Central banks flood markets with bailout money

Central banks in the U.S. and the EU are putting together rescue packages to deal with the Corona crisis that is currently infecting stock markets around the world with panic. While the measures are largely fizzling out, Bitcoin is rebounding without any help at all. Was it too early to write off Bitcoin as a lifeboat after all?

If you’ve been involved with Bitcoin, you certainly know: the maximum number of Bitcoins is limited to 21 million units. Currently, there are just under 18.3 million of them in circulation. The protocol dictates that there will never be more monetary units than 21 million, and it is nearly impossible to change this protocol on a decentralized network.

Critics of Bitcoin sometimes complain that this control of the money supply is too rigid. Too inflexible to respond to crises, too deflationary to create the kind of value stability that central banks define as ideal. The Corona crisis, which has dominated minds, media, and stock markets for several weeks, again shows what central banks mean by managing a crisis.

People already lost trust in banks and are looking for alternative solutions, it is now even possible to get loans via BTC services.

How central banks and governments are tackling the Corona financial crisis

central banksThe U.S. central bank Fed (short for Federal Reserve) was the first to react with several measures: First, it is lowering the key interest rate to just above zero percent; second, it has announced that it will buy $700 billion worth of government bonds and other securities. It also plans to offer banks emergency loans at favorable conditions and has cut the rate for banks’ “partial reserve” to 0 percent.

Meanwhile, the European Central Bank ECB has also announced a 750 billion euro “pandemic emergency purchase program” for bonds. The “Pandemic Emergency Purchase Programme (PEPP)” will buy both public and private securities. “Special times call for special responses,” ECB President Christina Lagarde tweeted, “Our commitment to the euro has no limits. We have a duty to use the full potential of our tools.” According to the press release, the ECB will “support all euro area citizens in these extremely challenging times.” All sectors of the economy should get the help they need to absorb the shock, it said. The central bank, it said, is prepared to increase the size of the program “by as much as necessary and for as long as necessary.”

So far, however, the central bank announcements do not seem to be having the desired effect. Both the DAX and the U.S. Dow Jones and S&P indices continue to fall unabated, while the “Fear” index of the U.S. stock markets has risen to a new all-time high. According to analysts, the central banks’ purchases will not be enough to halt the collapse in share prices. This alone could be a foreseeable end to the Corona crisis.

At the same time, governments must implement further measures to prevent the economy from collapsing. For example, the federal government is helping companies that have to downsize with the short-time work program, announcing a “billion-dollar shield” with unlimited volume for companies, expanding liquidity assistance programs, making it easier to defer taxes and waiving enforcement and fees for tax debts under certain circumstances. But all of this pales in comparison to the U.S. program: it plans to use $850 billion to cut taxes, target aid to certain industries and send a $1,000 check to every citizen.

Will new money be printed or not?

new moneyIt’s pretty complicated what these measures will do to the monetary system specifically. If the Fed and the ECB buy securities, this is quite concretely equivalent to creating new money. If the ECB were to actually invest 750 billion euros in the stock markets by crediting itself, it would increase the M1 money supply, which is currently around 6,300 billion euros, by a good 10 percent. However, the money supply can also fall at the same time, for example if loans burst or debts are repaid.

It is more difficult to assess the Fed’s further measures. If it lowers the key interest rate, this means that banks can borrow from the Fed at lower rates. This could indirectly increase the money supply, since money is created through loans, and these now become cheaper. Moreover, by lowering the fractional reserve rate of banks to 0 percent, the Fed allows banks to lend more or less indefinitely, thus not creating central bank money, but still creating fiat money. Such a measure seems downright desperate because it threatens to undermine the stability of the banking system.

It is even more difficult to assess the consequences of governments’ actions. It is clear that they will put a large amount of money into circulation. Since central banks are formally independent, governments cannot directly recreate this money. To a large extent – perhaps completely – they will be able to raise the money from savings. However, it is conceivable that the ECB will retroactively finance governments with new money, for example by buying government bonds.

In addition, not all countries have as good a financial cushion as the USA and Germany. Many European countries will not be able to support the economy for long as sales slump due to the global quarantine. If the state of emergency drags on for a few months, things will get tight for many businesses, and spirals of ruin loom: restaurateurs and retailers will go bust, they will let loans burst, which will put the banks in trouble, their employees will become unemployed, which in turn will cost the welfare state money and lead to further losses in retail sales, and so on.

There is a relatively broad spectrum of disaster scenarios for the economy that could come true in the coming months. It could lead to both deflation and inflation, although inflation seems more logical: the money supply has increased, but the number of goods produced is dwindling because supply chains are damaged and businesses are ruined. At the same time, there is a risk that the measures that the government is introducing to combat the crisis will end in an even greater expansion of the money supply.

Bitcoin, the safe haven

So we have not unrealistic scenarios in which the Corona crisis triggers inflation – an expansion of the money supply accompanied by a reduction in the quantity of goods. Should this occur, Bitcoin continues to be the optimal protection currency: scarce, but flexible to transfer and perfect to store. Provided there is even a small risk that we slip into an inflation crisis, Bitcoin’s appeal explodes.

Already, there is plenty of evidence that private demand for Bitcoins has skyrocketed with the onset of the crisis. Many companies report that their customers are buying more than ever. Bitwa.la, for example, states in a press release that 75 percent of their customers have repurchased, and U.S.-based Coinbase, the top destination for U.S. Bitcoin buyers, is also reporting record volumes with reportedly similar levels of buyers. The slump in the price appears to have been driven by corporate and institutional investors, but gratefully received by private buyers to establish or expand a position in Bitcoin.

Accordingly, the Bitcoin price has bounced back. While stock prices continue to fall, Bitcoin has risen from around $5,100 to $5,800 6,200 in the last 24 hours alone. One could almost think that the cryptocurrency recommends itself as a safe haven in times of crisis after all.