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Illustration by In Bitcoin We Trust

Bitcoin Would Be the Big Winner if the Fed Set Negative Interest Rates

Donald Trump continues to put pressure on the Fed.

Sylvain Saurel
May 21 · 8 min read

Created on December 23, 1913, the Federal Reserve is the central bank of the United States. It was designed to be independent of the United States government. Thus, Jerome Powell, the Chairman of the Fed, makes decisions without the need for authorization from the President of the United States.

In order to prevent the President of the United States from putting too much pressure on the Fed, office’s terms the members of the Board of Governors of the Federal Reserve are much longer than political terms.

Despite all the historic legal provisions that have been put in place to guarantee the independence of the Fed, Donald Trump does not hesitate to put constant pressure on Jerome Powell in a public way.

For months, Donald Trump has been calling Jerome Powell to lower the Fed’s interest rates to zero. Jerome Powell resisted as best he could, but the coronavirus pandemic that hit the world from March 2020 has clearly changed things.

In the month of March 2020, the Fed cut interest rates in two steps by a total of 150 basis points. Interest rates at zero were suddenly no longer taboo.

Trump is now calling on Jerome Powell to ensure that the Fed follows the example of the European Central Bank. He made another appeal in one of his many tweets:

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This tweet clearly shows that Donald Trump considers negative interest rates a gift. The reality is much more complex than that.

In what follows, I will explain to you why I think that the Fed’s implementation of negative rates would ultimately benefit Bitcoin, which is increasingly seen as the best hedge against the great monetary inflation that we are experiencing.

The Fed is resisting pressure from Trump for negative interest rates, but until when?

For the time being, Jerome Powell says that he is against the implementation of these negative interest rates. He reiterated this in his recent interview on the 60 Minutes program:

“I continue to think, and my colleagues on the Federal Open Market Committee continue to think that negative interest rates is probably not an appropriate or useful policy for us here in the United States.”
— Jerome Powell

Nevertheless, Jerome Powell was also against zero interest rates a year ago. We must therefore remain wary. Anything is possible in today’s world as the economic crisis of 2020 changes all the established codes.

Let’s now imagine for a moment that the Fed gives in to Trump and the financial markets by setting negative rates.

With negative interest rates, the investor wouldn’t even get back his initial amount. He would have $970 or $950 depending on the rates actually applied.

In fact, the purchase of U.S. Treasury bonds is no longer interesting for individuals. From a psychological point of view, this seems obvious. If you are told that you can have $1,000 today, or $950 guaranteed in a year, or ten years, what will you choose?

You will, of course, choose to keep your present $1,000 in order to make better use of it.

With its unlimited quantitative easing program, the Fed has already printed nearly $3 trillion. This money printed from thin air is injected directly into the monetary and financial system.

Since the Fed can print as much U.S. dollar as it wants, the Fed is able to buy U.S. Treasury bonds even though it is not making any money.

When money doesn’t cost you anything, you can afford to buy anything you want without looking at the returns.

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The Fed Balance Sheet rose +64% in 10 weeks

Fed’s actions push people out of bonds into equities

With its purchases, the Fed thus supports the American economy by allowing the government to continue to borrow a lot of money. More than $3 trillion has already been borrowed by the U.S. government since the beginning of the crisis, and a new $3 trillion stimulus package is currently being debated in the US Senate.

The U.S. public debt has already exceeded $25 trillion, and we are headed straight for $30 trillion at the current rate of progress.

Naturally, they are moving into equities. So it’s no coincidence that the Dow Jones or the S&P 500 rebounded sharply from March 23, 2020 when the Fed lowered interest rates to zero.

Their focus is on technology startups like Tesla, Uber, or Spotify for example. The +128% increase in Tesla’s share price since the Fed lowered interest rates to zero clearly confirms this shift to equities:

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Increase of +128% for Tesla share since the Fed cut rates to zero

U.S. Stock Market is therefore artificially inflated by the Fed’s decisions that push many individuals out of bonds and into the equity market.

