Bitcoin – The ECB reopens the floodgates

After the Canadian and Swiss central banks, it is the turn of the European Central Bank to lower its rates. Bodes well for bitcoin.

The ECB unloads its rate cuts

While the FED battles with inflation that is still painful, the ECB judges that it is time to let go of ballast for the first time in five years. The key rate falls from 4.50% to 4.25%.

This monetary easing comes despite a fortuitous rise in the annual inflation rate in May. We went from 2.2% to 2.4%. The ECB even raised its inflation forecasts for the coming year…

Faced with this contrast, Christine Lagarde conceded that the road may be bumpy over the coming months. In other words, inflation may be capricious.

The president notably highlighted the geopolitical risks which could impact energy prices and international trade. We are thinking in particular of the economic war (and war in general) between the West and the Sino-Russian bloc.

Ms. Lagarde therefore clarified that the ECB “do not commit” according to a predetermined rhythm. Indeed, the following graph shows that central banks rarely stop halfway. Rate cuts should therefore continue on a monthly or bimonthly basis if inflation remains in line with expectations.

The question now is, how far will rates fall? The latest statements from ECB pundits suggest that we will not return below 2%. We will see…

At the same time, the ECB confirms that the 1,850 billion euros of debt purchased during the pandemic will be sold bit by bit from July. At a rate of 7.5 billion per month to be precise. At this rate, it will take 20 years to wipe off this portion of the ECB’s balance sheet…

Good news for bitcoin

This relatively rapid drop in rates was a foregone conclusion. Indeed, if we take a little perspective, the fiat system is a ponzi. Clearly, it is necessary for the flow of new loans to perpetually exceed the flow of repayments.

This imperative is due to the fact that all the money in circulation comes from debts (apart from coins and notes). We therefore constantly pay interest on the entire money supply. The latter must therefore increase so that everyone can find enough money in the magma of the economy to honor their loan AND the interest.

In practice, raising rates aims to ensure that new loans no longer exceed repayments. The quantity of money in circulation decreases, causing in turn a drop in consumption and therefore inflation.

The annual growth of the quantity of money in circulation (M3) has been close to 0% recently. But a central bank can’t afford that for too long. The growth of the money supply must return to its cruising speed (~4% per year) so that everyone can understand it from an accounting point of view. Otherwise, there would be damage to the economy (reimbursement defaults).

And unless we have enough energy to put against this exponentially increasing money supply, we will have inflation. Inflation more or less disguised by the accounting tricks of statistical institutes…

However, there is concern about the energy supply of Europe, which now pays three times more for its gas than before… On this subject, do not miss this article: Bitcoin and endless inflation.

All this to say that you should not leave your savings in fiat currency. It is more reasonable to leave it in an existing currency in absolutely finite quantity: bitcoin.

Nicholas T.

Reporting on Bitcoin, “the goddess of wisdom, feeding on the fire of truth, exponentially growing ever smarter, faster, and stronger behind a wall of encrypted energy”.