2020 was especially unforgettable for Bitcoin. To commemorate our readers this year, we asked our network of contributors to reflect on the pricing, technological development, community growth and more of Bitcoin in 2020, and to think about what all of this could mean in 2021. These authors responded with a collection of thoughtful and thought-provoking articles. Click here to read all the stories from our series at the end of 2020.
That year, a “biblical flood of liquidity” was brought into the world by the largest central banks that feared the longevity of several of the world’s currencies. A review of key monetary policy changes by the Federal Reserve, European Central Bank and Bank of Japan reveals that 2020 was an unprecedented year for the legacy economy and that an alternative that is inflation and middleman free is urgently needed.
The Federal Reserve
- The key interest rate for funds was lowered by 150 basis points (basis points) to 0 percent
- Started quantitative easing (QE) of $ 80 billion per month
- Serving $ 1.95 trillion of potential credit in many different programs
- Expansion of $ 400 billion at the height of foreign exchange swap lines with foreign central banks
While the Federal Reserve’s monetary response was the largest and most comprehensive of the major central banks in absolute terms, it was not the largest in relative terms.
With a slowdown in China, cracks appeared in the global financial system in 2018, and the slowdown came to a head in September 2019 when repo rates rose from near zero to 10 percent in one morning. This series of events set the Fed on a path to “simpler” monetary policy in 2019, with the balance sheet bottoming out in the third quarter and rising as of 2020.
When the COVID-19 virus made the leap to Europe and then to the USA in March 2020, it surprised the doctor of economics. All of the major central banks reacted between Sunday March 15 and Wednesday March 18 when it became clear that the financial system was on the verge of collapse.
The Fed’s reaction was initially unique as the key rate was 1.5 percent above zero. It also added what had become a typical money weapon at the time: large-scale asset purchases (QE), followed by a new policy by Japan to buy corporate bonds. Finally, in coordination with the US Treasury Department, several dizzying acronym programs were introduced to make credit more widely available in the economy.
Although these new programs received a lot of attention in the press, they never came close to the maximum permissible values and are now almost unused. By April, all important parts of the Fed’s response were in place and, apart from a few reporting requirements, did not change anything in the second half of the year.
Federal Reserve Facility balances
2020 Federal Reserve Balance Sheet Changes
European Central Bank
- Started in 2020 already engaged in QE
- The asset purchase program, the Pandemic Emergency Purchase Program (PEPP), was gradually increased to 1.85 trillion euros
The monetary policy of the European Central Bank (ECB) this year has been much simpler than that of the Fed. It has suffered from multiple financial crises since 2009 and was still in the middle of a QE program called the Asset Purchase Program (APP) with a monthly weight of € 20 billion. This program did not change during 2020, but the PEPP was added. The PEPP was finally expanded to a total of 1.85 trillion euros in asset purchases by March 2022.
The ECB’s balance sheet soared to 55 percent of GDP in November, making the US tame compared to 34 percent and Japan looking like the currency basket at 126 percent. If central bank monetary policy had nothing to do with inflation / deflation, one country would be assumed to be Japan, followed by the euro zone.
The European Central Bank managed to have the simplest policy on paper and it was implemented quickly, but it came back and increased it twice, most recently this month.
The ECB has extended its intervention until March 2022, but it is unlikely that Europe will ever be able to stop QE. At this rate, the balance sheet ratio will reach 100 percent by the end of 2021.
The Bank of Japan
- The longest running QE program in the world
- The year started with quantitative and qualitative monetary easing (QQE), consisting of purchases with a broad spectrum
- Limited government bond purchases and increased already strong market intervention
After all, Japanese monetary policy is far above anything the Fed or the ECB do, and 2020 was no exception. In 2013, Japan launched QQE, where it not only bought government and agency bonds, but also bought other securities such as ETFs and Japanese REITs directly.
The Japanese started this modern era of QE almost 20 years ago, and in 2020, when all central banks were consistently following the same path as they were when buying assets, Japan says, “Hold my beer.” It’s in really scary money – and demographic crisis with no obvious flight.
Interventions for 2020 amount to well over $ 1 trillion with GDP under $ 5 trillion (more than 20 percent). Compare that to the eurozone rate of nearly $ 2 trillion as an incentive for an economy of $ 18 trillion (11 percent) or the US at $ 3 trillion for an economy of $ 20 trillion (Jan. Percent).
Central bank balance sheets in relation to GDP
This is a guest post by Ansel Lindner. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.