A Global Monetary Plague: Asset Price Inflation and Federal Reserve Quantitative Easing


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Brendan Brown is a monetary economist whose areas of expertise include monetarism in theory and practice, Austrian School monetary tradition, European monetary union, Japanese monetary issues and international financial history. Brown is Head of Economic Research at a leading Japanese financial institution. Brendan Brown. The Great Monetary Experiment designed and administered by the Federal Reserve under the Obama Administration unleashed strong irrational forces in global asset markets. The result was a 'monetary plague' which has attacked and corrupted the vital signalling function of financial market prices.

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Contrary to popular belief, the function of quantitative easing actually creates the instability it seeks to avoid. History has consistently established that the experts are limited in the field of their own expertise, yet policies such as quantitative easing continue to be pursued, largely because macroeconomics and central banking is a monoculture, as Taleb describes.

The mainstream policy position starts with the assumption that central banking is core to the function of an economy; then debate centers on what levers to pull and how best to manage the economy via central bank planning.

However, there remains an opposing economic view which argues that the very function of a central bank and the active management of the money supply is harmful to the economy. The opposing viewpoint cannot practically co-exist within a central bank because it is antithetical to the very function, which is why the monoculture exists and why a different course is never charted. Ultimately, the economic debate played out over the course of the 20 th century and ended with what has become the current mainstream position. The consequence has been an economic system that relies heavily on monetary debasement and credit creation, both of which are achieved through quantitative easing.

Now that bitcoin exists, it is no longer merely the subject of an intellectual debate. Instead, we now have two competing monetary systems that present great contrasts: one attempts to create stability through active management of the money supply, while the other tolerates interim volatility in the interest of maintaining a fixed supply.

Will the Fed and U.S. Monetary Policy Ever Get Back to ‘Normal’?

For the last ten years, the bootstrapping upstart has been gaining ground on the incumbent system, as demonstrated by its adoption and steadily increasing value relative to other currencies. Opting in to bitcoin means opting out of quantitative easing, and while it may be a volatile path, the long-term trend will continue because central banks continue to pursue the very policy tool which bitcoin prevents.

While attempting to be a source of macroeconomic stabilization, central bankers inadvertently create instability through the manipulation of the money supply. By manipulating the supply of money, all global pricing mechanisms become distorted. As Hayek describes in The Use of Knowledge in Society , the price mechanism is the greatest distribution system of knowledge in the world.

A Global Monetary Plague by Brendan Brown | Waterstones

When the price mechanism becomes distorted, false signals are distributed throughout the economic system and the result is an imbalance between supply and demand which ultimately creates instability and fragility. Today, this instability has primarily been created and sustained as a function of quantitative easing. The financial crisis made it clear that the size of the credit system was both unstable and unsustainable; rather than allow the system to naturally deleverage, the Fed reflated asset prices and induced further credit expansion, such that existing debt levels could be sustained.

Practically speaking, the central banking approach to solving a problem of too much debt was to induce the creation of even more debt, which was the original source of instability. Fortunately, bitcoin fixes this. In the most simplistic terms, quantitative easing is a technical term that describes how the Federal Reserve creates new dollars. The Fed digitally creates new digital dollars on a ledger literally out of thin air and uses those dollars to purchase financial assets, such as U. As a net effect, more dollars exist within the banking system in the form of bank reserves and those reserves can then be used to lend or to purchase other assets.

In simple terms, more dollars exist, which causes the value of each individual dollar to decrease. Quantitative easing is the root cause of why your dollar purchases less tomorrow; however, the effects of quantitative easing are transmitted gradually through the economy via the expansion of the credit system. Said another way, quantitative easing is designed to allow banks to expand credit; for every dollar that is created through quantitative easing, the credit system can expand by multiples of each dollar added.

This incremental credit think auto loans, mortgages, student loans, etc. The short answer is no. While many believe that quantitative easing was necessary, it merely kicked the can down the road and guaranteed more QE would be necessary in the future. The root cause of the crisis was a financial system that had become far too leveraged. At the time of the financial crisis, every dollar in the banking system had been leveraged and lent see Fed Z.

There was too much debt and too few dollars, and the degree of leverage was only made possible as an indirect function of the Fed sustaining economic imbalances. With every recessionary business cycle in the decades leading up to the crisis, the Fed increased the supply of dollars to lower interest rates and to induce credit expansion. Through this function, the Fed inadvertently created the instability that existed in the financial system in because it created the environment which allowed for an unsustainable degree of system leverage to accumulate over the course of decades.

While it has pursued similar policies for decades, the financial crisis created an environment that triggered a more drastic response from the Fed. This time was different; while the subprime crisis steals the headlines, the real issue was the cumulative effect of sustained imbalances in the credit system which had accumulated over many cycles and the overall degree of system leverage. And because the Fed has a mandate to maintain price stability, it must implicitly maintain the size of the credit system in order to sustain general price levels.

During the financial crisis, the credit system began to contract and asset price levels rapidly declined in a disorderly fashion. In order to reverse the impact, the Fed was forced to drastically increase the money supply quantitative easing in an effort to maintain the size of the credit system. Even after the height of the crisis, the Fed determined it was necessary to add trillions more in new dollars to continue to support a languishing system, despite acknowledging the limitations of its monetary policy tools.

I think we can see the effects on financial markets, which in turn must be affecting wealth, confidence, and some other determinants of spending and production.


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To the extent that transmission is weaker, that could be used to argue for more stimulus rather than less stimulus. By responding with quantitative easing, the Fed induced a credit system already saddled with too much debt to expand massively. Today, the U. As a consequence, there remains far too much debt and too few dollars. Because QE induces the creation of trillions more in debt, it is more like heroin than an antibiotic; the more that is applied to a financial system, the more dependent on it that system becomes and the worse off when it is removed.


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Prior to , everyone was forced to opt-in to this system, and there was not a viable off-ramp. This is ultimately the option that bitcoin provides, and it exists largely as a response mechanism to global QE. There is no more simple explanation to the question of why bitcoin exists. While bitcoin would have presented a superior alternative even in the absence of quantitative easing, the global monetary debasement which occurred in response to the crisis sharpens the contrast.

It is this contrast that makes the mere existence of bitcoin far more intuitive than it otherwise may be.


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Bitcoin literally exists because some highly intelligent individuals identified a problem and set the wheels in motion to create a solution. However, bitcoin practically exists because it presents a fundamentally better solution to the problem of money.

jordants.org/components/subsets/cadence-falling-the-great-hunt-book-1.php Because of the leverage that remains inherent in the existing financial system, future QE is not merely a possibility; it is a certainty. The credit system was unstable and unsustainable in Every time the Fed, or any central bank, announces subsequent rounds of QE, that is the reinforcing market signal of why bitcoin exists.

A Global Monetary Plague: Asset Price Inflation and Federal Reserve Quantitative Easing
A Global Monetary Plague: Asset Price Inflation and Federal Reserve Quantitative Easing
A Global Monetary Plague: Asset Price Inflation and Federal Reserve Quantitative Easing
A Global Monetary Plague: Asset Price Inflation and Federal Reserve Quantitative Easing
A Global Monetary Plague: Asset Price Inflation and Federal Reserve Quantitative Easing
A Global Monetary Plague: Asset Price Inflation and Federal Reserve Quantitative Easing
A Global Monetary Plague: Asset Price Inflation and Federal Reserve Quantitative Easing
A Global Monetary Plague: Asset Price Inflation and Federal Reserve Quantitative Easing
A Global Monetary Plague: Asset Price Inflation and Federal Reserve Quantitative Easing

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