What is Monetary Policy in crypto and how it is affecting digital currency and world banks?

What is monetary policy and how does it work?

There are two major ways for the government to manage the economy, fiscal policy and monetary policy. The objectives of monetary policy are to keep inflation under control while supporting the level of employment.

Balancing these objectives is not always easy. Monetary policy is usually the responsibility of a country's central bank also called the Federal Reserve Bank in the United States. Central banks try to reach their goals by controlling the quantity of money that circulates in the economy, which determines the rate of interest.

Let's first see why interest rates are important. Remember that if you save money, you receive interest from the bank and if you borrow money. You need to pay interest, so interest can be seen as the cost of money or the price of money. If interest rates are high, borrowing is expensive and people prefer to leave their money in the bank, so it earns interest. If interest rates are low, then the money is cheap and people will borrow more in order to buy durable goods like cars or to invest in improving their homes or in a business. Low-interest rates can increase output, but only if there is spare capacity or unemployment in the economy.

If the economy is already operating near full capacity, then lower interest rates will just lead to more inflation, as more money is circulating to chase a constant supply of goods and services. So the central bank wants the interest rate to be low enough to promote economic activity but manages the risk of inflation getting out of control. To achieve this goal, the central bank determines the federal funds rate, which is its target interest rate for banks to lend to each other.

How the central bank tries to achieve this target interest rate is by controlling the money supply, keep in mind. That notes and coins are only a small part of the money supply, and bank deposits and securities that are easily converted into cash are much larger components of the money supply today. So when we say the central bank is increasing the money, supply, or printing money, we usually mean that it is increasing the number of deposits in the financial system.

There are three major ways to control the money supply.

1. The first and most important method is through open market operations. Here, the central bank buys government bonds in the open market from investors. The money that has bought these bonds is deposited at banks and circulates in the economy. Stimulating the economy by increasing the money supply is called an expansionary monetary policy. The central bank can reduce the money supply by selling bonds it owns, taking money out of the financial system. This is called a contractionary monetary policy and happens when there are concerns about inflation.
2. The central bank also affects the money supply by setting the interest rate it charges. Other banks called the discount rate,
3. The last way to control the money supply is through the reserves it requires banks to hold. This is called the reserve ratio requirement and refers to the percentage of deposits that a bank must keep in reserves, the more money that banks need to keep in reserve. Less money is circulating in the economy. Although the central bank has a variety of tools, it can use, controlling the money, supply is difficult.

Policymakers can never be sure of the exact consequences of their actions on the economy and how long it takes for their decisions to have an impact. That is why central bankers monitor economic data all the time. That concludes the intro to the money supply check.

Adoption of Digital Currencies by Central Banks

There is an extraordinary change going on in the world, and it's something that I've been seeing around. This generational change, this fourth turning that's coming, was probably going to change the system that we operated in and, as things developed, these two hypotheses of mine became stronger and stronger.

Obviously, we've all seen the rise of bitcoin, and we've all seen the political shifts that are going on in the world today. It all looks like we're reaching this point. This is where macro crypto politics everything comes into the same big bucket. It's all concentrated on our pure focus right now. The news is coming out that central banks are going to adopt digital currencies. If you remember this started getting floated by, I think Facebook Libra was one of the first. They come up to create a global basket of currencies that were digital, and they would have this foundation in Switzerland, and that global basket would be a new world currency that could be used for the internet to interact with the central banks. Looked at that and said, no, you're not doing this, because this really is redefining the rules of currency and what you're going to create. It was basically a stable coin, but what you're going to create is something that's out of our control. Now they kind of don't mind bitcoin, yet they've observed it, they've seen it, and they're learning from it.

Next were the IMF papers about digital currencies. Then we've seen it from the department of justice in US. We've has seen it from the agreement in the U.S. for certain banks to custody, bitcoin, and other digital assets, allowing them to come into the system. We've seen a bunch of these things. This could be a really superb way to solve. Many of the world's problems - it solves the swift problem, it solves the euro dollar funding markets, problems.

