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How Bitcoin Stands to Gain from “Currency Wars” Among Central Banks

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Recent figures shows that the United Kingdom’s economic growth fell to a slower pace in June, even before the European Union referendum, which will lead the Bank of England to cut interest rates as early as next week. This is known as ‘easing’ monetary policy. Following the market chaos of the E.U. referendum result, the Governor of the Bank of England Mark Carney hinted that, “some monetary policy easing will likely be required over the summer”. Monetary policy comprises of various tools to try to control the money supply and interest rates and thereby influence economic activity.

Interest rates can be used to reduce the costs of borrowing, investment and increase economic activity but since the financial crisis in 2008, central banks around the world have been resorting to monetary policies to breathe inflation into the economy and devalue currencies in a bid to compete with other countries exports. It is criticized as a mercantilist policy, that is, not adhering to free-market principles, and the collective actions of the world’s major central banks are resulting in “currency wars”; countries use record-low interest rates and quantitative easing to expand their supply of fiat and out-compete other currencies in terms of cheapness. Indebted countries are also using this policy to inflate debt away, making it easier to deleverage.

The Bank of England’s next move will no doubt trigger a response from others. Societe Generale expects a cut in interest rates in the U.K. to a historic low of 0.25 percent; this monetary easing could even be complemented with quantitative easing at the next meeting on July 14. The reactions by other central banks could confirm that the global economy is moving into a negative interest rate environment. German and Japanese government debt yields are already negative and the U.S. 10-year government debt yields recently reached historic lows near 1.00 percent. Thus, investors in German and Japanese bonds pay a premium to lend the government money; this artificiality was introduced into these economies by central banks and looks to be implemented on a global scale. The base interest rates among the major economies, shown in the table below, are at all-time record lows, with negative rates in Switzerland, Sweden and Japan.

U.S. Federal Reserve

0.50%

Bank of England

0.50%

Bank of Canada

0.50%

Swiss National Bank

-0.75%

Bank of Japan

-0.10%

Swedish National Bank

-0.50%

Reserve Bank of Australia

1.75%

People’s Bank of China

4.35%

European Central Bank

0.00%

Source: http://www.cbrates.com/

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The Bank of Japan (BOJ) is expected to increase stimulus at the end of July as consumption in Japan is weak and the Yen surging, appreciated significantly to a 12-month high against the U.S. Dollar. The BOJ’s Governor Haruhiko Kuroda yesterday stated that, “the BOJ is ready to expand monetary stimulus further if needed to achieve the 2 percent inflation target.” Data has shown that consumer inflation has been falling for the past three months which means that it is very likely the central bank will respond with an easing of monetary policy in a bid to increase inflation. Also, the strengthening Yen is a concern for Japanese exporters and will look to the central bank to weaken their currency. Analysts at JPMorgan Tokyo expect the base interest rate to be slashed to -0.30 percent in an attempt to reduce the “safe-haven” appeal of the Japanese Yen, as well as ramping up its purchases of assets to expand the money supply.

Even if the U.S. economy shows improving domestic data, the Fed is likely to leave rates unchanged for a while as futures markets are not pricing any rate hike until 2019. The next move could even be downward and away from “normalization.” Stanley Fischer, the Fed’s vice chairman, indicated that the U.S. Federal Reserve is not considering a move to negative interest rates. But could this just be an attempt to preserve the central bank’s credibility and to keep the markets guessing as to the future path of interest rates.

It is always better to surprise people when it comes to monetary policy due to the effect of expectations. The Fed’s Daniel Tarullo said recently that the central bank will have to see the medium-term implications of Brexit and wants to see inflation move higher before any consideration of an interest rate rise. The Fed previously signaled two rate hikes for 2016 but now that looks to be off the table, damaging its credibility and introducing more uncertainty into markets.

Gold has so far seen an almost 25 percent gain against the U.S. Dollar this year, and recently we have seen silver jump to fresh highs as well. This could signal that the market is preparing for a major loss in the confidence and credibility of central banks. Over a third of all developed-country government debt is now trading at negative yields according to Citi.

Implications for Bitcoin

As bonds and currencies force investors to worry about getting their principal back rather than making money, commodities such as bitcoin (BTC) and ether (ETH) could boom over the long-term as a vehicle for returns. Investors are looking into commodities, viewing national currencies as too risky as the “currency wars” continue to push into uncharted territory. This could mark a long-term paradigm shift in which national fiat currencies enter a bearish phase as the general public experiences a loss of confidence and credibility of central banks.

Even the Federal Reserve is worried about losing its credibility, as highlighted by the following statement from the recent minutes:

Several participants expressed concern that the Committee’s communications had not been fully effective in informing the public how incoming information affected the Committee’s view of the economic outlook, its degree of confidence in the outlook, or the implications for the trajectory of monetary policy.

Bitcoin and other decentralized virtual currencies will stand to gain as the limits on the extent of the money supply prevent debasement of its value. No one central authority can issue bitcoin, and the discipline of a fixed rate of supply can highlight how the current fiat monetary system can be improved.

This advantage is illustrated by the current divergence between the supply of bitcoin and the supply of fiat currencies; central banks are ramping up quantitative easing programs and slashing interest rates, while bitcoin carries on without intervention. The lead-up to one of many reward halvings serves as a reminder of its fixed, decreasing rate of supply and mathematical design.

The unprecedented “easy” monetary policy environment across the world has the potential to help drive this fundamental divergence between bitcoin and fiat currencies, and to boost bitcoin’s value over the long-term. As the ‘currency wars” intensify, more money will flow into bitcoin as people look for alternative assets to act as a store of value.