Jerome Powell said today that the Federal Reserve has no choice but to face the mounting U.S. debt balance. That negative balance is now $21.9 trillion.

The annual U.S. deficit has reached sustained highs of over $1 trillion.

Speaking at The Economic Club of Washington, D.C today Powell said:

“I’m very worried about it.”

Jerome Powell. Image from Shutterstock.

Referring to the long-term implications which can be easily ignored when focusing on shorter-term policies Powell said:

“The long-run fiscal, non-sustainability of the U.S. federal government isn’t really something that plays into the medium-term that is relevant for our policy decisions.”

Adding:

“It’s a long-run issue that we definitely need to face, and ultimately, will have no choice but to face.”

Federal Reserve Policy May Have Exacerbated U.S. Debt

The Federal Reserve has been pursuing a policy of quantitative tightening. This to counter the quantitative easing put in place in response to the global economic crisis. It has been reducing the amount of U.S Treasury Bonds it purchased by allowing these holdings to expire.

This means the Federal Reserve is earning less interest on its holdings. Interest that usually contributes positively to the treasury balance. Through increased interest rates, government debt gets a higher cost of interest, adding to the debt balance.

That said, the Federal Reserve’s impact on the accruing U.S. debt is minor compared to the biggest culprit – government spending.

A Suicide Mission or a Debt Bomb?

U.S. Debt Bomb Imminent? Image from Shutterstock.

Wall Street legend Jeffrey Gundlach warned in December that the federal reserve appeared to be on a “suicide mission” to be raising interest rates at the same time as U.S. debt is increasing. An expanding deficit can often be a signal for the federal reserve to lower interest rates, instead of potentially compounding a problem.

Banker and author Satyajit Das questioned in April 2018 if in fact the process of normalization after years of quantitative easing to counter recession could “set off a debt bomb.” Das wrote:

“A decade of unprecedently low global rates and abundant liquidity appears to have encouraged a spree of public and private debt accumulation.”

Adding:

“Higher interest rates will exacerbate the risk of financial distress for highly indebted corporate and sovereign borrowers.”

The fact that Powell is concerned about debt is not bad news for the markets. It actually makes further interest rate hikes less likely as Powell will be concerned about further compounding the U.S. debt balance. It could even mean the Federal Reserve considers an interest rate reduction.

This post credited to CCN. Featured image from Shutterstock.

The Federal Reserve Board governor is still not fond of the idea of central bank digital currencies, despite the fact that the reserve is equipped to issue one.

The Fed Says No to CBDCs

It’s been a year since bitcoin’s price exploded and launched cryptocurrencies into the mainstream, which pushed many to believe that the future of money was just around the corner. With an incredibly high number of companies promoting blockchain-based—assets popping up each day—the idea doesn’t seem all that far-fetched.

Despite the number of advocates promoting the benefits of cryptocurrencies, there is still a long way to go before major financial institutions decide to enter the market.

Quartz reported on Dec. 27th that back in May 2018, Lael Brainard, a Federal Reserve Board governor, spoke at the Decoding Digital Currency Conference in San Francisco, where she delivered a speech criticizing cryptocurrencies and their lack of transparency.

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While her speech praised blockchain for being one of the most significant technological innovations of the decade, she was skeptical about the usefulness of cryptocurrencies. Citing the high price volatility of cryptocurrencies such as Bitcoin, Brainard said that such coins couldn’t be used as a store of value or a unit of account.

She also noted that cryptocurrencies were extremely vulnerable to hacks and money-laundering, making it hard for any major financial institution to deal in these assets. Raising concerns about how a national digital currency would affect retail banks, which make loans to the public, Brainard said that the Federal Reserve maintains that issuing central bank digital currencies (CBDCs) is generally a bad idea.

The Infrastructure for CBDCs is Already Here

The subject of central bank digital currencies got a lot of media traction after Christine Lagarde, the director of the International Monetary Fund, supported the idea at the Singapore Fintech Festival in November.

Lagarde highlighted some of the benefits that national cryptocurrencies would bring, saying that they could solve the problems of financial inclusion and privacy, as well as security and consumer protection.

Even Kevin Warsh, a former governor at the US Federal Reserve, who was among the candidates to become the new chairman of the Reserve, was in favor of the idea. Earlier this year, Warsh told the New York Times that he would have allocated resources to explore a national currency.

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According to Quartz, the blockchain-based “Fedcoin” had the potential to improve the transparency and efficiency of the U.S. dollar and could have given the Federal Reserve access to unconventional financial tools, such as negative interest rates.

Aleksander Berentsen and Fabian Schar, researchers at the St. Louis Fed, studied the idea even further. In February 2018, they concluded that any central bank could “easily” create its own digital currency.

Bernsten and Shar argued that, as the key characteristics of cryptocurrencies are red flags for central banks, and consequently they wouldn’t be issued on a “permissionless” network. These digital currencies would effectively be centrally-managed electronic money.

However, the researchers noted that the idea would be hard to put into practice:

“cryptocurrency is still a very young technology and there are large operational risks. Overall, we believe that the call for a ‘Fedcoin’ or any other central bank cryptocurrency is somewhat naïve.”

