In this episode of Bitcoin Magazine’s “Fed Watch,” Christian Keroles and Ansel Lindner look back at the events of the last few weeks and put them into a macro perspective. They also give us an optimistic vision of the next year that only the Bitcoin space can offer. This show always delivers macro insights you cannot find anywhere else!
The episode began with a quick discussion of censorship and the Bitcoin Twitter exodus. It is very appropriate that, in the era of the modern internet, our idea of censorship has changed to mainly include internet speech and digital transactions. Bitcoin, of course, will play a pivotal role in giving the power back to the people and helping mold the debates going forward.
Lindner attempted to put these events into context with other similar events from the not-so-distant past. The main difference today is that society is in a populist, revolutionary mood. Where a similar event in the 1980s or late 1990s was not treated as “insurrection” or the “end of America,” today, the world is at a different point in the grand cycle, ready to interpret things in that way. Whether it is a 100-year debt cycle or the 100-year generational Fourth Turning, these events, at this time, are causing specific reactions.
Next, our hosts summed up the situation for several assets like gold, the dollar and commodities. Gold is expected to struggle over the next six months, while the dollar rebounds, and the build up of inventories for commodities will create pressure on the recent rally.
Lastly, the show wrapped up with summaries of what they expect in 2021. It is a very optimistic vision of the future. Bitcoin is a steady guiding light in this troubled time, and though things might get slightly worse from a political perspective over the next year, history and Bitcoin show us that the future is still very bright.
2020 was unforgettable, especially for Bitcoin. To help memorialize this year for our readers, we asked our network of contributors to reflect on Bitcoin’s price action, technological development, community growth and more in 2020, and to reflect on what all of this might mean for 2021. These writers responded with a collection of thoughtful and thought-provoking articles. Click here to read all of the stories from our End Of Year 2020 Series.
A “biblical flood of liquidity” was released onto the world this year by its largest central banks, raising fears for the longevity of several of the world’s currencies. In reviewing the major monetary policy changes from the Federal Reserve, the European Central Bank and the Bank of Japan, it’s clear that 2020 was an unprecedented year for the legacy economy and that there is strong need for an alternative that is free of inflation and middlemen.
The Federal Reserve
Decreased its funds target rate by 150 basis points (bps) to 0 percent
Started open-ended quantitative easing (QE) of $80 billion per month
Provided a potential $1.95 trillion in lending in many different programs
Extended $400 billion at the peak in currency swap lines with foreign central banks
While the Federal Reserve’s monetary response was the largest in absolute terms and most comprehensive of the major central banks, it was not the largest in relative terms.
Cracks started appearing in the global financial system in 2018 with a slowdown in China, and the slowdown came to a head in September 2019 when repo rates spiked from near zero to 10 percent in the matter of one morning. This series of events set the Fed on a path toward “easier” monetary policy in 2019, with its balance sheet bottoming in Q3 and rising when entering 2020.
When the COVID-19 virus made the leap to Europe and then the U.S. in March 2020, it took the PhD economists by surprise. All major central banks responded between Sunday, March 15 and Wednesday, March 18 when it became obvious that the financial system was on the verge of collapse.
The response from the Fed was unique at first, since its baseline policy rate was above zero at 1.5 percent. In addition to that, it added what had become the typical monetary weapon by this point, large scale asset purchases (QE), followed by a new policy from Japan of buying corporate debt. Finally, it introduced several dizzying acronym programs in coordination with the U.S. Department of the Treasury to extend loans more broadly in the economy.
Though these new programs received a lot of attention in the press, they never got close to the maximum allowed levels and today stand almost unused. By April, all of the major pieces of the Fed’s response were in place and didn’t change much of anything, other than some reporting requirements in the second half of the year.
Federal Reserve Facility Balances
Federal Reserve 2020 Balance Sheet Changes
European Central Bank
Started 2020 already engaged in QE
Gradually increased its one asset purchase program, the Pandemic Emergency Purchase Programme (PEPP), to €1.85 trillion
The European Central Bank’s (ECB) monetary policy this year was much more straightforward than the Fed’s. It has suffered from multiple financial crises since 2009 and was still in the midst of a QE program called the Asset Purchase Programme (APP), weighing in at €20 billion per month. That program did not change throughout 2020, but the PEPP was added to it. The PEPP eventually was extended to a total of €1.85 trillion in asset purchases to run through March 2022.
