Posted by: Evan Faggart
July 3, 2014
On June 18, 2014, The Federal Open Market Committee (FOMC), the policy making committee for the United States Federal Reserve, publicly announced the decisions they made during their 2-day meeting. In this meeting, the FOMC discussed the state of the American economy and deliberated on what the Fed’s policy should be in the near future.
Several things came out of the 2-day FOMC meeting. The Federal Reserve ended up downgrading their forecast for economic growth from 2.9%-3% and now expects the economy to grow only 2.1%-2.3% this year. However, despite this bleak outlook for economic growth, the Federal Reserve concluded that the unemployment rate is actually falling much faster than they originally expected. Because of these results, the Fed will continue their policy of very light tapering, reducing Quantitative Easing by $10 billion every month. However, due to the unsatisfactory projection for future economic growth, the Fed will continue their policy of extremely low short-term interest rates in order to stimulate investment. They do not fear the inflation caused by low interest rates, however, saying that the current rate of inflation is too low to warrant any concern.
But it does not really matter what the Fed’s economic forecast is for the future, or how that forecast affects their decisions about monetary policy. The Fed’s constant manipulation of the money supply, through Quantitative Easing and 0% to 0.25% interest rates, has placed the American, and global, economy on a foundation of sand, which will inevitably collapse. The economy is trying to bring itself out of a business cycle, which was created by the Federal Reserve almost immediately after the bust of the tech bubble in the 90s, but the Fed will not let any real recovery take place. Thus, the markets are on a crash course for disaster, regardless of any policy prescriptions from the Fed. Due to the simple nature of business cycles, the market will correct itself eventually, despite the indefatigable attempts from the Fed to reverse the damage they have done. The only difference between stopping the inflation now and waiting for the economy to fall in on itself a few years from now is the extent of the recession that will necessarily follow. If the Fed were to stop all stimulus immediately, the markets would slide back into recession and start reallocating capital to areas of the economy with legitimate demand, therefore producing real recovery and growth in the economy. Indeed, there will be a drop in prices and an increase in unemployment, but that is a consequence of the Fed’s inflationary policies. Businesses grow to an unsustainable level due to cheap credit and they rely solely upon that cheap credit. Once the money stops flowing, those credit-addicted enterprises will collapse, putting everyone working for the companies in the unemployment line. But the extent of this painful correction will be far less if the Fed pulls the plug now rather than later. If the central bank inflates further, not allowing the correction to happen, the recession will be pushed a short distance down the road and the ensuing recession will be far worse.
The Federal Reserve, of course, ignores all of these economic truths. In pure contradiction to the Great Depression, the stagflation of the 1970s, the tech bubble in the 90s, and the housing bubble in the 2000s. They say that those crises were caused by the market and not enough central bank intervention, not enough government spending. With just a little more inflation, a little more deficit spending, we can reach an economic state where there is 0% unemployment and no one has to worry about financial instability because there will be a massive welfare state to bail them out of any bad decisions they make. Funny though, how the amount required for the “just a little more” inflation and deficit spending always creeps continuously higher.
Central bankers now worry not only about deflation, but they also say that too little inflation is dangerous as well. They are calling unsatisfactory levels of inflation “lowflation.” Now we are in danger of having not enough inflation! Fire up the printing presses, our currency is too valuable and people can buy too much stuff with less money! Keynesians such as Krugman are terrified of a deflationary “death spiral,” an erroneous economic belief that is based on an assumption of the evenly rotating economy, something that is not realizable in the real world. At the same time, they tout the efficacy of inflation and say that an inflationary “death spiral” is impossible, even though it is very possible in the real world and has occurred in several countries, which used the same policies that the Federal Reserve is using now. Meanwhile, the economists working for the federal government have tweaked their models for the Consumer Price Index so that the real rate of inflation is masked and continues to appear low.
What Does Reckless Central Banking mean for Bitcoin?
Essentially, the Fed has admitted that their policies are failing, and that they will continue on with these policies, expecting different results. It seems as though we are entering a period of stagflation similar to that of the 1970s; prices keep rising while the real unemployment rate remains high and wages are stagnant. At some point, Janet Yellen will be forced to stop tapering because the economy will slip back into recession, and her cronies in the private sector will be looking to her for more cheap money.
At the risk of bringing up the tired cliché, “this is actually good news,” present in the Bitcoin community, the disastrous path that the Federal Reserve has carved out for the global economy could lead to increased adoption of Bitcoin. Naturally, as the dollar constantly depreciates, people will begin looking for alternative means of wealth preservation. Bitcoin could be a serious contender, considering its exponential growth in both price and acceptance over the last two years. As the Dow Jones Industrial Index creeps closer and closer to 17 thousand points, a full three thousand points higher than it was on the eve of the 2008 crash. That three thousand point difference serves as an indicator that, as the economy goes back into recession, things will be worse than they were in 2008; the bigger the inflationary phase is, the longer and more drawn out the correction will be.
Although, the increase in Bitcoin price is dependent not only on how bad the crash is, but it will also be affected by how sudden it is. As mentioned above, it seems as though the American economy is in a stagnant position much like that of the 1970s. Therefore, it is likely that there will not be a “crash” per se, but that the economy will gradually reenter a state of recession over some period of time. A gradual decline, such as the one that will possibly happen here, could very well make for a less enthusiastic leap to Bitcoin. Individuals will not notice their money depreciating as quickly, and will not feel as much of an urge to seek out alternative means of wealth preservation. But, if the recession lasts long enough, and the standard of living is decreased enough, people will necessarily look for ways to stop relying on the government’s monopolized monetary supply. Bitcoin could very well be the answer.