Grow Up or Blow Up

The 2008 Global Financial Crisis

The beginning of the end started when the world’s central banks decided that they learned their lesson from the 1930’s Great Depression. That is, when deflation takes hold due to a banking crisis, money printer go BRRR. Ben Bernanke was named Time’s Person of the Year in 2009 for “saving” the world from the spectre of deflation.

Whatever It Takes

COVID first infected China’s financial markets in January 2020. When the rest of the world got the message that a pandemic was upon us, the Fed governors earned their stripes and proceeded to print like no administration has printed before. On March 23rd, the endgame began when the Fed backstopped just about all institutionally-traded USD denominated credit instruments in order to avert a collapse in the financial markets.

Listen Up

Those of us who love financial markets, trading, and investing all try to think differently than the herd. But what if listening to our policymakers generates better returns with less risk, and less time wasted pontificating?

  1. In order to keep interest rates down and prevent the government from crowding out all other borrowers, the Fed expands its balance sheet.
  1. The government will sell bonds to finance spending rather than raising taxes too aggressively. At a certain level, raising taxes acts as a drag on the economy and is very unpopular (take a look at the Laffer Curve). It is much easier politically to print money and spend it into the economy.
  2. The central bank will support the government by expanding their balance sheet to buy bonds in order to reduce borrowing costs.
  3. A weaker currency helps your export sector. Increasing the supply of a thing, reduces the price of a thing.
  4. In conclusion, if everyone else is debasing their currency to stimulate their domestic economy, you must do it too. If you don’t, your currency will appreciate in value and it hurts your export sector.

Grow Up or Blow Up

I have no price target for Bitcoin. I only care about the size of the Fed’s balance sheet. The Fed must stand ready to buy what the Treasury is selling. Otherwise, the reorientation of the U.S. economy from capital to labour cannot happen.

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