Bitcoin is fixing the economic hurricane that is happening around the world

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“Fed Watch” is the macro podcast for Bitcoiners. In each episode, we discuss macroeconomic news from around the world, with a focus on central banks and currencies.

In this episode, Christian Keroles and I cover developments in Japan, regarding Yield Curve Control (YCC); in the United States, regarding growth and inflation forecasts; and in Europe, with regard to the concern for fragmentation. At the end of the episode, we celebrate the 100th episode of “Fed Watch” by reviewing some of the guests and calls we’ve had throughout the show’s history.

Big problem in Japan

Economic turmoil in Japan is legendary at this point. They underwent several lost decades of low growth and low inflation, addressed by the best monetary policy tools of the day, by some of the best experts in economics (maybe that was the mistake). None of this worked, but let’s take a minute to review how we got here.

Japan entered its recession/depression in 1991 after the bursting of its giant asset bubble. Since then, Japanese economic growth has been around 1% per year on average, with low unemployment and very little dynamism. That’s not negative gross domestic product (GDP) growth, but it’s the bare minimum to get an economic pulse.

To address these issues, Japan became the first major central bank to initiate quantitative easing (QE) in 2001. This is where the central bank, the Bank of Japan (BOJ), would buy government securities from banks in the purpose of correcting any balance. leaf issues, paving the way for these banks to lend (i.e. print money).

This first attempt at quantitative easing failed miserably and actually caused growth to fall from 1.1% to 1%. The Japanese were convinced by Western economists, such as Paul Krugman, who claimed the BOJ failed because it did not “credibly promise[d] be irresponsible. They need to change people’s inflation/growth expectations by shocking them into inflationary worry.

The second round of monetary policy in 2013 was dubbed “QQE” (quantitative and qualitative easing). In this strategy, the BOJ would cause “shock and awe” at their profligacy, buying not just government securities, but other assets like exchange-traded funds (ETFs) on the Tokyo Stock Exchange. Of course, that also failed.

The third round was the addition of YCC in 2016, where the BOJ would peg the 10-year Japanese government bond (JGB) yield at a range of plus or minus 10 basis points. In 2018, that range was extended to plus or minus 20 basis points, and in 2021 to plus or minus 25 basis points, where we are today.

The YCC fight

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With the world now facing massive price increases due to an economic hurricane, Japan’s government bond yield curve is rising, testing the BOJ’s resolve. So far, the ceiling has been breached several times, but it hasn’t completely burst.

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The BOJ now owns over 50% of all government bonds, in addition to their huge share of ETFs on their exchange. At this rate, the entire Japanese economy will soon belong to the BOJ.

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The yen is also collapsing against the US dollar. Below is the exchange rate of the number of yen per US dollar.

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Federal Reserve DSGE Forecast

Federal Reserve Chairman Jerome Powell appeared before Congress this week and said a U.S. recession was not his “baseline scenario,” despite nearly every economic indicator falling over the past week. last month.

Here we look at the Fed’s Dynamic Stochastic General Equilibrium (DSGE) model.

The New York Fed’s DSGE model has been used to forecast the economy since 2011, and its forecasts have been released continuously since 2014.

The current version of the New York Fed’s DSGE model is a closed-economy, representative-agent, and rational-expectations model (although we deviate from rational expectations in modeling the impact of recent policy changes , such as average inflation targeting, on the economy). The model is mesoscale, in that it involves several aggregate variables such as consumption and investment, but it is not as detailed as other larger models.

As you can see below, the model predicts GDP for the fourth through fourth quarters of 2022 to be negative, as well as GDP for 2023. This is consistent with my own estimates and expectations that the US will experience a prolonged recession but mild, while the rest of the world will experience a deeper recession.

In the chart below, I highlight the return to the post-global financial crisis (GFC) norm of low growth and low inflation, a norm shared by Japan for that matter.

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European anti-fragmentation cracks

Just a week after showing Fed Watch observers, listeners and readers European Central Bank (ECB) President Christine Lagarde in the face of repeated anti-fragmentation questions, EU heavyweight Dutch Prime Minister Mark Rutte, poses as a bull in a Chinese store.

I read excerpts from a Bloomberg article where Rutte argues that it is up to Italy, not the ECB, to contain credit spreads.

What’s the big worry about fragmentation anyway? The European Monetary Union (EMU, aka Eurozone) is a monetary union without a fiscal union. The ECB’s policy must serve different countries with different amounts of indebtedness. This means that the ECB’s interest rate policy will affect each country in the union differently, and that the most indebted countries such as Italy, Greece and Spain will bear a greater burden from the rise. rates.

The worry is that these credit spreads will lead to another European Debt Crisis 2.0 and possibly even political rifts. Countries could be forced to leave the euro zone or the European Union on this issue.

Back to 100 episodes

The final part of this episode was dedicated to revisiting some of the predictions and big calls we made. However, it didn’t go according to my plan and we got lost in the weeds. Overall, we were able to highlight the success of our unique theories put forward by this show in the Bitcoin space:

A strong dollar
Dominance of bitcoin and US dollar
The relative decentralization of the United States makes the country a better choice for bitcoin
Bearish on China and Europe

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