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Debt, negative interest rates and investors: the dollar goes down, Bitcoin goes up and these are the reasons

The Fed is printing money to prevent a rise in interest rates in the face of the huge increase in federal government debt.

The dollar flood is not about to dry up any time soon, and foreign investors will not rush to buy dollars to buy US debt.

In this situation it seems that Bitcoin will continue to maintain the title of the most promising financial asset

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• Bitcoin

• dollar

Hanan Steinhart

Sunday, 06 December 2020, 06:19

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In the video: The dollar at the lowest rate in 12 years (Editing: Nir Chen)

Since the beginning of 2020, the dollar has lost about 6% against a basket of currencies in the DXY index - a basket that includes the euro (57.6%), the Japanese yen (13.6%) and the pound sterling, the Canadian dollar, the Swedish krona and the Swiss franc. 21% against gold, and about 60% against bitcoin, digital gold.The reason for this landing of the dollar, lies in the policy of the Federal Reserve (Fed), the US Federal Reserve.

The total supply of money in the American economy increased this year by about 26.4%.

From about $ 15.3 trillion in early January to $ 19.1 trillion in mid-November.

The total supply of money in the economy is expressed in the term M2 - it includes all cash, current deposits, and deposits that are "a kind of cash", such as various types of cash, which can be easily and quickly converted into cash.

The increase, in percent, is equal to the increase from 2014 to 2020. In dollars, $ 3.8 trillion, it is equal to the total increase in M2 between 1981 and 2002.

As large as this is a large sum, it is only 60% of the new money, about $ 6 trillion, generated in the form of debt by the commercial banks and the central bank, by 2020. Of this huge amount of new money, 3.1 trillion are directly printed by the Fed and are designed to prevent The rise in interest rates in the face of the huge increase in federal government debt.

It grew from $ 23.2 trillion at the end of 2019 to about $ 27.3 trillion today.

This debt is mostly intended to fund a cumulative budget deficit of over $ 3.1 trillion in the 2019 budget year, and another $ 500 billion new deficit accumulated in the first two months, October and November, of the 2021. fiscal

regime. Others and skyrocketing interest rates.

An increase in interest rates in general, and of the federal government in particular, is not a matter that the Fed can afford, and at any cost.

A farm built on a debt mountain of over $ 81 trillion and does not increase GDP in a normal year even at half the interest rate on the debt, cannot bear an increase in interest rates in general, and in the corona year in particular.

Indeed, in view of this huge increase in the supply of money, interest rates have collapsed.

At the beginning of January 2020, the interest rate (yield to maturity) on US government bonds for the year, at 1.56%, will fall by more than 90% to 0.12% at the beginning of December. Longer-term interest rates will also fall, ten-year bonds will fall by 51% from 1.88% to 0.92% and that of 30-year bonds will fall by about 28%, and it is

estimated that the depreciation of the dollar will continue.

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Print and print and print - and the price is charged.

Fed President Jerome Powell (Photo: Gettyimages)

Given the fact that official US inflation stands at about 2% per year, and practically double that total, it is clear that all U.S. government bonds currently carry negative real interest rates.

The stated commitment of both the central bank and the new administration to pursue an aggressive deficit, printing and interest rate policy ensures that the flood of dollars is not going to dry up in the foreseeable future.

The combination of a dramatic increase in the amount of dollars, which puts constant downward pressure on their value, and the Fed's promise to continue holding interest rates on government bonds in the negative real interest rate area, ensures that foreign investors will not flock to buy dollars to buy US debt.

For this reason in part, various analysts estimate that the downward trend in the dollar price will continue.

"Our foreign exchange experts believe that the current decline in the dollar is just the beginning of a structural decline in the value of the dollar ... it may fall more than 20% from its last peak (March)," a recent Goldman Sachs report said.

Other experts estimate that landing will be even more difficult.

The director of the foreign exchange department at ECG Beast Investments, estimated that the dollar will fall by 36% against the euro in the next two years. He continued, "The current weakness of the dollar is the beginning of a very big move that will hurt many investors exposed to the dollar through bond and stock investments."

Therefore, even without official inflation in the consumer price index, which purports to measure the decline in the "consumer" purchasing power of the dollar, printing money is also hurting the "investment" purchasing power of the dollar. and a hedge against the US dollar in general, and its monetary policy wanton Fed in particular, led by gold and bitcoin.

Hbitkoiin enjoying a tailwind

after two years in the wilderness, and a low of $ 3,300 in bitcoin December 2018, a decrease of 75% from the peak of 19,783 dollars just a year ago, won bitcoin During 2020, after proving solidity and stability and not completely disappearing as some of his great enemies such as Professor Krugman, and chairman of JP.

Morgan, Jamie Dimon, and more and more institutional investors have begun to warm up to the idea that Bitcoin is a new financial asset that competes with gold.

Falling chest - and lied.

Paul Krugman (Photo: AP)

In June, Fidelity, an investment management firm with about $ 3.3 trillion in management, conducted a survey of 800 institutional investors from Europe and the United States. In the survey, 60% of respondents said that cryptocurrencies, such as bitcoin, have a place in their portfolio. Investors in cryptocurrencies, led by Bitcoin, reported that as of the first half of the year, $ 1.4 billion had been poured into the various funds it manages. About three-quarters of the investments were directed to the one that tracks Bitcoin. 85% of those investors were institutional investors.

That demand alone by Grayscale investors in the second quarter surpassed all new bitcoins mined that quarter, according to analyst Kevin Rock. The market value of Bitcoin is still very small, less than $ 350 billion, compared for example to a market value of over 10 trillion for all physical gold in the world. But even so, the potential and connection between it and the future of the dollar was recently recognized by Larry Fink, CEO of BlackRock, one of the largest investment companies in the world, which manages $ 7.4 trillion in investments: "There is indeed a possibility that cryptocurrencies will develop into international financial assets. Really about the dollar ... making it (the dollar) less relevant to foreign investors holding assets denominated in dollars. "

But not only institutional investors have warmed up for Bitcoin. Two companies offering e-wallets, PayPal and Cash-up, have also added the ability to buy Bitcoin In the last quarter of this year, Cash-up reported that in the third quarter of this year a total of $ 1.63 billion of Bitcoin was purchased through its digital

wallet.Unlike the dollar, Bitcoin does not have a seven-member council that secretly decides how much will be produced this year Distributed by the million miners that strengthen the network.To date, 18 million bitcoins have been produced, and they will continue to be produced, over the next three and a half years, at a rate of 6.25 bitcoins every 10 minutes, or about 328,500 bitcoins per year until 2024, then the rate will be cut Production in half again with h And in a bloated government that pays negative interest. And the continued massive production of new money as promised by all the central banks in the world, it would not be a wild guess to believe that Bitcoin, which was the most promising financial asset in the last year as well as the last decade, will maintain this crown in the year ahead as the dollar continues to decline.

The writer is a lawyer by education who deals with and is involved in technology. Manager of an investment fund in cryptocurrencies, and has lived in Silicon Valley for 22 years. Author of the book "A Brief History of Money" and recorder of the podcast KanAmerica.Com. On Twitter: chanansteinhart

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