Remember when Coinbase, and other major exchanges, reported that Americans were converting their $1,200 stimulus checks into Bitcoin? By now, that $1,200 would be worth $1,620. As one Reddit user said, “Putting an inflationary currency into a deflationary one, what a novel idea!”
But to really understand the significance of this move, we need to go a bit deeper into what’s happening to the economy at the moment and what governments are doing to try and get people and businesses through this difficult time.
The Cost of A Crisis
Economic crises are nothing new. Like seasons of growth and decline, economies follow a cyclical, ideally upward, trajectory. And just as with the world’s natural ecosystems, upsetting the delicate equilibrium between productivity, credit and debt can wreak havoc.
Actually, the sudden appearance and rapid spread of the novel coronavirus fits this narrative as well. In some cases, it seems viruses are nature’s ruthless way of restoring balance. Today, we then find ourselves at a critical, and frankly frightening juncture in history where both cycles overlap, creating an intensely complex dilemma: a (false) choice between public health and economic prosperity.
2020 buzzwords: Lockdowns, quarantine, face masks, ventilators, social distancing, but also stimulus packages, bailouts and quantitative easing.
In this post, we’ll look a bit more at quantitative easing, what it means, and also what we can do to build more resilience into our personal finances.
What is quantitative easing?
Simply put, quantitative easing (QE) is the process whereby a Central Bank pumps cash into the financial system to stimulate spending and prevent liquidity from drying up by purchasing debt from the open market in the form of Treasury bills/notes/bonds and Mortgage Backed Security (MBS) paper.
These types of securities are traditionally regarded as safe havens, although during the mass selloff in mid-March, along with equities, gold, and Bitcoin, US Treasuries were also affected as investors fled to cash and markets deleveraged.
QE is a last resort method, pursued only after steps such as lowering interest rates have been taken, and it is not without risk.
Is quantitative easing a good thing?
Whether QE is good or bad is not really relevant. In our current financial system, where free floating fiat currencies form the cornerstone of our economy and the US dollar (rather than bullion gold) functions as the global reserve currency, QE is simply part of the Central Bank’s toolbox.
If the money released into the system is distributed wisely, and not excessively, governments can support families that may not be able to pay their bills and loans, and protect jobs. However, increasing the supply of money (by printing bills or typing in some digits) ultimately accelerates inflation. Even worse, if inflation occurs but the economy does not grow as a result of the measures taken, we end up with what is called ‘stagflation’.
It’s a delicate balance, especially because a moderate debasement of a domestic currency does not always spell doom. Currency debasement makes imports more expensive, which may stimulate local entrepreneurship and manufacturing, and exports may go up.
However this evolves, now diversification is more important than ever to protect your finances. Here’s what you might consider as you seek to build more resilience into your portfolio.
While QE can drive up inflation, the US dollar is currently still the exception, especially as virtually all fiat currencies are under some form of pressure, raising worldwide demand for the greenback.
Traditionally bonds, and other long-term securities in this category, are safe haven asset. However, low interest rates and excessive money printing put these investments at risk.
Gold is a proven safe haven asset, despite recent episodes of volatility. Over the past 100 years, gold has outperformed all fiat currencies, including the US dollar, and while not the most convenient commodity, with the rise of gold-backed ETFs and stablecoins, the case for gold remains solid and in tune with the needs of our mobile, digital lives.
Bitcoin arose from the flames of the 2008 Financial Crisis. Instead of debt, this digital asset is denominated by demand, and as it its gradual release into the market is pre-programmed and it’s total supply is limited, rather than inflationary, Bitcoin is a deflationary currency, which some believe may one day replace or at least supplement with fiat money.
There is no doubt that a scarce, digital, non-sovereign, public form of money suits the modern condition and could be a powerful hedge against money printing.
In fact, as Central Banks pump more new money into the system, the Bitcoin blockchain is about to undergo the Halving, which will cut block rewards for Bitcoin miners in half, which means less newly minted Bitcoin will be in supply, while demand remains in place.
While this is clear to Bitcoin enthusiasts that have followed developments in the crypto space for longer, when it comes to the mainstream, more work needs to be done to raise awareness and collectively reflect on the nature of money.
“A lot of people automatically dismiss e-currency as a lost cause because of all the companies that failed since the 1990’s. I hope it’s obvious it was only the centrally controlled nature of those systems that doomed them.” – Satoshi Nakamoto