For every monetary move that the United States Federal Reserve makes, there appears to be a hard-and-fast response from the cryptocurrency community. The Fed announces a quantitative easing program and you can most certainly expect responses of how the government is further enriching large corporations and doing little for small and medium-sized businesses as well as citizens.
That script ran again over the past week after the Fed, on June 15, announced plans to expand its corporate credit program to include the purchase of individual corporate bonds, in addition to the exchange-traded funds it is already buying.
The Fed will be able to buy up to $750 billion worth of corporate bonds under the new program. The aim of the bond-buying program is to give corporations access to a slosh of cash, having suffered a dip in cash flow no thanks to the Covid-19 outbreak.
“Over time we’ll gradually move away from ETFs and move to buying bonds. It’s a better tool for supporting liquidity and market functioning,” said Fed Chairman Jerome Powell.
The Fed has been actively engaged in stimulating the American economy all through the pandemic, having previously injected an unprecedented $2.3 trillion. This provided liquidity for corporations, SMEs, state and municipal governments through a slew of loan and bond purchase programs.
At the very least, these programs have kept the stock market from crashing, protecting shareholders from losing their wealth due to the pandemic. Over the previous three months from June 19, the S&P 500 is up roughly 28.6% despite the fact that the first-quarter earnings of companies on the index slumped the worst since 2009.
Still, the bitcoin community isn’t a fan of the Fed. Crypto proponents generally believe that the Fed, or any other central bank, shouldn’t be able to “print money” without a cap, especially when such moves mostly just widen wealth inequality. Bitcoin, whose total supply cannot exceed 21 million, is therefore considered a suitable alternative or hedge against central banks. Here are some expert thoughts on why crypto proponents don’t support the Fed’s monetary moves.
The problem isn’t so much that the Fed is injecting liquidity to keep the economy afloat during such a difficult time as this. Many crypto proponents, on the contrary, do believe it’s better than doing nothing. The concern is how its initiatives are unsustainable, widens the wealth inequality gap, and create stock market bubbles.
Dan Schatt, the CEO of crypto lending service Cred, argues that the Federal Reserve has shifted roles from being an overseer of the U.S. monetary system to be the monetary system itself.
“The Fed’s role has gone from setting interest rates to acting as a buyer of last resort to serving as a wholesale buyer of stocks, bonds, ETFs, and anything else it can get its hands on,” Said Schatt, who has previously served as the head of innovation at PayPal. “Everything now starts and ends with the Fed, which cannot be healthy for an economy.”
“When the Fed’s stabilizers are removed, will the economy keep coasting, or will it veer off the road and crash? We may be reaching a point where the stock market is unable to avoid contraction without permanent Fed assistance,” he added.
Meltem Demirors, the chief strategy officer at CoinShares, a digital asset management firm, echoes Schatt’s view, pointing at the negative impact that the Bank of Japan’s continuous liquidity injection has had on the Asian country’s economy.
Demirors is concerned about the government buying corporate bond ETFs, now corporate bonds directly, with plans to keep doing it for as long as it takes.
“Looking at the lessons learned from Japan, where the Bank of Japan has been pressing the ‘print’ button for the last 30 years and the impact it’s had on markets there, I see the US heading in a similar direction,” she said. “I don’t think the Fed will be able to stop the stimulus anytime soon, especially given the sheer amount of leverage in the market, and the pension funding gap.”
The Fed’s current approach of injecting unlimited capital stands out in sharp contrast to bitcoin’s capped supply and predictable inflation schedule, in the form of the mining block reward. This, according to Demirors, makes bitcoin a suitable alternative store of value.
As mentioned earlier, the earlier announced $2.3 trillion stimulus program included a $500 billion bailout loan fund for corporations. The terms on those loans were stringent, with conditions that prohibit the use of the money for stock buybacks and dividend distributions, limitation on executive pay and employee layoff restrictions. The goal of the fund is to keep businesses from going under during the pandemic.
By setting up a parallel program, which doesn’t have the same rigid requirements, there are concerns that the Fed is sponsoring wealth inequality.
“Even if you make the case that extraordinary times call for extraordinary measures, it’s not healthy for unprofitable companies to be allowed to run up debt or to engage in stock buybacks and generous executive remuneration schemes in the knowledge that when everything hits the wall the Fed will bail them out,” Schatt said.
In addition to the distasteful prospect of lining the pocket of the rich through the latest credit program, the process of repaying the rising debt could also perpetuate inequality.
“Little attention has been given to the basic fact that the current accumulation of debt will have to be repaid — and not necessarily in the most equitable and transparent way,” said Barry Topf, the chief economist at Saga Monetary Technologies, a stablecoin developer.
All of this is part of why the bitcoin community takes advantage of such Fed moves to highlight how bitcoin could a hedge against the long-term effects of the Fed’s choices — a role that gold has played for decades.
“Excessive quantitative easing policies and unlimited ‘money printing’ by the Fed will benefit bitcoin in the long run,” according to Lennard Neo, the head of research at Stack Funds. “In our view, central banks globally are running out of ammunition to satisfy market concerns as a result of COVID-19, leaving a substantial gap in the market for assets such as bitcoin to bring uncorrelated and decentralized value.”