What is “tapering” and how does it relate to the price of Bitcoin?

There are many ways to pump money into the economy. And not all are conventional. The monetary authorities have undoubtedly learned to improve their practices over time. Obviously we are talking about relative improvements. There is no such thing as a perfect measure in monetary terms. However, quantitative expansion (QE) has proven to be an effective measure. Of course, this does not mean that the measure is not without its disadvantages. Nor does it mean that the measure can be implemented forever. That means that sooner or later the stimuli have to stop. What is “tapering” ????? It is the gradual reduction of quantitative expansion (QE).

Before we talk about the various aspects of quantitative expansion (QE), we need to talk about the evils of deflation. Deflation leads to economic decline. It is a crisis. Falling demand lowers prices. Price cuts reduce income. And with low incomes, unemployment rises, which in turn lowers demand. In short, too strong a currency is fatal to the economy.

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What is “tapering” and how does it relate to the price of Bitcoin?
What is “tapering” and how does it relate to the price of Bitcoin?

During the 2008 crisis, over-indebtedness led to a collapse in demand. In 2020 it was the pandemic. State intervention was necessary in both cases. This is when the debate gets hot. For many conservatives, such an intervention is detrimental. Ideally, the market should go its own way. The â ???? Painâ ???? Deflation actually cleanses the system. That â ???? Painâ ???? Eliminate bad actors, stimulate innovation and increase efficiency. I mean deflation is a good thing. It strengthens the currency, encourages saving and makes investments easier. This (wrong) idea has been around for more than a century. So great is the repetition that many believe it is true.

Libertarians choose a classic liberal economy for political rather than economic reasons. However, this dogma is an oppositional thought. And the opposition is always right. It is very easy to criticize everything and say that my ways are the best. In contrast, utopia is always easier to sell. Opponents are always right, because unproven utopias are perfect.

The spartan ethic of doing nothing in the face of the pain caused by a deflationary image sounds very heroic to the mouths of conservatives. But things change when you live in your own flesh. The truth is that during a crisis, society seeks government intervention to solve its problems. The free market dominance of the libertarian vision may have intellectual merits from an economic point of view, but it refuses to recognize the political and social realities. Inaction has a political price. And the government would feel the pressure on the streets.

In short, despite lawsuits from the ultra-conservative side, monetary authorities inject liquidity during a deflationary crisis to stimulate demand. In this way reactivate the economy. The goal is not inflation per se. The goal is economic growth. How is this growth achieved? Maintain an annual inflation rate of 2-3% (or higher in exceptional cases).

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This intervention can be done in two ways: fiscal and monetary. When you talk about household spending, you are talking about public spending. In other words, the state is the main customer. This refers to the various social programs, investments in infrastructure, etc. When you talk about monetary policy, you are usually talking about the actions of the central banks. In particular, the bank interest. A lax policy consists of a low interest rate to stimulate credit. And a rigid policy consists of a high interest rate to limit credit. In this way the competent authorities maintain the monetary balance.

The problem is that sometimes setting a tariff is not enough. During a crisis, the weight of the crisis can turn the public off regardless of the interest rate. In these cases, other measures are required. Central banks buying government and corporate bonds is one solution. This “quantitative expansion”? (QE) is a quick and violent measure ideal in an emergency situation. If the rate is a “subcutaneous” injection, the CE is an “intramuscular” injection.

Of course, QE is not a panacea. The problem with QE is usually the speed of money. Let’s say Toyota bonds are bought. But Toyota takes that money and doesn’t spend it. That means there is no money circulating. It remains stagnant and does not contribute to recovery. In this case the measure becomes less effective. That means the injection of liquidity may be historic, but if the money doesn’t move, the injection will lose its effect.

Other details. During the pandemic crisis in the United States, government spending was initially very low, credit suffered from defaults, and funds injected through QE moved very slowly. In fact, the corporations used the QE money to buy their own stocks. In this way, in the midst of a major economic and health crisis, a financial bubble with public money emerged. This was called a K-shaped rally because it mostly benefited large capital cities.

Now we are in a different phase. Now economic overheating threatens. This means that in order to maintain the balance, the authorities have to withdraw liquidity from the system. The â ???? Rejuvenationâ ???? it is the phasing out of purchases by the Federal Reserve (the central bank of the United States). That means that not so much money will fall out of the sky. Obviously bad news for Wall Street investors.

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Why is this so relevant for Bitcoin? Because the abundance of cheap money develops a special risk tolerance among investors. It creates optimism and opens the mind to new things. Suddenly, volatility is not a problem and speculation is becoming a fad. In times of low liquidity, however, the investor becomes a little more talkative. This implies that she will take refuge in more stable assets and avoid very high risks. Obviously, Bitcoin benefits from liquidity and optimism.

Of course the â ???? Taperingâ ???? it doesn’t necessarily determine the end of this bull cycle. If the decline is gradual and offset by high corporate incomes, the product of an aggressive economic recovery, the negative effects can be mitigated. In other words, tapering isn’t the end when markets can adjust.

When will that come? Tapering ????? We do not know. Everything depends on the macroeconomic data. You must be very attentive to the announcements made by the reserve. It is expected to start in the last two months of the year. Which isn’t too bad as these last few months are usually very good for the markets and the tapering can be offset by year-end bullish speculation. Fingers crossed.

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