Monetary policy, or mainly “manipulation” of interest rates, is the framework for central banks to influence economic growth and inflation. In order to reverse the credit crisis brought about by the 2008 financial crisis, central banks have reduced interest rates to unprecedented levels. As the Fed tries to restore interest rates to near levels before the financial crisis, the US stock market has already oscillated. During the economic downturn, the central bank tried to solve the credit crunch problem by lowering interest rates. According to the International Monetary Fund (IMF), “a historically severe recession needs to reduce policy rates by 3-6 percentage points. ”
Interest rate changes in major western countries
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The Fed is the highest interest rate among the major central banks in the West, but only 2.5%. Although the US stock bull market has been around for ten years, traditional monetary policy will inevitably be in trouble in the next serious recession. Since the interest rate cut alone is not enough to reverse the 2008 financial crisis, central banks around the world have designed new forms of unconventional monetary policy.
In addition to quantitative easing, for the first time in history, the central bank has set interest rates to negative values . In such a world of negative interest rates, citizens who save will suffer a lot of losses. Although inflation itself is seen as a punishment for savings, negative interest rates can further damage the interests of depositors . Proponents argue that in a severe credit crisis, when consumption is completely paralyzed, negative interest rates are the only way to stop further savings and stimulate investment. Fed officials even discussed the possibility of implementing negative interest rates in the US in the face of the next financial crisis:
Can you imagine that in addition to inflation, will your savings depreciate by an additional 2-4%?
The decades-old loose monetary policy of the global central bank may make this happen inevitably in the wake of the next recession. The central bank’s inability to raise interest rates to the 3-6% interest rate needed to fight the financial crisis severely limits the role that monetary policy can play. Economic institutions such as the International Monetary Fund are preparing comprehensive policy studies for this future economic situation to prepare for this future.
One problem with negative interest rates is, of course, how will countries implement them? If your bank account requires an additional 2-4% tax, can you replace all the deposits with cash to avoid this loss? Sweden is a pioneer in negative interest rate policy (currently still -0.25%) and a leader in the transition to a cashless society.
The fact that people can convert deposits into cash is a major loophole in the negative interest rate policy. In fact, the International Monetary Fund has proposed a so-called “dual currency system” in which physical cash and electronic money are separate. Cash conversions will be severely punished, and physical cash versus electronic cash will depreciate against negative interest rates.
Since Sweden is a pioneer in this area, we can look at the effects of Swedish cashless experiments. The experiment pointed out:
“One advantage of a cashless society is that it is easier to track criminal activity, and we may be able to stop some of these crimes. The downside is that everyone will be tracked. We will lose our privacy.”
As the population fully transitions to a digital bank account directly managed by the state, a society in which everyone is closely monitored will emerge. Physical cash has a strong privacy advantage, but it is also the tool of choice for bribery, money laundering, tax evasion and drug use. Just like the negative interest rate environment, the cashless world will be a fierce social change.
So how does such a world affect Bitcoin?
If inflation, state surveillance, and negative interest rates hurt the interests of sovereign currency holders, then the public may have more and more incentives to use bitcoin. As a currency outside the control of the state, Bitcoin will naturally become more attractive to citizens, although it currently has significant technical limitations.
If a severe economic recession triggers such fierce economic measures and the popularity, technology and privacy of Bitcoin increase, sovereign states will inevitably introduce new capital control mechanisms . Bitcoin exchanges, at least legally compliant exchanges, will need to be taxed at the same or higher rate than a negative interest bank account or physical cash. However, if the economic environment as described above does occur, the public will certainly look for any possible alternative value stores . They are looking for a point-to-point currency tool that may not be licensed.