Bullish Bitcoin Policies of the Federal Reserve
In the USA, the Federal Reserve has some of the most powerful tools that can save the world economy from collapsing. Most people would call the United states Federal Reserve a lender of last resort. Now, the various tactics that the Federal Reserve uses to help control the economy may have several outcomes.
The main tactic is generally to manipulate the supply of money by controlling interest rates on lending. If there happens to be a crisis of liquidity, the Federal Reserve will decrease interest rates so that people will borrow more money. This will therefore create more liquidity in the market. That said, in order to avoid overinflation after much money has been printed, the reserve will then increase the cost of borrowing.
This increased borrowing rate will incentivize the velocity of money that flows into the economy. This is done in the hopes that the deflationary death spiral will not happen. At this time, the chairman of the Federal Reserve, Jerome Powell, has been putting these tactics to use all throughout the coronavirus pandemic.
In the year 2020, Powell used the printers of the Federal Reserve to create a lot of money, about 40% of what is now all of the United states dollars floating around in the world. That said, massive inflation is expected for 2022, which means that the Federal Reserve has no other choice but to dry up the world economy.
In 2021, Jerome Powell created monetary policy that saw a 0.05% rise in interest rates, which applied to interest rates on excess reserves as well as the interest rates on reverse repossession contracts. Today we want to take a closer look at how the technical monetary instruments of the Federal Reserve operate and how they function to control the world economy. One of our main goals here is to take a look at the future of Bitcoin in relation to these policies of the Federal Reserve.
The Federal Reserve
The Federal Reserve is ultimately accountable to its member banks, which in all reality are its shareholders. These include the big banks such as the Bank of America, Morgan Stanley, Wells Fargo, Goldman Sachs, and more. These big banks are important because they generally purchase the excess supply from the US treasury.
These reserves are auctioned off by the Treasury Department to help increase the economy going and to bring funds into the bank. These large bank shareholders usually buy around 50% of all issued treasuries, and then sell them to the Federal Reserve in exchange for cash. This is how United States debt is monetized. This is in huge contrast to other banks around the world, which usually only by around 30% of the issuance of new treasuries, with 20% of the purchase is being left to the private sector.
What it all comes down to is that the Federal Reserve uses the United states dollar as a cornerstone to help control the world economy. What we want to do now is to take a closer look at some of the main tools and instruments that the United states Federal Reserve uses to help control the world economy.
The Federal Reserve Fund Rate
Perhaps the most important tool that the Federal Reserve uses to manage the economy is known as the federal funds rate. This is how much it costs to borrow money from the Federal Reserve, and as we mentioned before, it is known as the lender of last resort.
What is interesting to note is that the Federal Reserve can print virtually unlimited amounts of money. The fact of the matter is that if banks lend each other too much money and can’t pay each other back to meet the required reserve rates, the Federal Reserve can just bail them back out at a much cheaper cost with lower interest rates.
It’s easy for banks to borrow money from the Federal Reserve at low interest rates. The Federal Reserve can print pretty much unlimited amounts of money to help balance imbalances.
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During the economic crisis of 2008, there were two important monetary programs created. One of these was the interest on excess reserves, with the other being the reverse repo policy. During the 2008 financial crisis, both policies were utilized to decrease liquidity from the market.
Another example, in order to sterilize all of the QE money that the Federal Reserve created during the bailouts of the Great Recession, banks continued tightening up for years. Simply put, some entities are too big to fail, Such as banks, and the Federal Reserve can then bail them out.
Something interesting about the IOER is that any of the excess reserves in the banking system would be held by the Federal Reserve, and would be able to earn interest in the meantime. This reduces liquidity because banks won’t have excess money to create for people in terms of loans.
Banks never used to utilize this IOER. The Federal Reserve paid below the going rate that was offered in the market, so nobody would use the IOER. However, after the Lehman Brothers crisis, the IOER was raised by 25 points.
This therefore led to various big banks quickly putting up to $2.8 trillion into the Federal Reserve, because it earned them 0.25% interest. At this time, the IOER is way higher than what banks can make overnight, so they put their money into the Federal Reserve.
Another tool that the Federal Reserve has in order to tighten liquidity in the market is a repurchase agreement. It is a desperate measure, but sometimes it is called for. This is much like the tightening that went on during the Great Recession, but repossession contracts usually always take place on a very short time frame.
A repossession contract is any kind of agreement made by the Federal Reserve and banks, which is to temporarily by a security, which is collateral, with the intent of returning it with a small return, which is known as interest. If there is a liquidity crisis, and the bank doesn’t have enough money, it can then tap into the Federal Reserve and get a securitized loan.
The Federal Reserve will then give the bank money in exchange for a security. The cash will provide the bank lending power as well as liquidity within the economy. It also helps to ease market uncertainty and tension. When the loan comes to term, the Federal Reserve will swap assets for cash, and the bank will pay any interest that is owed. Keep in mind that there is also such a thing as a reverse repossession contract.
