How we got here — a short recap

They say history doesn’t repeat but it rhymes. In 2008, the banking system in the US was on the verge of collapse. Banks had taken up a lot of risk in a favorable economic environment. But the accumulation of bad credit caused huge problems when a rising number of borrowers became unable to repay their loans. Banks went bust and had to be saved by the taxpayers.

One of the key political responses to this crisis was that interest rates were drastically revised downwards by the Fed. This was done to get the ailing economy going again. It was of little use, as the following chart shows.

After 2008, there was hardly any economic growth in western industrialized countries, despite cheap money. But this policy led to some serious consequences in the years that followed.

Now let’s jump ahead to the year 2023.

Opening the floodgates

Turns out that unlimited money printing does have consequences. As described above, inflation was fueled after 2008 to support the economy. That was eclipsed in 2020 by the response to the virus.

It lead to inflation — although it must be said that monetary policy was only one of the triggers. If you want to read more about where today’s inflation is coming from, you should read my in-depth article on it.

Chickens coming home to roost

As most of us have experienced in recent years, high inflation rates are a problem. Basically, inflation is a theft of human time and life force. As a result, inflation lays the foundation for social unrest.

So the Fed was again forced to intervene.

Their solution was to increase interest rates. Fast.

But once again, the Fed created a new problem. Since risk-taking was taboo after 2008, the banks bet on long-duration bonds like US treasuries and mortgage-backed securities.

Wait for a second. If these supposedly come with less risk, what’s the problem?

Simply said, when interest rates go up, prices of fixed-rate bonds fall.

When the Fed opened the floodgates after 2008 to pour money into the US economy, the banks put gargantuan amounts of their funds into low-risk investments.

With the prices of fixed-rate bonds falling, banks are now losing a lot of money. And the big issue here is that this is not only affecting a few banks. It’s systemic. So we are on the brink of another major collapse of the US financial sector. Something needs to be done.

But what can the Fed do?

The Fed’s only answer: more inflation

The Fed has painted itself into a corner. One option is they can allow the system to collapse, which would also jeopardize the global dominance of the US dollar. They don’t want that.

Instead, they will go for the only other option left. To continue pumping huge amounts of money into the financial system to keep it from going under. They announced this more or less openly in the form of their Bank Term Funding Program.

The program is limited to 1 year and an amount of $25 billion. However, the Fed could expand the program if needed. As a consequence, inflation, which is currently stagnating at a high level, will make another leap upwards.

People flee into Bitcoin

This will cause the US dollar to lose purchasing power rapidly. And in general, trust in the traditional financial system will continue to decline.

I don’t want to sound like a smart ass but I pretty much predicted all of this happening here.

Enter Bitcoin.

Over the last few days, Bitcoin has recovered from the losses that came with the news of the banking crisis. After all, Bitcoin was created exactly for this kind of scenario. Another reason is that many investors expect an end to rate hikes, which has a positive effect on Bitcoin’s performance.

Is this the initial spark that Bitcoin will go its own way and decouple from traditional financial assets?

What I am sure of is that the negative consequences of this crisis will be felt by more and more people in the coming months. And these people will look for solutions to escape an unfair system.

Check out my data-driven articles that analyze trends in cryptocurrencies.