Over the past few weeks, as detailed heavily by Blockonomi, the world’s central banks and governments have done everything in their power to stave off the negative economic effects of the coronavirus outbreak. This is especially true in the U.S.
After announcing that a majority of Americans taxpayers would get $1,200 each, the Federal Reserve went into overdrive, announcing a swath of never-seen-before measures that are still active:
- A full percent emergency interest rate cut to boost spending in the economy
- A decision to put junk bonds, the debt of companies that are not investment grade, on its balance sheet,
- The operation of daily liquidity injections into the repo/overnight lending market to the tune of hundreds of billions
- And much more.
The measures announced were so outsized that the only thing they seemingly weren’t willing to do was to buy Bitcoin on the open market.
Indeed, the Federal Reserve is at the printing press so much more than ever before that according to Holger Zschaepitz, a writer at German news site Welt and an author on financial trends, the central bank’s balance sheet now amounts to $6.367 trillion.
#Fed balance sheet has hit fresh ATH at $6,367.9bn as Powell keeps printing press rumbling. Total assets rose by another $284.7bn, now equals to 29.1% of US GDP, fresh record. Since Fed announced its bailouts on Mar15, it has printed and handed to Wall Street $2,055.9bn. pic.twitter.com/ESchAzdrEb
— Holger Zschaepitz (@Schuldensuehner) April 17, 2020
This metric is up by a jaw-dropping $2.055 trillion since the week of March 15th — the week the global economy turned sour as the coronavirus numbers continued to rise and rise. It’s also equivalent to 29.1% of the entire GDP of the U.S.
The Federal Reserve Isn’t Doing Enough
According to Raoul Pal, CEO of Real Vision and a former Goldman Sachs executive and hedge fund manager, the Federal Reserve isn’t doing enough to prevent a full-on breakdown of the systems that we know.
That’s right, the emergency measures laid out above, according to him, aren’t enough.
He made this assertion in a recent podcast with The Block, saying that he thinks the Federal Reserve’s decision to act as a backstop in the corporate bond and junk bond markets won’t be enough to 1) support the economy and 2) prevent the arrival of a deflationary event.
As Pal said, all the Fed is doing is “papering up the cracks” of the crisis, not preventing the effects of the core issue itself: deflation.
Although interest rates are 0% and negative around the world — which many would say coincides with a spending-friendly environment — the drop-off in spending caused by the coronavirus, best exemplified by the utter collapse in oil prices, suggests there may be too many goods and not enough demand, dropping prices, creating deflation.
Just look online and see charts of negative oil prices or farmers burning and destroying their crops due to the lack of demand.
Fortunately, Bitcoin stands to benefit from deflation.
Bitcoin Stands To Benefit
According to Jeff Booth, a Canadian tech entrepreneur and the author of a book outlining deflation, a deflationary environment would result in the real value of debt skyrocketing, leaving many debtors with a bigger and bigger hole to dig out of.
In other words, the chance of defaulting on debt should increase in a period of deflation, which in turn may erode trust in institutions, forcing individuals to seek alternatives like gold and Bitcoin, Booth said in the interview.
Furthermore, a negative interest rate environment incentivizes investors to seek assets with better yields, like the 0% offered by Bitcoin or even the small yields provided by Ethereum 2.0 staking once the update is live.
Importantly, should the pendulum swing the other way, Bitcoin also stands to benefit from inflation. But as it stands, deflation seems to be more likely at the moment.