The ECB’s balance sheet soared to 55 percent of GDP in November, making the U.S. look tame in comparison at 34 percent and Japan look like the monetary basket case it is at 126 percent. Unless central bank monetary policy has nothing to do with inflation/deflation, if any country is going to experience inflation, one would assume it would be Japan, followed by the eurozone.
The European Central Bank managed to have the most simple policy on paper and it was implemented quickly, but it came back and increased it twice, with the most recent just this month.
The ECB has extended its intervention until March 2022, but it’s unlikely Europe can ever stop QE. At this rate, its balance-sheet-to-GDP ratio will reach 100 percent by the end of 2021.
The Bank of Japan
World’s longest running QE program
Started the year already engaged in quantitative and qualitative monetary easing (QQE), consisting of broad spectrum purchases
Took limits off government bond purchases and increased its already heavy market intervention
Lastly, the Japanese monetary policy is far in advance of anything the Fed or the ECB are doing, and 2020 was no exception. In 2013, Japan embarked on QQE, where it not only purchased government and agency bonds, but also directly bought other securities like ETFs and Japanese REITs.
The Japanese began this modern era of QE almost 20 years ago, and in 2020, with all of the central banks uniformly walking down the same path it did with asset purchases, Japan says, “hold my beer.” It is in a truly scary monetary and demographic crisis with no obvious escape.
Its interventions for 2020 are well over $1 trillion dollar equivalent for a GDP of less than $5 trillion (more than 20 percent). Compare this to the eurozone rate of nearly $2 trillion in stimulus for a $18 trillion economy (11 percent), or the U.S. with $3 trillion for a $20 trillion economy (15 percent).
Central Bank Balance Sheets Relative To GDP
This is a guest post by Ansel Lindner. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
The dynamic duo of “Fed Watch” is back in another episode. This time, Christian Keroles and I walk through policy updates from the three major central banks of the world, the Federal Reserve, the European Central Bank (ECB) and the People’s Bank of China (PBOC).
This year has been full of central bank action and it can be hard to stay on top of everything happening, even for those who try to follow monetary matters. The global recession is by no means over, and while the Federal Reserve and Jerome Powell might be holding policy constant, the ECB and PBOC are actively fighting slowing economic numbers.
Policy from the ECB is the most exciting because it is the most active, with the most colorful rhetoric. Last week, its expanded its stimulus program by €500 billion. Their Pandemic Emergency Purchase Programme (PEPP) is now a whooping €1.85 trillion. In the ECB’s statements, it admits to fighting deflation and a strong euro, despite the unprecedented central bank action this year. It seems the more it does, the worse its situation gets.
The Federal Reserve meets on December 16, 2020, for its final meeting of the year. Chairman Powell is expected to keep policy unchanged. Relative to the euro and renminbi strength, the U.S. dollar has been weakening, with the dollar index (DXY) extending yearly lows and approaching two-year lows. This presents a dichotomy, the least active central bank has the relatively weaker currency, which is contrary to the accepted wisdom that central bank activity devalues a currency.
The next central bank of interest in this episode of Fed Watch is the PBOC. After an update on the Digital Yuan project, we discussed the wave of defaults faced by the PBOC in recent weeks. To address the deflationary pressures in the Chinese economy it has rolled over previous bailout loans and expanded on them by $145 billion.
The episode ended with a discussion about a possible speculative attack against the dollar. MicroStrategy has given people an outline in how to borrow hundreds of millions of dollars and buy bitcoin with it. If this is done in high enough quantities, it can force the price of bitcoin up and the relative value of the debt down. MassMutual was also another large story, but as I said on the show, “Bitcoiners have been expecting this for a very long time.”
This is another great episode to keep you current on central bank issues. Do not forget to subscribe to Fed Watch’s new RSS feed, so you don’t miss any of our great guest insights in the future.
For this episode of Bitcoin Magazine’s Fed Watch, my cohost Christian Keroles and I get into specifics on the plans of the European Central Bank (ECB) in regard to its digital euro. We are told in the media that central banks are going to release Central Bank Digital Currencies (CBDCs) and that this will will have damaging economic effects. However, on this podcast episode we get our information directly from the source.
First, we must answer a critical question: Is a digital euro likely to really launch and why? (In future episodes we will cover the side-effects of CBDCs, if there are any.)
