bonds can live together. (The term ‘emergency’ demonstrates how soft markets have become in the past 30 years.) Credit conditions are tightening rapidly, and it is all about the velocity of collateral. Think of Tether in the digital ecosystem. In the past 24 hours, the on-chain trading volume of Tether matches its assets. This is a remarkable rate of velocity – 365x annualized, compared to 4x for ordinary cash. It also means that the ecosystem is constantly churning USD dollars, through Tether, as collateral to balance risk like an elegant ballet. Now, imagine that market participants hoard USD – a sudden stop in velocity. Those who need dollars to balance risk must either pay a huge interest rate premium to do so or deleverage rapidly. Some can’t, and they disappear. That’s a credit crunch! In traditional markets, such credit shocks are protected by central banks. Yet, the reach of those policies is well beyond what they were intended. Europe’s monetary union did not preclude sovereign default. Nor do American states or Canadian provinces. The credit crunch in digital asset markets is clearing as markets should – with brutal efficiency to cull weakness. Those who survive will take enormous ground on the recovery. Traditional markets are hostage to a nominal illusion that central bank liquidity can cure structural ills. It can’t and only difficult choices follow. Central banks are tightening into recession. That is rare. The real test of orthodoxy? Whether policy is prepared to accommodate the looming credit crunch. That would be bold.