The Federal Reserve & Jerome Powell
In 2021, the Federal Reserve increased both the reverse repossession rates and the IOER by a total of five points. The intention of this was to sterilize the market in order to avoid massive inflation. Jerome Powell also created a defensive strategy that removed money from the global economy to put stress on European governments. By early summer in 2021, the USA had removed over $250 billion from the market. This then caused the euro to crash. However, something that the European Central Bank can do is to go bankrupt by demolishing the euro with extremely negative interest rates.
Apparently, the plan of the European Central Bank is to dry up the banking industry and to wreak havoc on the sovereign bond market. Some people are calling this the European Trojan horse to gain control over the flow of money in the world. The goal here is to undercut the banking cartel that is the Federal Reserve. Moreover, the central European bank wants to curtail the ability of the US Fed to print money.
This is therefore designed to ensure that the Federal Reserve does not have any other option but to monetize spending and to utilize negative interest rates for Americans. The result of this would be a weaker United States dollar and a stronger euro. The goal here would be to help Europe from imploding due to being unable to pay back its debts. However, the decisions that Jerome Powell made, put a damper on this, and made the US dollar much stronger.
Powell passed the CARES act, Which meant that corporates and non financial corporates could access the federal window that was originally designed exclusively for the banking cartel. That said, since the corona virus pandemic started, the IOER was zero, and the repossession window was only available to primary dealers of the Federal Reserve. That said, these primary dealers are now being cut out of the economic transmission system.
Jerome Powell is in the process of tightening and increasing United States monetary policy, with the aim being to protect this banking cartel and the dominance of the Fed and the US dollar. The expectation here is for the Federal Reserve to increase interest rates, which will only diminish the euro even more. The point here is to also reallocate money into better investments. Just before the end of 2021, the Federal Reserve was indicating that it was going to aggressively taper three different interest rate hikes in 2022.
This would then help capital to come back into the USA from Europe. Repossession facilities in foreign countries are how Jerome Powell is instituting these economic policies around the world. By the end of 2021, nearly 2000 trillion dollars had gone back into the federal reserve’s repossession facility, and this was the highest one day cash injection to ever happen.
At this point, many European governments are offering negative yields on excess euros. On the other hand, the Federal Reserve was offering a positive yield of 0.05%. While this relocation of capital is occurring, there’s going to be an inevitable correction as deflationary pressures set in. Asset price inflation will be prevented thanks to higher interest rates. This is going to become more expensive due to a stronger dollar.
This will also aid in the disincentivizing of various individuals and businesses, as they will leverage themselves as much as possible. It is also predicted that many different assets, such as equities, and real estate as well as treasuries, will be repriced into hard and tangible assets, such as gold and oil. What needs to be said here however, is that the money that will be gained through tangible assets is going to be minimal compared to the appreciation that Bitcoin and cryptocurrencies will see in the near future.
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Bitcoin & The Trojan Horse
It is very clear that the economic policies of Jerome Powell and the current Federal Reserve are extremely fiscally responsible. Powell may be spurred on to use Bitcoin in order to maintain the USA’s economic superiority. It is all about embracing Bitcoin as a legitimate asset. The fact of the matter is that the whole world decrease is liquidity because they don’t know what the federal reserve’s monetary policy will look like during times of economic uncertainty.
Jerome Powell is implementing extremely hawkish policies, and this is a strong sign that the Federal Reserve needs to regain the trust of the market. Moreover, increasing interest rates is the only real way to do so. Jerome Powell needs to use all of the monetary tools in his power to protect the strength of the United states dollar.
You might know that there is a 21 million supply cap on big coin. That said, the value of Bitcoin could greatly outpace that of gold, especially during times of economic uncertainty. The US treasury is currently yielding negative returns, which makes parking money with the Federal Reserve a liability. The overall result here is that countries are going to sell off their US treasuries. At the same time, America’s creditworthiness is decreasing.
People are coming to the realization that the moral dilemma between banks and Federal Reserve bailouts is very real. People are looking for new ways to secure collateral, and Bitcoin is that way. Bitcoin does suffer from the so-called counterparty risk. it’s a fantastic form of capital that can be leveraged by commercial banks. Banks are going to start offering big coin reserves to customers so that they can stay relevant.
As capital is reallocated into Bitcoin, Bitcoin could become the new form of collateral, which would therefore create a hybrid dollar and Bitcoin standard. The dollar backed by Bitcoin is completely ephemeral, especially because Fed Reserve plans tend to fail. At this point in time, the dependence on central banks and Fiat money has all but evaporated. The interesting point here is that the same economic policies that Jerome Powell is using to strengthen the United states dollar, will actually be a speculative attack on that dollar. Easing into this new Bitcoin standard is going to take time.
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