The US Quietly Printed $75 Billion out of Thin Air (For the Banks). This Is Why Bitcoin Matters

September 18, 2019 09:41 UTC

The Federal Reserve Bank of New York very quietly handed out $75 billion in cash to the banks on Wednesday in a process known as a ‘repurchase operation,’ or repo. 

This emergency measure hasn’t been used at scale for a decade, since the last financial crisis.

It’s a reminder of the central banks’ power to artificially expand the money supply and devalue your money. This is why bitcoin, with its capped supply and strict, predictable output, matters.

What is the repo operation?

In simple terms, the central bank prints $75 billion and makes it available to commercial banks for a 24 hour period. 

In exchange, the banks post Treasury bonds and other assets as collateral.

It gives the banks instant liquidity for the overnight money market where banks execute short-term loans with each other. As CCN previously explained:

“Banks get the overnight capital they need by pledging collateral, usually Treasury bonds, in exchange for cash. When the Fed provides the cash, they basically print the money in exchange for the securities.”

Sign of a crisis?

It’s a canary in the coal mine. It means liquidity has dried up in the overnight money markets.

The banks desperately needed liquid cash to trade and lend each other overnight.

The first warning sign came as the overnight interest rate shot up to 10% (up from the typical 2%). The Fed had to step in to ease the liquidity crisis.

Why does this even happen?

German reporter Holger Zschaepitz summed it up with the simple line:

“It looked like banks were suddenly short of cash.”

The New York Fed admitted themselves that the most likely cause is dwindling reserves at the banks.

“Upward pressure on overnight interest rates is the most direct indicator that reserves are becoming scarce,”Lorie Logan, head of Market Operations and Market Analysis at the New York Fed, back in 2017.

In other words, the banks are not holding enough cash.

A slippery Repo slope

I should point out that the repo operation is a short-term weapon.

The Fed injects liquidity and the banks pay it back in 24 hours. It only becomes a true problem when the repo operation extends day after day. We’re on day two.

While it’s not a crisis yet, it’s the slippery slope to a much bigger monetary easing policy. It increases the likelihood of bringing back quantitative easing (QE) – the Federal Reserve bond-buying program.

It also comes on the day the Federal Reserve is widely expected to slash interest rates.

This is why bitcoin matters

The trend here is obvious. Monetary easing is back in a big way.

Stimulus, low-interest rates, QE. Since the 2008 crisis, these tools have flooded the US money supply and weakened the purchasing power of the dollar.

Bitcoin is different. Bitcoin cannot be manipulated by central banks. 

BTC has a hard-coded 21 million cap that can never be changed. No entity can print more or set artificial lending rates.

Bitcoin’s daily supply is predictable. Its monetary policy known decades in advance.

It’s deflationary in nature, designed to increase in value so long as demand increases. Meanwhile, central banks are fighting to lower the value of their currencies, in doing so, destroying the long-term value of your savings.

Central banks are wildly printing money while bitcoin chugs along, methodically producing one block after another, every ten minutes as designed.

Time to chose order and predictability over chaos.

This article was edited by Samburaj Das.

Last modified: September 18, 2019 10:13 UTC

Ben is a journalist with a decade of experience covering financial markets. Based in London, UK, his writing has appeared in The Huffington Post and he was Chief Editor at Block Explorer, the world's longest-running source of Blockchain data. Reach him at benjamin-brown.uk or on Twitter at _Ben_Brown. Email ben @ benjamin-brown.uk.