On November 30, 2020, the president of the ECB, Christine Lagarde, released a blog post detailing the ECB’s current thoughts on money and how a digital euro, or CBDC, fits into its plans. I talked about this on my recent episode of Bitcoin & Markets, and Keroles wanted to explore the idea of the worries of the ECB specifically, because its thinking seems to be heavily worried about monetary sovereignty.
That term, “monetary sovereignty,” came up several times is Lagarde’s blog post in the context of why ECB feels pursuing a CBDC is necessary. This contrasts with statements from Federal Reserve Chairman Jerome Powell’s, which have focused on patience and conservatism instead of worries about monetary sovereignty. Why is this?
Most likely, this is because there already are digital stablecoins, which function in a similar manner to how a digital euro would function in the market. But there is a big problem in the free market offerings of these stablecoins from the ECB vantage point: they are 99 percent U.S. dollar based. If the ECB were not to act, the market might completely bypass use of the euro in favor of a digital dollar. That is a scary possibility for the ECB, so it must provide that option for the market, and maybe even require its use in some cases to maintain the euro’s global position.
This episode also covered the recent MicroStrategy “bonds for bitcoin” proposal. Listen to find out if this is the first signs of the long awaited “speculative attack” on fiat by bitcoin, and what to watch out for as this move receives the keen attention of regulators.
We also discussed jurisdictional arbitrage at length. How does bitcoin enable jurisdictional arbitrage even within regions like the U.S. or European countries? Of course, as good bitcoiners, this leads us to a cosmic back and forth about citadel locations, and the best place to live in the future from a freedom and economic standpoint.
In this off-the-cuff episode of Fed Watch, Christian and I dove more deeply into the technology-driven deflation debate we started last week with our guest Jeff Booth.
We brought up the “chicken or the egg?” conversation that did not get resolved fully last time: Is the deflation from technology first or is the inflationary environment first? In other words, which force is primary? We discuss that topic again, and also touch on the problem presented by the fact that not all technology is equally inflationary.
Modern finance preceded the industrial revolution and it is widely accepted that technological advance and economic stimulus are directly correlated. I attempted to make the claim that it is the culture and capital structure that results from debt-based fiat money that incentivizes massive technological advancement. Without debt-based fiat money, the deflationary pressure from innovation will return to the natural and gradual speed we saw throughout the days of the classic gold standard.
On this episode of Bitcoin Magazine’s Fed Watch, Christian and I are joined by Jeff Booth. It results in a show that is unlike any other interview with Booth that you may have seen. Most listeners are familiar with his book, so we spend most of our time discussing what a timeline of events looks like from Booth’s perspective, and then some possible limitations to the technology-driven deflation theory. In usual Fed Watch style, we end with trying to understand how Bitcoin affects these arguments and what Bitcoin means for the world.
Booth not only took bitcoin by storm in 2020, but he overtook all of macro investing, with his book “The Price of Tomorrow: Why Deflation is the Key to an Abundant Future.” In it, he outlines a new way to look at monetary policy and economics, through the lens of a technologist. Technology has a massive deflationary effect in the sense that it lowers prices through the economy. Also, technology is multiplicative, meaning its effects are exponential, not linear. When we approach monetary economics from this angle, deflation becomes inevitable and, most disquieting of all, very near.
Booth’s deflationary arguments fit well into the broad discussion that macro is currently having on inflation versus deflation, but with a new spin that is hard to deny. Fed Watch has explored this topic primarily from a financial angle. Are the actions of central banks inflationary? Is the money supply increasing or decreasing? And so forth. We have argued that credit is contracting, meaning there is deflation, but central banks can adjust banks’ balance sheets which looks like inflation.
Booth’s approach cuts straight through these academic arguments, right to the jugular. Humanity is approaching the vertical portion of the exponential curve of deflation. This technological deflation will force central banks and governments down a predefined path of money printing and centralization, which in turn will chase people and capital into bitcoin.
Throughout the podcast, we raise several questions to test Booth’s theory. The most important being: Instead of technology driving deflation, could it be that inflation is driving technology? You will have to listen to hear how Booth skillfully answers that question. It leads the interview into a deep conversation on Bitcoin culture and our deflationary future.
Overall, this is a very thought-provoking episode of Fed Watch. Behind a bearish view of the near future, Booth is an optimist. Technological deflation will win against centralization and central banks, leading us to a more prosperous future with a new money designed for deflation. Thanks to Booth for coming on the show.
