The Federal Reserve Is Considering ‘Controlled’ Inflation In Order To Wipe Out A Fraction Of National Debt; This Is A Very Bullish Factor For Crypto

May 21, 2020 / by Zachary Mashiach

The Federal Reserve Bank of Chicago has released a new paper titled ‘Monetary and Fiscal Policies in Times of Large Debt: Unity is Strength (REVISED May 2020).’ It essentially describes how one of the Federal Reserve’s best options for dealing with the current fiscal crisis is to cause ‘controlled’ inflation, which will wipe out some of the United States’ debt and give the Federal Reserve more room to operate. Undoubtedly, it is clear that if the Fed does adopt this ideology, the crypto market would benefit greatly as people buy up Bitcoin (BTC) in order to keep their savings safe from inflation.

Ever since the 2008 Great Recession the Fed Funds Rate, which controls the interest rate for interbank loans, has been quite low. Due to the Coronavirus Pandemic-induced economic crisis, the Fed Funds Rate is now 0%, and there is even talk of pushing it into the negative.

This is a big problem for the Federal Reserve, since previously the Fed Funds Rate was their greatest tool to stimulate economic growth. Basically, when the Fed Funds Rate is lowered, it is easier to obtain credit and capital, and liquidity grows in the economy. Now however, the Fed has no more room to lower the Fed Funds Rate, and they have essentially lost one of their most powerful tools.

This is why the Fed has relied heavily on money printing for the current round of economic stimulus, with the Fed printing at least $2.6 trillion according to this paper.

However, there is an expectation that the Fed will have to repay this printed money at some point. In other words, the trillions being printed now are supposed to be paid back later.

This is where the Fed runs into serious issues, since if the Fed tries to perform ‘quantitative tightening’, where they pay back the money that was printed and lower their balance sheet, it will completely deplete liquidity in the global economy, and will lead to an economic crash.

Indeed, between late 2017 and the middle of 2019 the Fed began to pay back the money they printed during the 2008 Great Recession, and ultimately reduced their balance sheet from $4.5 trillion to $3.8 trillion.

However, even this modest $0.7 trillion of repayment, which occurred years after the money was originally printed during the 2008 Great Recession, sucked liquidity out of the economy and led to the Repo crisis of 2019.

As described in-depth in a previous article on Crypto.IQ, it was basically proven that the Fed cannot repay any of the money that was printed during the 2008 Great Recession. If even a small fraction of that printed money is taken off the books it will cause a global economic collapse. The Fed quickly responded by increasing their balance sheet back to $4.2 trillion in order to reverse the damage.

Now this situation has become even more dire due to the economic crash this year, with the Fed balance sheet already skyrocketing to $7 trillion.

At this point the Fed realizes there is no way they can repay any of this printed money, based on their failed experiment in repaying $0.7 trillion between late 2017 and mid-2019 which almost collapsed the global economy.

That is why the Fed is now proposing to devalue the USD, so that they can devalue the debt that they owe. In other words, the Fed is coming to terms with the fact that there is no way out of this situation besides causing the USD to lose value.

Specifically, this Fed paper proposes printing tons of money via an ‘emergency unbalanced budget’, causing inflation to significantly rise, which will devalue the debt while flooding the economy with money. Also presumably, this printed money will be used to pay off the Fed’s balance sheet.

This Fed paper makes this scenario sound controlled and intelligent, but what if the Fed loses control of the situation and the inflation spirals out of control, while more and more money printing is needed to sustain the economy and the government?

Indeed, that is exactly what has happened in countries like Venezuela and Zimbabwe, and this Fed paper contains the same sort of thinking as the governments of Venezuela and Zimbabwe, before those governments destroyed their fiat currencies with this sort of plan.

Interestingly, this paper also mentions that if the Fed does not adopt this ‘controlled inflation’ plan, then the Federal Reserve might lose control anyway and an uncontrollable inflationary spiral will happen.

This brings up the question, is this paper just a way to put a positive spin on the inevitable USD inflation that is coming, by making it seem like it was a plan?

In any case, it appears the Fed is getting ready to unleash USD inflation, whether intentionally or unintentionally. This could lead to people rushing into Bitcoin (BTC) en masse in order to protect the value of their savings, rather than watching their savings evaporate in a bank as inflation takes hold.

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