Human beings have long been involved in borrowing and lending. There are always people wanting to buy what they cannot buy. And there are always people with the extra capital willing to fix that problem. This is the old art of making money with money.
The economy requires constant financing. Credit is the basis of modern economic activity. Which implies that there is a lot of debt. Credit is a peculiar instrument. It is passive for the debtor. And it is active for the creditor. In many ways, we are talking about a promise. It is about the promise to pay tomorrow. In this dynamic, today’s spending is increased, but tomorrow’s spending is reduced. Credit is spending capacity during the bullish stage and that same credit becomes a weight during the bearish stage. And therein lies the origin of financial cycles.
Banks function as a meeting place between lenders and borrowers. That relationship has never been perfect. In fact, it turns toxic all too often. And of course, not all stories have had a happy ending. Nevertheless, the world is more beautiful and productive when the relationship manages to function at acceptable levels.
Now, let’s talk about the government. In most jurisdictions, the government is the largest debtor, the largest creditor, the largest consumer, the largest provider, and the largest employer. The Government is the provider of many essential services to society. And society must pay for those services with taxes. In other words, the economic relationship already exists. And for a matter of size, Like it or not, the influence is considerable. In other words, state intervention in the economy is not optional. What has been tried to achieve over time is that this intervention is as timely and beneficial as possible.
Consider the mayor’s office of a hypothetical small town. Suppose the town mayor needs to make repairs to the local school. He issues a promissory note that he uses to pay the bricklayer. The bricklayer, in turn, goes to the hardware store to buy the necessary supplies to carry out the work. What does he pay with? He can pay with the promissory note the mayor gave him. The shopkeeper can then use that same promissory note to pay his suppliers. And so it goes. For practical purposes, the town is using the mayor’s promissory notes with money (medium of exchange). And it was the mayor’s office with that initial payment that activated the economy.
Why can the mayor issue “money out of thin air”? ANDThe mayor can assume debts with the people. Because the town has debts with the mayor’s office. Sooner or later, the people must pay their taxes.. What do they pay with? Well, with the mayor’s IOUs. The mayor’s office accepts its own credit as a form of payment. Debt is canceled with debt. The economy thrives. They all have jobs. And the son of the mayor, the son of the mason, the son of the shopkeeper and the children of the rest get a repaired and functional school.
Of course, when there is credit, there is a risk of non-payment. So the banks can go bankrupt. A bank can go bankrupt due to fraud, mismanagement or widespread non-payment. The banking system is based on short-term deposits and long-term loans. Which implies a great vulnerability. In fact, in some cases, a bank can fail because of a rumor. A phenomenon known as “bank run”. If all the depositories withdraw their money at the same time, that can cause a bank to collapse in a matter of days. That is the importance of having “a lender of last resort”. This institution was established (in part) to curb the “bank run”. A central bank is a hedge against that risk. So, the depository knows that his money is safe. Because, in the worst case, the “lender of last resort” will arrive to save the day. And that increases the level of confidence in the banking system.
In the case of the United States, the Federal Reserve (its central bank) is responsible for regulating the cost of credit. In addition, it has the ability to purchase financial instruments such as public and private bonds at its discretion. And these powers have been given so that the institution can fulfill its double mandate: Monetary stability and full employment.
Liquidity is injected so that the economy grows. If the Federal Reserve buys a lot of bonds, there isn’t much incentive to buy bonds because the yield is reduced due to high demand. Individuals then sell those bonds and buy variable income assets in search of higher returns. Money becomes more affordable. And that increases the appetite for risk. Consequently, it forms a boom speculative that greatly benefits risky assets such as Bitcoin.
In other words, the Federal Reserve is not our rival. Deep down, she’s our Fairy Godmother. During a bullish cycle, monetary policy is specially designed to get people to spend. And this spending raises the prices of financial assets. In the process, the USD-BTC pair thrives. The price of Bitcoin rises. And early buyers benefit.
The opposite happens during a tightening monetary policy.. If monetary policy is designed to reduce spending, this generally strengthens the dollar and lowers the price of risky assets. Which is not very good for Bitcoin.
Howeverliquidity injections are very good for the price of Bitcoin. Why, then, is the practice so criticized by the militant bitcoiner? Why is the Federal Reserve presented as the great rival? Why is the enemy to be defeated? Why are banks so bad? The short answer: For a matter of political identity. The idiosyncrasy of the militant bitcoiner.
Many libertarians, anarcho-capitalists, and conservatives view Bitcoin as digital gold in a kind of monetary insurrection against the state. If the investor (like me) is in it for financial growth (filthy money), the idiosyncratic and revolutionary bitcoiner is in it to fight for a separation between the economy and the state through an independent and emancipated citizen currency.. “The price does not matter,” say many on Twitter. “The only thing that matters is freedom.” Of course by “freedom” is meant the libertarian doctrine, a doctrine deeply rooted in classical liberalism.
Does the price matter? Suddenly, there are many people out there who are willing to lose their savings for an ideal. It’s not my case. I do care about the price of Bitcoin. And a lot. My goals are purely financial. The Federal Reserve’s measures are key to forecasting. Hate for the rival and love for the ally cloud our vision. They create a bias. But, to invest successfully, we need a clear and objective vision.
Rival or ally? A central bank, to the pragmatic investor, just is. just like that No adjectives. It is a high-impact actor whose decisions must be taken into account when making financial forecasts. As simple as that.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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