This episode of Bitcoin Magazine’s Fed Watch is a cosmic ride though the broad topics of money, central banks, and bitcoin.
My co-host Christian Keroles and I started by extending the analogy of a financial hurricane, which I spoke about in another recent podcast. Many people point to certain asset price rises as a sign of inflation, however, I argued that it is a natural evolution of prices due to the malfunctioning financial system. This malfunctioning financial system acts similarly to a physical natural disaster by distorting supply and demand for goods.
During a decade-long financial hurricane, changes occur not only to asset allocations of investors but the system itself can evolve, as well. It affects the pipes and infrastructure of the financial system, favoring relatively “safer” global assets like U.S. Treasuries and U.S. stocks. The economic behavior, products and relationships that form during a financial hurricane will favor hedging against deflation rather than risk-taking or behavior aimed at expansion.
Next, we turned to central banks and Central Bank Digital Currencies (CBDCs). We listened to comments by Fed Chairman Powell and ECB President Lagarde on CBDCs and cash from a recent ECB Forum. Of note in Powell’s remarks was his insistence on patience and his emphasis that CBDCs “must be done in a way where they do not affect [physical] cash or other private digital currencies.”
Keroles made a great observation about Powell’s position being analogous to the innovator’s dilemma. Lagarde follows Powell’s lead and reiterates a commitment to cash, but in a less convincing manner, and then gives a general timeline for a digital euro of two to four years. She sounded significantly more bullish on the idea of CBDCs than Powell did, but the offered timeline seems too slow.
By the time a digital euro is ready to launch, bitcoin will be a multi-trillion-dollar network and eating the world. The central banks will find themselves in the uncomfortable predicament that they inadvertently marketed bitcoin with all of their hype about CBDCs.
Lastly, Keroles and I get cosmic about the recent bitcoin rally, what we can expect from the bitcoin price in the short- to medium-term and about the long-term societal implications of bitcoin.
This is a guest post by Ansel Lindner. Opinions expressed are entirely his own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
Bitcoin has an unyielding apolitical nature which, oddly enough, makes it a political statement in today’s rampantly politicized world.
In this episode of Bitcoin Magazine’s Fed Watch, my co-host Christian Keroles and I discuss the recent U.S. Presidential Election and what it means for Bitcoin. Our discussion is wide-ranging, going from election irregularities, to the rebound in mining hash power, to bitcoin price predictions for the near term. Bitcoiners — those who believe that Bitcoin can change the world for the better — see bitcoin as generally insulated from most other market concerns. They think political and monetary events inevitably force the interaction of human nature with bitcoin’s unique properties creating a perhaps politically-unpopular yet unavoidable outcome. They believe this process will occur regardless of election outcomes and the only question is how fast it will happen.
I am a staunch anti-voting advocate who rips into elections as a route for central planners and statists to legitimize their infringement on the electorate. It is now popular to contest the validity of this election, and hopefully in doing so, people will realize that they should contest the validity of all elections. Casting a vote creates the very space for election fraud to exist and harmful laws to be enacted. We cannot achieve prosperity and happiness through a ballot box.
Nevertheless, markets seemed to approve of the outcome. Whether that is because they are trying to price in further stimulus or as an effect of relief that Election Day is over, markets leaped upward.
Keroles and I discuss where they are going from here. The conversation also moves toward the recent volatility of the Bitcoin hash rate. The last few weeks saw the end of the rainy season electricity rates in China and an apparent mass movement of mining equipment to other parts of the country. This resulted in the second largest downward adjustment in difficulty in the history of bitcoin mining, followed by a steep rebound. In this episode, I discuss at length from his recent article on the seasonal hash rate.
This is a guest post by Ansel Lindner. Opinions expressed are entirely his own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
Matthew Mežinskis is co-host of the Crypto Voices podcast and author of the Crypto Voices Global Monetary Base report. In this episode of Fed Watch, Christian Keroles and I discuss that report’s Q3 2020 update with Mežinskis. What follows is a wide-ranging conversation, from Mežinskis’ “Bitcoin origin story” to the difficult definitions of what money is, and back to a personal walkthrough of visuals contained in this report (please see the YouTube version of the podcast for this visuals).