This post credited to cryptoslate Image source: Cryptoslate

Would a state-backed cryptocurrency be better than its decentralized counterpart? International media has already rolled out their opinions on the matter. It’s a YES-IT-CAN.

The opinions find their inspirations in comments made by Christine Lagarde last week. The head of the International Monetary Fund (IMF) said that a government-backed cryptocurrency would eliminate the issues of trust that have clogged the decentralized cryptocurrencies like Bitcoin.

New York Times reacted to the IMF chief’s remarks, calling it “a hopeful sign for digital tokens,” while predicting it could “have a chilling effect on existing, nongovernmental tokens.” The Guardian offered its editorial space to a long-time Bitcoin critic and economist Nouriel Roubini to further his plan. He outright called cryptocurrencies worthless when compared to central bank digital currencies (CBDC).

“If a CBDC were to be issued, it would immediately displace cryptocurrencies, which are not scalable, cheap, secure, or [actually] decentralized,” Roubini claimed.

Missing Links

The comments mentioned above appear at a time when the cryptocurrency market cap has plunged by more than 70 percent since its all-time high. It has allowed critics to jump to the conclusion that decentralized digital currencies, mainly Bitcoin and Ethereum, have no intrinsic value, that they are highly speculative unlike central-bank issued fiat money. Yet, critics have ignored the whys and whats that prompted the launch of decentralized assets at the first place. They have been unable to respond to how Federal Reserve stimulus programmes, secret bailouts, and money production have destroyed the value of the US Dollar.

Their focus has turned more towards proving Bitcoin as a sugar-coated false promise of a financial revolution while ignoring the very bads of the existing financial system. Economy believes that an asset has value when it checks scarcity and utility. The US Dollar lacks scarcity, for its supply is governed by a centralized body called Federal Reserve. There is no check on how many dollars would get printed, allowing insiders to manipulate a greenback-backed market on their whims.

Bitcoin, on the other hand, has a set cap of 21 million tokens. Its supply is governed by mathematical algorithms, meaning no corrupt human involvement would be able to topple it. As far as the use-cases are concerned, Bitcoin has been constantly looked at for its potential of becoming a store-of-value asset like Gold, while being constantly considered for settling cross-border payments despite its price volatility.

The critics then say that bitcoin has no intrinsic value. But even gold and paper money suffers from the same stigma. According to the World Council, only 15 percent of the global Gold supply is used in industrial applications. The rest goes into making bars, bullions, and jewelry – mainly because people trust they have value.

Trust is the Only Factor

The launch of Bitcoin was a response to a global financial crisis in which – let’s accept it – banks had f***ed up the economy. The digital currency – more or less – follows the philosophy of the Austrian Monetary Theory. According to it, money can be sound only when its supply is limited. It believes that money should not be controlled by the state. These facts are missing from the reports and opinion pieces of anti-Bitcoin economists.

The Federal Reserve and central bankers believe that only they have the right to print money. Bitcoin is only a beginning towards breaking the myth. As long as the central banks do not innovate and protect people against currency inflation – as evident in the case of Zimbabwe and Venezuela – there is no chance they would be able to outrun crypto. People need to trust their banks, but mainstream media and economists are avoiding a broader discussion.

The next financial crisis should bring more evidence to the theory. No rush.

This post credited to News BTC Image source: News BTC 

Cryptocurrencies could serve as a possible solution to disparities currently faced by the U.S. dollar, an economist with the Federal Reserve Bank of St. Louis said Tuesday.

During an hour-long question-and-answer session, the Federal Reserve Bank of St. Louis – one of 12 regional banks that make up the U.S. central banking system – answered questions on Twitter with economist David Andolfatto, who is a vice president in the bank’s research division.

During the session, one user asked whether cryptocurrencies can be used to solve the 50-year-old Triffin Dilemma, which refers to the conflicting interests between national and global monetary policy for a country whose currency is used as the world’s reserve.

Specifically, it refers to the U.S. dollar, which has been considered a world reserve currency for decades. In order to maintain this role, the U.S. must incur a trade deficit.

When posed the Triffin Dilemma question, Andolfatto responded:

“The Triffin Dilemma refers to the double-edged sword of possessing a currency that serves as the world reserve currency. If a private cryptocurrency were to replace a given world reserve currency, this would eliminate the dilemma for that currency.”

Other questions asked during the session ranged from whether Andolfatto thought a cryptocurrency could replace the U.S. dollar or whether the Federal Reserve is likely to ever consider monetary policy in terms of cryptocurrencies.

The economist demurred on both counts, noting that cryptocurrencies are essentially private monies, and therefore not something that would fall under the central bank’s purview.

Moreover, because there is “no need for decentralized consensus based record keeping” for the dollar, he does not see it being replaced with a cryptocurrency.

Andolfatto also does not see the demand for cryptocurrencies supplanting the demand for existing reserve currencies, he added.

This post credited to coindesk  Federal reserve logo via Shutterstock