The Federal Reserve Should Buy Bitcoin

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Quantitative easing (QE) is a term used to describe when the Federal Reserve buys assets from private markets. Typically, the Fed purchases longer-dated bonds, including Treasury notes and mortgage-backed securities (MBS), but during the pandemic, it has even purchased corporate junk bonds. It does this for a variety of reasons, including (but not limited to) lowering interest rates, liquifying the banking system, ensuring proper functioning markets, and inducing a wealth effect. Academics and market participants have debated both the merits and effectiveness of QE since the Global Financial Crisis. Whether one believes in the effectiveness of QE or not, the goal is ultimately to support aggregate demand in the economy, which is a fancy way of saying they want Americans to spend more money. What I argue here is that Fed purchases of bitcoin could be an effective means to boost aggregate demand and have other benefits as well.

To understand why, we need to briefly explore how QE works and why purchases of some assets are more effective than others. Let’s start with a thought experiment: assume the Fed purchases a three-month Treasury bill from a private market actor. In exchange, the private market actor, through the magic of primary dealers and the banking system, receives a deposit to their bank account, which we think of as money. Then assume the market actor takes said deposit and, to achieve a higher interest rate, converts their deposit to a certificate of deposit. What has changed? I’d argue, hardly anything. All that’s been done is the trade of a liability of the U.S. government for a liability of a commercial bank. That CD in the bank may show up as M2 in fancy graphs, but in reality, the asset transformation has done nearly zilch for the real economy.



Source link Bitcoin Magazine

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