Mežinskis was introduced to Bitcoin in 2011 but did not get heavily involved until 2013. As most people who have fallen down the bitcoin rabbit hole know, an outlet while assimilating the concepts of Bitcoin is required. Mežinskis’s outlet was in the form of his podcast, “Crypto Voices.” From its modest beginnings, with Mežinskis reading and talking about Bitcoin articles, the show began a new phase with the addition of co-host Fernando Ulrich. It grew into a home for the exploration of important economic concepts via quality interviews and deep discussions between the two hosts.
Through the conversations on Crypto Voices, Mežinskis and Ulrich became aware of the glaring lack of information around base money. Some disparate data existed, but none was systematically presented. Base money is the foundation of our monetary system, yet no easily-accessible data was available until Mežinskis started publishing the Global Monetary Base report. He spent a long time sifting through data and has produced a beautiful result.
The discussion on this episode of Fed Watch centered around the question of “what is base money?” and Mežinskis’s thoughts on some of the edge cases in the definition. We also attacked the inflation/deflation debate from a data-driven angle thanks to Mežinskis’s research and knowledge on the subject. We didn’t ask simple questions and expanded the topic past the common hyperinflationary tropes of the end of the dollar.
The listener will hear discussion on dollar liquidity, the history and current status of gold and silver, foreign reserves of the dollar, and, of course, Bitcoin’s current status relative to other base money types. Mežinskis also shared some great charts which can be seen on the video version of Fed Watch on YouTube.
Don’t forget to subscribe to Fed Watch so you don’t miss any of our great guest insights in the future.
The IMF panel on cross-border payments was a Central Bank Digital Currency (CBDC) discussion in disguise, headlined by Jerome Powell, chairman of the Federal Reserve.
The CBDC narrative is the central bank version of the hype around blockchain technologies that rose from 2016 to 2018. Back in 2019, the International Monetary Fund (IMF) began dipping its toe into the CBDC idea. That naturally spread to emerging markets, where we see the majority of interest today.
In a recent episode of “Fed Watch,” CK and I try to describe the scene, breaking down a video message from Kristalina Georgieva, IMF’s managing director in Washington, DC, filmed on October 15 and titled “A New Bretton Woods Moment,” as well as the IMF panel with Chairman Powell.
Fed Watch was the first podcast or media outlet of any kind in the Bitcoin space to make this connection and start talking about a coming Bretton Woods agreement or Plaza Accord. We’ve asked all our guests in recent months about this issue. The dollar’s dominance is growing in relative terms, but is also too debt-laden to provide much, if any, growth. Since there is no better fiat alternative to the dollar, Bitcoin is showing people a better, more optimistic way forward.
We anticipated this call for a new Bretton Woods agreement, but in this episode, we point out why this statement from the IMF won’t lead to a new agreement. The U.S. and China, both important parts of the IMF, are at each other’s throats and won’t work together on a Bretton Woods-style agreement anytime soon. We are not optimistic about the possibility for an East/West Bretton Woods agreement.
Later in the episode, CK and I discussed the IMF panel on cross-border payments, which was really a panel on CBDCs. The first elephant in the room was the lack of Chinese representation on the panel. China is a big part of the IMF, and the only Special Drawing Right (SDR) member actively testing a CBDC. Its absence was noticeable.
We played audio and video of two important places where Chairman Powell speaks and throws cold water on the CBDC love fest.
The Federal Reserve is actively researching the CBDC issue. Several speeches and updates have been released over the years, and Fed Watch covered the most recent, which mirrors what Powell said on this panel. As of now, the Fed is pursuing a “wait-and-see” approach. It is keeping bridges open to key researchers in the U.S., but doesn’t have plans to do much more at this time.
Chairman Powell constantly talks about “costs and benefits” of a CBDC. It is a sober analysis that we don’t see from other central bankers. They are full steam ahead, spending millions on research and testing, convinced a CBDC is a viable new tool. On the other hand, the Fed’s position as the maintainer of the world reserve currency gives it the latitude to stand back and watch how it develops. The Fed is not willing to jeopardize its fragile monetary system to introduce an experimental central bank asset class.
The Fed does not know exactly what money is today. It gave up measuring the eurodollar in the 1980s. It isn’t sure what releasing a brand new central bank liability will do to the financial system.
As I said over a year ago, we will be able to watch central bankers learning in real-time about CBDCs, as their thinking evolves from blockchain technology, to tokens, to payments and back to bitcoin, just like everyone that evolved from blockchains back to bitcoin in 2016 to 2018.