How the ECB is putting the euro at risk – and what that means for bitcoin

As deflationary money, Bitcoin serves as a hedge against runaway inflation.

It’s already being felt in numerous developing countries. Why the ECB is putting the euro at risk and why we need Bitcoin now more than ever.

Inflation is one of those things. Even if the Bitcoin System community likes to use the central banks‘ expansive monetary policy as a reason to call for high inflation rates: There is currently no talk of inflation. In fact, the price level in Germany is actually declining. To be more precise, the inflation rate officially determined by the Federal Statistical Office for December 2020 was minus 0.3 percent.

And that is quite astonishing in view of the considerable flood of money with which the European Central Bank (ECB) has literally flooded the market over the past twelve months.

#ECB balance sheet back >€7tn ahead of this week’s meeting. Hit fresh ATH at €7,015.7bn as Lagarde keeps printing press rumbling. ECB’s total assets now equal to 69% of #Eurozone GDP vs Fed’s 35%, BoJ’s 130%, BoE’s 36.4%.

The ECB’s balance sheet has grown from just under five trillion euros to now over 7 trillion euros within a year. Meanwhile, the balance sheet total is 69 percent of the Eurozone’s approximately 18 trillion euro GDP.

The purchase programs that have made this unique monetary experiment possible have meaningful titles such as „Pandemic Emergency Purchase Programme“ (PEPP, volume: 1.85 trillion euros) or „Corporate Sector Purchase Programme“ (CSPP). Behind these are ultimately decisions by the ECB Governing Council to inject further liquidity into the market by purchasing assets such as bonds.

The abbreviated conclusion from the expansion of the money supply in the Eurozone would now be an analogous inflation. After all, more money in the face of stagnating economic output suggests an increase in prices. But inflation is not happening. Why is that?

The money is in the hoards

Economists such as Hans-Werner Sinn, former president of the Ifo Institute for Economic Research, don’t believe it. According to them, low inflation rates measured against the basket of goods give a false picture of the actual situation. In reality, Sinn said during his Christmas lecture, appropriately titled „Corona and the miraculous multiplication of money in Europe,“ the ECB has fallen into the liquidity trap.

In a nutshell, this is a market-based situation in which low interest rates meet high savings balances. Accordingly, the large amount of money is not flowing into government bonds, but is sitting in consumers‘ savings accounts, as it is assumed that the economic situation will deteriorate and interest rates will soon rise again. In such a situation, monetary policy is ultimately ineffective.

In this context, there is also talk of „money hoards,“ where all the money is stashed away.

The ECB’s hands are tied in this situation. After all, it has a mandate to guarantee price level stability – and according to the Treaty on the Functioning of the European Union (TFEU), this means inflation of close to two percent. With current conditions close to deflation, the ECB is missing its target by a long way and has a blank check to print money.

The only question is: How long will this last? Because COVID-19 will not last forever. As of today, 1.4 million people in Germany have already been vaccinated against COVID-19 – even if some of them are still waiting for their second dose. As the economy recovers from its forced pause, people’s willingness to spend money should also increase and the historically low velocity of money velocity of money will pick up again.

The treacherous thing about high inflation is the inability of central banks to recapture it. Once the inflation rate gets out of control, it will be hard to push it back down in the short term.

Fortunately, there is Bitcoin

It is precisely for this scenario that investors are stocking up on value-holding tangible assets such as gold and, increasingly, bitcoin. Gold is considered a so-called safe haven asset, i.e., an asset that provides an air of stability in times of crisis.

But in Bitcoin, the precious metal has found a worthy competitor. After all, Bitcoin is even better in the characteristic that gives gold its value, namely its scarcity. While the gold supply increases by about 3,500 tons every year, BTC grows more slowly over time. In 2024, Bitcoin will halve in value for the fourth time. Then the inflation rate will be only about 0.8 percent per year. Bitcoin will then be the hardest monetary asset in human history.