Why Bitcoin may benefit from the FED interest rate hike?
Simple answer is that the FED interest rate hike is a spent bullet. According to a blog by herbiewu, an independent economic analyst. The FED interest rate hike is not sustainable and we may expect drastic changes in the near future. Bitcoin may be a safe haven in the upcoming financial meltdown.
The OP believes that the interest rate hike is almost over with the following argument.
The FED interest rate spiked at 19.10% in June 1981, a historical high since the end of WWII. In the following 36 years, the FED interest rate has been running in a descending channel. Although some “interest rate spikes” were observed during the period, the bounce was still running in the channel. We can tell the trending from the US 10-year bond yield below:
10-year US Treasury Bond Yield
We have observed two slight rise of FED interest rate during the current “interest rate spike cycle”. However the interest rate has touched the resistance line of the descending channel. It’s not easy to break the 36-year trending.
Why was the interest rate peaked in 1981 and on a downward channel ever since? Why is the momentum of downward trend in interest rates so strong that we cannot break it in 36 years?
It must be contributed to the excessive distribution of credit-backed currency in the first place.
During the gold-standard period, issuance of USD was under control. The market demand for USD increased with economic development and interest rate was up naturally. However, after the collapse of the Bretton Woods system in 1973, the anchor-free distribution of US dollars went out of control. After 8 years of money printing, hyperinflation happened in USA in the 80’s. In order to curb inflation, the Federal Reserve had to raise interest rate to an unprecedented 19.1% in 1981.
In the next 36 years, serious inflation occurred several times in the United States. Why was the interest rate lower than last one? That’s because the real economy couldn’t afford the interest as the M2 increases every day. The figure below shows the growth of M2 in the United States.
M2 Growth of USA(1960-2015)
We all know that capital is profit-driven and printed money is seeking interest. However, the payout must be undertaken by the real economy no matter where the capital lies in bank savings, national bond etc. With the heavy burden of M2, the real economy could not afford high interest rates. When the size of US Treasury bonds grows to 1 trillion, the US Treasury Department could still pay 10% interest. But 10% interest would be too much to bear when the national debt is getting close to 20 trillion. Eventually, the interest rate will be lower and lower.
If you think that M2 of USA is bad but money supply in other countries may look even worse. The interest rate of all major economic bodies is running on a downward channel in the past 3 decades. Let’s have a look at the growth of M2 in China. With 63 trillion as residents’ saving, over 60 trillion in bonds market, 26 trillion in bank’s wealth-management products and 13 trillion in the insurance, a slight increase in interest rate would be unbearable to the loaners. All these funds are supposed to receive their interest. Check out the figure below:
M2 Growth of China(1960-2015)
Interest rate running at low or negative level is favored by government across the world as it allows them to get away from the debts arising from interest. No country is willing to raise interest rate without major crisis. Besides, low interest rates and accompanying monetary easing can cover up the problem and even create miracles.
Then OP cites the example of the four major asset management companies in China, which was set up to dispose of state-owned banks’ poisonous assets. The 4 companies did manage to get rid of the problematic assets not because they are good at managing but simply because of the quantitive easing of money supply.
Many people believe that the FED will impose interest rate hike even more aggressively this year. However, there might be more drastic changes that we are facing in the future, like US stock market crash, warfare or something happened to President Trump. Anyway, the FED interest rate spike is bound to be interrupted by something unpredictable.
In view of the negative interest rate in Europe and Japan, maybe the 36-year descending channel is about to be reversed. However, prior to that, a hyperinflation is anticipated to sweep across the world.
Despite the recent ETF rejection by SEC last week, price of Bitcoin slowly recovers and now stands at around 1,240 USD, still over 1 ounce of gold. As a unique investment item, Bitcoin could well serve as the last safe haven for the public worldwide.