2020 was unforgettable, especially for Bitcoin. To commemorate this year for our readers, we asked our network of contributors to think about Bitcoin’s price action, technology development, community growth, and more in 2020, and what all of this could mean for 2021. These writers responded with a collection of thoughtful and thought-provoking articles. click here to read all the stories from our End Of Year 2020 series.
A “Biblical flood of liquidity” was unleashed on the world this year by the largest central banks, raising fears about the longevity of several of the world’s currencies. When evaluating the major monetary policy changes of the Federal Reserve, the European Central Bank and the Bank of Japan, it is clear that 2020 was an unprecedented year for the legacy economy and there is a strong need for an alternative that is free of inflation and middlemen. .
The Federal Reserve
- Reduced the fund’s target rate by 150 basis points (bps) to 0 percent
- Started quantitative easing (QE) with an open end of $ 80 billion per month
- Offered a potential of $ 1.95 trillion in loans across many different programs
- $ 400 billion expanded at peak in currency swap lines with foreign central banks
While the Federal Reserve’s monetary response was the largest in absolute terms and the most comprehensive of the major central banks, it was not the greatest in relative terms.
In 2018, cracks began to appear in the global financial system with a slowdown in China, and the slowdown came to a head in September 2019 when the repo rate spiked from nearly zero to 10 percent in one morning. This series of events set the Fed on a path to an ‘easier’ monetary policy in 2019, with a low in the third quarter and an increase in 2020.
When the COVID-19 virus made the leap to Europe and then the US in March 2020, it surprised the PhD student economists. All major central banks responded between Sunday, March 15 and Wednesday, March 18 when it became clear that the financial system was on the verge of collapse.
The Fed’s response was initially unique, as the base rate was above zero at 1.5 percent. In addition, it added what had become the quintessential monetary weapon at the time: large-scale asset purchases (QE), followed by a new Japan policy of buying up corporate debt. Finally, in conjunction with the United States Treasury Department, it introduced several dizzying acronym programs to provide loans more broadly in the economy.
While these new programs received a lot of press coverage, they never came close to the maximum allowable levels and are virtually unused today. In April, all major elements of the Fed’s response were in order and not much of a change, except for some reporting requirements in the second half of the year.
Federal Reserve Facility Balances
Federal Reserve Balance Sheet Changes 2020
European Central Bank
- Already started doing QE 2020
- Gradually increased its only asset purchase program, the Pandemic Emergency Purchase Program (PEPP), to € 1.85 trillion
The monetary policy of the European Central Bank (ECB) this year was much simpler than that of the Fed. It has faced multiple financial crises since 2009 and was still in the midst of a QE program called the Asset Purchase Program (APP) weighing in at € 20 billion per month. That program did not change during 2020, but the PEPP was added to it. The PEPP was eventually expanded to a total of € 1.85 trillion in asset purchases through March 2022.
The ECB’s balance sheet rose to 55 percent of GDP in November, leaving the US looking tame at 34 percent and Japan looking like the case of a monetary basket at 126 percent. Unless central bank monetary policy has nothing to do with inflation / deflation, it would be assumed that it is Japan, followed by the Eurozone, when a country is facing inflation.
The European Central Bank managed to have the simplest policy on paper and it was quickly implemented, but it came back and upped it twice, with the most recent being only this month.
The ECB has extended its intervention until March 2022, but it is unlikely that Europe can ever stop QE. At this rate, the balance sheet ratio will reach 100 percent by the end of 2021.
The Bank of Japan
- The world’s longest-running QE program
- Already started the year engaged in quantitative and qualitative monetary easing (QQE), consisting of broad-spectrum purchases
- Limited buy-back of government bonds and increased the already heavy market intervention
Finally, the Japanese monetary policy is way ahead of anything the Fed or the ECB do, and 2020 was no exception. In 2013, Japan started QQE, where it not only bought government bonds and bonds from government agencies, but also directly bought other securities such as ETFs and Japanese REITs.
The Japanese started this modern era of QE nearly 20 years ago, and in 2020, when all central banks were uniformly following the same path as when buying assets, Japan says, “hold my beer.” It is in a truly scary monetary and demographic crisis with no apparent escape.
The contributions for 2020 are more than $ 1 trillion dollar equivalent for a GDP of less than $ 5 trillion (more than 20 percent). Compare this to the Eurozone’s rate of nearly $ 2 trillion in incentives for an $ 18 trillion (11 percent) economy, or the US at $ 3 trillion for a $ 20 trillion (15 percent) economy.
Balance sheet of the central bank in relation to GDP
This is a guest post from Ansel Lindner. The views expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.