In 2008, a financial crisis started in the housing market. The crisis happened because banks extended subprime mortgage loans to individuals who couldn’t pay. As was expected, the bubble that was created in the housing industry popped leading to the biggest financial crisis of our time.
In response to the crisis, the government passed a $700 billion stimulus package that went to bail out the same Wall Street firms that had created the mess. These were companies like Goldman Sachs, JP Morgan, and Morgan Stanley.
The Federal Reserve also swung into action. As the crisis started, the Fed implemented its easiest policy of reducing interest rates. The idea is that when interest rates come down, it will force savers to withdraw their funds and spend it in the economy. In turn, this is expected to boost the performance of the economy. At the same time, the Federal Reserve introduced a policy that was unheard of before then. It called the policy Quantitative Easing, also know as QE. In this article, we will look at QE and what it means for the Bitcoin market.
In researching for this piece, I found the following video, that captures best what quantitative easing is.
In its simplest form, Quantitative Easing is a process in which a central bank engages in a large-scale purchase of financial assets like treasury bonds and corporate bonds. The bank does this by creating or printing money from thin air and channelling it into these purchases.
The goal of a central bank that engages in quantitative easing is to make assets cheaper and to encourage banks to lend more money. When the banks lend more money, it stimulates the economy, which then becomes more active. Small companies can access funds from banks at a cheaper rate while savers are discouraged because of the low rates they are offered.
In short, QE creates more money in the economy and makes it readily available to those who want it. However, central banks don’t like this narrative because printing of money is something that is associated with failed countries.
A good example of this is Zimbabwe. During the Mugabe era, he directed the central government to print money to fund development. By creating more money, it became relatively useless. This led to hyperinflation and dropped the value of the Zimbabwean currency. Below is an image of a 50 trillion Zimbabwean note that was worth less than $10.
As the Coronavirus spreads around the world, central banks swung into action. The Federal Reserve was the first central bank in the developed world to implement monetary policy to counter the disease. The first action the Fed did was to lower interest rates by 50 basis points. This early move did not solve the crisis. Instead, the bank moved to the next tool and announced a new round of quantitative easing, worth $700 billion.
Again. This did not solve the crisis, since the financial markets continued to tank. The latest action came on 20th March, when the Fed removed the cap of its QE. In the announcement, the bank said that it would not be limited by the earlier-announced cap of $700 billion.
The implication of this is that the Fed could now print more money than it printed during the last financial crisis when it printed more than $4 trillion.
As it always happens in global crises, the Fed does not work alone. It works by coordinating with other central banks.
In the past financial crisis, the Bank of England (BoE) printed more than $550 billion in its QE program. The European Central Bank (ECB) followed next and printed more than $600 billion. The Bank of Japan (BoJ) too has been printing money as the officials try to cushion the markets. The char below shows how the BOJ has added funds to its balance sheet in the past few years.
Similarly, the banks have all announced their QE as they respond to the current financial crisis. The Bank of Japan (BoJ) is conducting an emergency 1.3 trillion yen while the ECB announced a fresh round of 750 billion euros of purchases. In a statement, the Bank of England has said that it is committed to increase its QE program.
The problem with all this is that they really don’t make sense. They don’t make sense because the crisis that we have now is relatively easier than what we had in 2008/9. We now have a global pandemic and more people are staying home. As such, even when banks lower rates, it will not make people and companies borrow money. It will not boost spending by people because no one will buy a car just because interest rates have fallen.
I expect Bitcoin to do relatively well because of Quantitative Easing. This is because at its core, Bitcoin was created after Satoshi Nakamoto observed the inefficiencies caused by central banks. He argued that a small group of unelected officials were deciding on the fate of billions of Americans. He viewed this as being morally wrong and created a decentralized currency that is not controlled by anyone.
The concept of demand and supply is valid when you are looking at monetary policy. As with Zimbabwe, when there is a lot of money, its value decreases. This is possibly the reason why the dollar index underperformed gold when central banks started the irregular printing of money.
Another reason why Quantitative Easing will have positive impacts on Bitcoin is that investors will continue searching for yield. In the past decade, we saw large investors invest in risky assets because interest rates were very low. Since the current phase of low interest rates will last for a longer period, I expect more money to move to cryptocurrencies.
Finally, Bitcoin is just a better currency. While it has had some early challenges, Bitcoin is better because no one controls it, the total supply available is well-known and fixed, and the supply is getting more difficult to get. Therefore, with Bitcoin, there cannot be something like QE.
Fiat currency is about to get BLASTED.
There is no way your dollars can keep their value after pumping $6 trillion into the system.
It's time to move your fiat into hard money.#Bitcoin
— Yano (@JasonYanowitz) March 24, 2020
The Coronavirus pandemic opens the world to the risky nature of central banks. They will do everything they can to boost markets, even if the option is dangerous to its reputation and the overall health of the economy. The pandemic also helps the world to see the ingenuity of Satoshi Nakamoto, and his idea of a decentralized currency. As inflation returns, I expect that Bitcoin will benefit greatly from this new normal.