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Inflation may grow as the US prevents negative interest rates, boosting Bitcoin bull case
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One of the biggest Bitcoin catalysts over the past few months has been the introduction of negative interest rates into economies in Europe and Asia.
The idea goes that if consumers have to pay banks to hold their money, they will seek assets that provide relatively better yield. BTC fits the bill: it costs no money to hold, or it can even yield upwards of six percent yield if coins are held on a platform such as BlockFi.
Unfortunately for the Bitcoin bull case, the U.S. Federal Reserve has been hesitant to let its policy interest rate go negative. Chairman Jerome Powell said in a recent speech that negative interest rates are something the Federal Reserve is not looking at as a viable monetary policy lever.
Yet the fear is the economy will eventually demand it. That’s to say, to keep the cogs of Corporate America turning, it will need more stimulus. And that stimulus could be massive for Bitcoin.
The Federal Reserve’s target inflation rate could soon double
To respond to the ongoing recession caused by the end of the business cycle and the COVID-19 lockdowns, the Federal Reserve has been forced to take record action, dropping its policy interest rate to 0-0.25 percent just months ago.
But with the worst economic outlook in modern history as both the Bank of England and Federal Reserve have said, it may not be enough.
A 2017 study from two individuals on the Federal Reserve Board — which is arguably more relevant today than before due to the macroeconomic backdrop — found that due the tendency to keep rates and inflation near zero, economic performance will be poor. Low inflation will beget low inflation and output will be low.
So what’s the solution?
According to an op-ed authored by former Federal Reserve chairman Ben Bernanke in 2017, a solution may be to increase the central bank’s inflation target to four percent, double the status quo of two percent inflation.
This would give the Federal Reserve more flexibility with monetary policy, especially in recessions like the one we’re going through today. It would also be relatively easy to implement, he postulated.
Bitcoin Stands to Benefit
Max Bronstein of Coinbase recently wrote in response to the Bernanke’s post that we could see another “wave of debt monetization,” whereas treasuries issue new bonds and/or central banks create money:
“If you’re wondering how the fed is going to try and stave off negative interest rates, here’s a potential preview, authored by Ben Bernanke himself. The inflation target is going higher, expect another wave of debt monetization.”
It’s a trend that could benefit Bitcoin.
Paul Tudor Jones, a hedge fund billionaire, explained in a recent report that Bitcoin is the “fastest horse” in a world where there is an “unprecedented expansion of every form of money, unlike anything the developed world has ever seen.”
Tesla CEO Elon Musk has echoed this as well, writing in a recent tweet:
“Although massive currency issuance by govt central banks is making Bitcoin Internet money look solid by comparison.”
Pretty much, although massive currency issuance by govt central banks is making Bitcoin Internet 👻 money look solid by comparison
— Elon Musk (@elonmusk) May 15, 2020