How policies are going to change because of cryptocurrency

It solves the swift problem: it solves the euro dollar funding markets issues. It solves the problems of getting money to people who need it. Central banks can also change entirely the structure of how money and monetary policy work and fiscal policy because they can give it to different people in different ways. So they can credit the restaurateur but then penalize with negative interest rates. The baby boomer saved because they want to release their money back into the economy, which can give students a positive interest rate to help them save.

They can change everything. This is the rise of behavioral economics and incentive systems, so governments, essentially using big data, can find who they need to stimulate and adjust accordingly. They can do it dynamically. This is a structural, massive shift to everything we understand about economics, particularly macroeconomics, but the currency agreement is likely to be, let's say, a trade-weighted global basket. So that means, or maybe there's an oil commodity producer's basket as well. So people can have different baskets of currencies that move away from the need for a swift payment system. It moves away from us dollar issues when you're looking for the life raft. Okay, how do I avoid this? The debasement of currencies, forget the freedom stuff because I just don't think that exists in our world.

So bitcoin is my answer to that. I think bitcoin works on several levels, and I will do not go into it now because there are plenty of pieces from me on why I think bitcoin is a reserve asset and probably the world' s most pristine reserve asset. It's the only hard asset that has a fixed supply that eventually runs out and demand is increasing and as the world is turning towards bitcoin and its price goes up. Its market cap is only 200 billion. It's noise right now. It's like a mid-cap S P stock

Why cryptocurrency will overtake gold as the world's reserve asset and become the payment system of the digital world.

Gold is about 10 or 11 trillion. I think bitcoin goes much bigger than that over time too, but that's where it's headed because in this modern digital world, it is the payment system that we all want. But it's also it's the store of value. We need now some people say well. If the central banks have got this digital currency, why do we need bitcoin? Do two different things again, remember payment system and bitcoin? Does that extremely well slower than it could do, but the lightning layer and all of the development can mean that, but nothing is a reserve asset like bitcoin, literally nothing, not even gold.

It is truly extraordinary, and it's so innovative. We do not know where it's going and when we talk about bitcoin, we can also look at the other parts of the digital asset ecosystem that is not going away. The genie is out of the bottle. Ethereum is not going away. Digital asset's tokenization it's all coming, and it's all going to slot into these new digital currencies brought by the central banks, so payment systems and rails and everything are going to change massively everything.

We understand it's going to be as big a revolution of money that the internet was for everything, from email to video, to shopping, to everything, to commerce. It just changed the world, that's the size of what this is and this central bank digital currency is part of that narrative, and it is positive if you own bitcoin, it is positive. I think if you own gold - I think gold has that place for those concerned about the future of bitcoin, but I will take that risk in bitcoin. I will say I think it goes a lot higher before I have to worry about that.

Why IMF, BIS, and governments can't overcome from cryptocurrency

I think bitcoin can't be killed. I think it is something too powerful for even governments to overcome, so the central banks are going to compete at the level of the payment. So that's probably the end of stable coins and I think the central banks will force those out of the system, but bitcoin as a pristine reserve asset is something different. It's like collateral for a new system, and I think other governments will adopt it first. It won't be the big government, but some nations will be sick and tired of the currency crisis, and we'll just adopt bitcoin as its currency. They'll, probably first, stop putting it into their central bank reserves, because it's a harder currency and a game theory plays out.

Many people suggest to me: well, the governments are going to ban bitcoin the IMF, BIS they're all going to get together and get rid of this well at 200 billion. They don't care to tap me on the shoulder. It's $10 trillion, we'll talk again. So there are plenty of upsides to paying for playful before it becomes something we need to worry about. They probably will give it a go. They tried to ban gold last thing. I've checked has been working for about six millennia as a currency, so it didn't really work, did it and in this world of a distributed ledger which is owned by everybody known by nobody, there's almost no chance unless you shut down the internet entirely to get rid Of bitcoin,

it's impossible, it's a cockroach in finance, something you can never kill, and you see that is its power and that's what makes it so incredible. That's what makes it such a great reserve asset, and this very hardness of it. So I think they may try, but in a globalized world of regulatory arbitrage, somebody else will adopt it. I think it is something too powerful for even governments to overcome, and I think it is our life raft and our way out.