“It would be a substantial change to give the Federal Reserve the ability to buy stock. I frankly don’t think it’s necessary at this point. I think intervention to support the credit markets is more important, but longer term it wouldn’t be a bad thing for Congress to reconsider the powers that the Fed has with respect to assets it can own.”
— Janet Yellen

A stock market that’s too high is not always a good thing

Many people are pleased when stock prices on the stock exchange reach record highs. This may be true in some cases, but it is not always true. In this case it is not.

The stock market is far too high given the state of the real economy where the number of additional unemployed in the United States is approaching 40 million since the start of the coronavirus crisis.

In just a few weeks, the U.S. has gone from full employment with an unemployment rate of 3.5% to 20%.

Added to this will be the great monetary inflation that we all have to face. It is the result, in particular, of the unprecedented increase in the outstanding money supply of the U.S. dollar decided by the Fed since it has been conducting its unlimited quantitative easing program.

As always in such a situation, it is the poorest who suffer the most like stated Jerome Powell in his interview for the 60 Minutes show.

Indeed, their wealth is composed mainly of cash, and they do not have the opportunity to protect themselves against currency devaluation by buying real estate, stocks, or gold.

As the theories behind the Cantillon Effect teach us, the richest will emerge even richer from this economic crisis.

Bitcoin is the best hedge against manipulation by central banks and governments

This monetary inflation also aims to push small savers to spend their money to support American consumption. In the same way, borrowers are encouraged to borrow, and to go further into debt, with this easy money policy conducted by the Fed.

The disconnection between the real economy and the market is therefore being confirmed.

In this unprecedented context, Bitcoin appears to be the solution that will allow millions of people to protect themselves against monetary inflation. All you need to buy Bitcoin is a smartphone and an Internet connection. That’s all.

Because Bitcoin is divisible up to eight digits after the decimal point, anyone can get started, regardless of their budget. You can perfectly start buying $50 of Bitcoin per month. With gold, that’s impossible. So Bitcoin is a much better store of value for the masses than gold.

And this is also one of the reasons why the current situation will benefit enormously to the Bitcoin adoption in the coming months.

The Whales’ manipulations only affect Bitcoin price for short periods of time. By buying Bitcoin for the long term, you can protect yourself against it quite easily.

More and more people are realizing the advantages of Bitcoin. The Generation Z that is starting to enter the world of work sees Bitcoin as a unique opportunity to have a chance against a monetary and financial system that benefits especially those who have already accumulated a lot of wealth.

I am of course talking about the Baby Boomers here. If they are able to buy Tesla shares at a price of $800, many of the Generation Z members will probably not be able to buy Tesla shares. They ill therefore prefer Bitcoin. Bitcoin is going to be the standard for Generation Z.

Conclusion

The current economic crisis, and all the decisions that are being made by central banks and governments, is already setting the perfect stage for Bitcoin’s adoption to explode in the coming months.

By going even further, with negative interest rates, the Fed would be taking another historic step. Bitcoin would probably be the big winner in the end.

We can therefore better understand why Jerome Powell is so reluctant to answer Donald Trump’s recurring calls for negative interest rates.

In Bitcoin We Trust

In Bitcoin We Trust is a place where Bitcoin believers…

Sylvain Saurel

Written by

Entrepreneur / Developer / Blogger / Author. In Bitcoin We Trust: https://www.inbitcoinwetrust.net

In Bitcoin We Trust

In Bitcoin We Trust is a place where Bitcoin believers share their ideas about the upcoming revolution. Blockchain and cryptocurrencies are also covered in this publication.

Sylvain Saurel

Written by

Entrepreneur / Developer / Blogger / Author. In Bitcoin We Trust: https://www.inbitcoinwetrust.net

In Bitcoin We Trust

In Bitcoin We Trust is a place where Bitcoin believers share their ideas about the upcoming revolution. Blockchain and cryptocurrencies are also covered in this publication.

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