The economy is now in its biggest financial crisis since 2008, with the Dow Jones Industrial Average (DJIA) plunging almost 10,000 points so far, putting it well into a bear market. Just like in 2008, Central Banks are scrambling to print as much money as possible to rescue stocks, banks, and corporations, except this time it seems the money printing is happening at a more feverish pace. This article will discuss how many trillions have been printed so far, and how this could lead to an inflationary spiral.
The Federal Reserve started off its money printing spree by offering trillions of dollars of liquidity for the repo markets in the coming months, with daily allotments of up to $500 billion. However, even on days where $500 billion was allotted by the Fed, repo dealers only bidded for tens of billions of dollars, and repo markets continued to lack liquidity.
Basically, it seems repo dealers had no collateral to put up to get the Fed’s repo loans, and stocks continued to crash. The Fed then responded by cutting the Fed Funds Rate by 100 basis points to 0.00-0.25%. This means that money is basically free for top level banks and corporations, which theoretically should provide liquidity to the economy.
The Fed sweetened the deal with a simultaneous $700 billion of quantitative easing (QE), which is a fancy term for money printing. Specifically, the Fed said they were going to buy $500 billion of Treasuries and $200 billion of mortgage-backed securities, and these purchases were facilitated by printing money out of thin air.
The Fed sweetened the deal even further by cutting reserve requirements to 0%, meaning banks do not have to store any money with the Fed. This frees up liquidity for banks, but simultaneously can create optimal conditions for a catastrophic bank run, where banks are not able to pay out all of their depositors.
On top of all that, the Fed enhanced the liquidity available via international swap lines.
Shockingly, the Fed did these emergency moves two days before the regular March Fed meeting, and it spooked investors that the Fed could not wait a couple of days. Also, perhaps it was just not enough, despite being shockingly strong measures. The DJIA collapsed 3,000 points the day after the Fed did all of that.
Wall Street took this as a sign that the Fed had lost all of its credibility, and had lost control of the situation.
Since all of the Fed’s best tactics did not work, the Department of the Treasury, the President, and Congress stepped up with a $1.2 trillion stimulus package. The package has not been passed yet, but may involve ‘helicopter money’, where $1,000 could possibly be given to every adult American, as well as all sorts of bailouts for businesses, and delayed tax payments.
The Fed also chimed in by re-opening its commercial paper funding facility, which is something that first launched in 2008 but closed down once the Great Recession was over. This will allow the Fed to provide billions of dollars of direct liquidity to businesses, by buying commercial paper that the market can no longer afford to buy.
Also, the Fed just launched the primary dealer credit facility, which allows dealers to put up bonds as stocks as collateral and get cash. Essentially, now anyone can dump their large holdings of stocks or bonds by giving them over to the Fed as collateral, and the Fed is taking all the risk.
This article so far has only described the trillions of dollars of money printing from the United States, and does not mention the trillions of dollars of money printing in the rest of the world, such as $1 trillion from the International Monetary Fund (IMF).
Overall, the trend is clear, Central Banks worldwide and in particular the Fed are willing to print as much as possible, and give out as much free money to banks and corporations as it takes, to reverse this month’s stock crash.
So far these measures have failed to meaningfully stop the stock crash, and it can be assumed that trillions of dollars will continue to be printed until the market bottoms out.
Ultimately, money printed out of thin air is not free, rather all of this printed money obtains its value from all of the other fiat currency in the world, causing all of the other fiat currency in the world to lose value. That means in the end the general populace will be left holding the bag, since every dollar they own will be worth less.
It remains to be seen how long this money printing frenzy will continue for and how long it will go. Probably there will already be significant fiat inflation from the trillions printed so far.
The question is, will the market continue to crash, and will this frenzy of money printing continue to go completely out of control? If it does it could lead to a hyperinflationary spiral, which would be the nail in the coffin for the economy as we know it.
If that happens, then Bitcoin (BTC) could see a major rally, as people worldwide dump fiat and instead choose to hold Bitcoin (BTC), which cannot be devalued by Central Bank money printing.
However, it remains to be seen what will happen, and only time will tell. These are unprecedented conditions in the financial markets.