On Monday, the latest Bitcoin block reward halving finally arrived, decreasing the inflation rate of the BTC monetary base by 50 percent to ~1.6 percent — under the target inflation rate of fiat currencies and under the growth of the above-ground supply of gold.
It’s fitting, then, that around the time of the block reward halving, the Chicago branch of the Federal Reserve released a publication outlining the potential implementation of more inflationary monetary policy by the U.S.
As many in the cryptocurrency space like to say, “Bitcoin fixes this.”
Federal Reserve branch dabbles in (even more) inflationary monetary policy research
Although the world seems more prosperous now than ever before, it’s somewhat of an illusion.
Every corner of the world has taken on massive debts to pay for things they cannot really afford at current. It has reached a point where global debt has hit nearly $250 trillion — over 200 percent of the world’s annual GDP.
Governments, especially, have been saddled with big debt loads. Japan’s government has more sovereign debt than two times its annual GDP while the U.S. has accumulated nearly $25 trillion worth of national debt.
It’s a trend that many critics say cannot last forever — eventually, people will realize that the value of money is worthless. But that raises the question: how should this debt be rid of?
The Chicago branch of the Federal Reserve recently answered this question with a paper titled “Monetary and Fiscal Policies in Times of Large Debt: Unity is Strength.”
According to an analysis of the paper by economist and prominent Bitcoin trader Alex Krüger, the researchers at the central bank are arguing that a “coordinated monetary and fiscal strategy with an emergency budget” could increase inflation at sustainable levels while promoting economic growth to “erode a fraction of government debt”:
“New Chicago Fed working paper looking into a coordinated fiscal and monetary strategy to create a controlled rise of inflation to *erode a fraction of government debt*, so the government may spend more,” Kruger commented on the paper.
It’s good for Bitcoin
Although it isn’t clear if the contents of the paper are accurate or even feasible, it is part of a growing trend of the normalization of the inflation of fiat currencies, something that may benefit Bitcoin.
As reported by CryptoSlate previously, legendary macro investor Paul Tudor Jones said in a recent note titled “The Great Monetary Inflation” that with the current macroeconomic backdrop of money printing, he is heavily favoring Bitcoin.
While he mentioned the normal bets like gold and U.S. Treasuries, the piece had a big focus on BTC, with Jones writing how he thinks there is a “growing role” for the cryptocurrency, which he likened to gold in the 1970s prior to a massive bout of inflation. The hedge fund manager added that Bitcoin is likely to become the “fastest horse in the race.”
There’s a deflation issue too
There’s been a big deal made about inflation, but there might be a deflation issue as well.
According to an analysis by former Goldman Sachs executive Raoul Pal, there is a high chance that there will be a period of deflation in the coming months due to the crash in demand for global goods, accentuated by negative oil prices, and a slowing of the velocity of money.
With one of the largest deflationary waves in modern history underway, the chances of negative CPI is very high. That might mean the Fed will do the unthinkable in the coming months and go to negative rates or if not, monetary conditions will be tightening into a crisis 1/
— Raoul Pal (@RaoulGMI) April 3, 2020
Although the abovementioned inflationary case should result in growth for Bitcoin, deflation could benefit the cryptocurrency market as well, despite this industry’s use of the inflationary “money printer go brrr” meme.
According to Pal, deflation will cause the world’s largest insolvency event, where companies and governments may have to default on large sums of debt.
This would cause societal unrest, providing growth in the demand for Bitcoin, as explained by author and technologist Jeff Booth.
Furthermore, in a world where there is deflation, central banks will be incentivized to implement increasingly crazy monetary policies like extremely negative interest rates. That decreases the opportunity cost of holding BItcoin, which yields zero percent over the potentially negative rates of fiat.
