Can Digital Currency Mitigate the Unintended Consequence of QE?

Originally Published By: Jake Ryan

With a contentious election cycle behind us, it’s time to take a fresh look at how federal policies like quantitative easing contribute to income inequality in the U.S., and how digital currency could provide a path to a more economically balanced future.

Something that people don’t often realize is that, when the federal government takes dramatic action like quantitative easing (QE) to stabilize the economy during times of financial crisis, it also unleashes unintended consequences.

With our practice and penchant of deficit spending, there’s no way around it. During the 2008 financial crisis, there was no way for Congress to draft fiscal policy that would resolve the issues in time. Just about the only tool left in the federal government’s toolbox was QE, and that program held off the next great depression. It also triggered a series of events that drastically expanded the gap between the wealthy and everyone else and launched us on the road to out-of-control public debt.

How did that happen? Asset price inflation. As the reserve ratio for US Treasuries decreased, and as public companies were able to borrow at very low rates and increase their stock buyback programs, the investment community took advantage of the availability of cheap money to invest in a variety of asset classes. In 2019, gold, stocks, real estate, and bonds were all up for the year, and that was only possible from all the money printing.

As asset price inflation continues, it started to create a gap between those with the means to invest, and those who didn’t. For example, as the price of homes increased, the more investors parked their money in inflation-protected real estate, which in turn drove the prices up even higher. We saw money come in from China, Russia and the Middle East to purchase real estate in California and New York. Higher home prices meant higher mortgage payments and rents.

Meantime, wages stagnated. Those who didn’t have a robust 401K or the cash to lock into a low-interest 30-year mortgage were left out in the cold. There’s no getting around the fact that our well-meaning monetary policy made it harder to afford shelter for millions of people.

Home prices are rising faster than wages in roughly 80% of U.S. markets, according to ATTOM, a real estate and property data company. Almost two-thirds of renters nationwide say they couldn’t afford to buy a home if they wanted to.

So as some communities cheer the rise of the stock exchange and the housing market, they are ignoring the impact on the majority of Americans. This imbalance is a direct consequence of deficit spending. It’s nonpartisan. It happened under Presidents Bush, Obama and Trump.

Meantime, the Fed continues to print money to head off disaster. In response to the Covid-19 pandemic, for example, the Fed expanded its balance sheet from $4.5 trillion to ~$8 trillion, in less than one year!

When the next major downturn comes, the Federal Reserve will not be able to turn to QE. Interest rates are already low or zero, and there’s nowhere left to go. There next option will be to continue buying bonds and probably other asset types, even though it’s illegal and against the Fed’s charter. At the end of all this, we’re going to see a sovereign debt crisis.

Digital assets are a part of the solution in many ways. There will be a barbell approach to the solution. At one end, bitcoin will democratize who can buy inflation hedges and allow people to participate with $10 and a mobile app. On the other end, central bank digital currencies (CBDCs) will avoid the Cantillon Effect by circumventing the commercial banks and giving money directly to the people. In the future, every US citizen will have a digital currency account where the government can inject money directly to the people. These two approaches using digital currency will curtail inequality.

About the author Jake Ryan

Jake is the Founder and CIO of Tradecraft Capital and handles all aspects of investment management for the firm.

He is the author of Crypto Asset Investing in the Age of Autonomy.

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