The European Central Bank has acted. Across the 17-nation Eurozone, the benchmark re-financing rate was slashed on Thursday, from 0.5pc to a record low of 0.25pc. In Greece, Spain and other economically-fragile Eurozone members, where inflation is worryingly low, many welcomed the ECB’s action. In Germany, with its historic inflation aversion, Teutonic eyebrows were raised.
What’s beyond debate is that this latest ECB move is the prelude to a renewed round of money-printing. While America’s quantitative easing is meant to be “tapering soon”, in Western Europe the funny-money dials have just been turned up.
Since Western QE began in late-2008, the Federal Reserve has tripled its balance sheet, creating virtual money and using it to buy Treasuries and corporate toxic debt. In Britain, we’ve been even more enthusiastic QE-ers, with the Bank of England presiding over a jaw-dropping four-fold expansion of base money, much of it channeled through the gilts market.
Eurozone policymakers, largely on Germany’s insistence, have used QE less than their Anglo-Saxon counterparts, rather more quietly and via more circuitous routes. Yet the ECB has still engineered a doubling of its balance sheet over the last five years. As in the States and Britain, much of the new virtual cash has been used to support bombed-out banks – not just in the “periphery” countries, but in Germany too.
Over the last half-decade, then, the Eurozone’s central bank has used QE relatively little compared to its Western counterparts. The key word is “relatively” – seeing as all of them have engaged in unprecedented monetary stimulus. The euro, though, has been “losing the ugly contest” – with the single currency staying relatively strong to the dollar and pound, despite the Eurozone’s endless economic woes. That strength stems largely from the ECB running its virtual printing press at a lower speed – in a sop to German public opinion.
Such PR niceties explain why ECB President Mario Draghi, speaking just after the rate cut, deflected questions on QE. Yet there was vigorous off-camera briefing that the Eurozone’s central bank would ply the region’s still moribund banks with “as much liquidity as required” over the next 2-3 years.
It’s now a given that, within the next six months, the ECB will be dispense more cheap money. That’s why, following Draghi’s missive, the euro hit a seven-week low – and, that’s the point. Eurozone exporters, not least those in Germany, while tut-tutting money-printing in public, know where their bread is buttered.
What fascinated me wasn’t the falling euro, but the post-Draghi surge in a shadowy, decentralized currency called Bitcoin. I’m well aware that this subject, while still rather obscure, generates strong emotions. On one side of the Bitcoin argument, this internet-based currency, which allows cross-border transactions without the use of a bank, and no government involvement, has some fervent backers – many of them tech-savvy youngsters.
On the other side stand almost all reputable economists, together with a fierce range of vested interests – including the banks, credit card companies and other conventional players in the extremely lucrative money-transferring business. To them, Bitcoin is a cross between a dangerous irritant and a bad joke. To mention it in conversation is tasteless. To take it seriously is deeply suspect. Yet several events happened last week that made me suspect that Bitcoin – and the idea of “stateless” currencies more generally – will soon catch the zeitgeist.
To fully explain what Bitcoin is, and how it works, would take several full pages of this newspaper. Suffice to say that it’s a currency that only exists in cyberspace, with holders storing their stash in a virtual “wallet” and making transfers over the internet. First devised and launched in 2009, the core of the Bitcoin system is publicly available software that allows independent “miners” to create units of the cyber-currency by employing time, electricity and computing power to solve mathematical formulae.
Unlike “fiat currencies” controlled by governments, which can be issued endlessly, an upper limit of Bitcoins is built into the software. Only 21m can ever be “mined”, making them immune to inflation – the perennial problem of paper-based currencies.
So far, so weird, you may think. And, until recently, the Bitcoin world really was the preserve of a small circle of computer nerds and extremely adventurous investors. But back in March, after the systematic confiscation of bank deposits by regulatory authorities in Cyprus, “bailing-in” account holders to “bail-out” the country, interest in Bitcoin escalated. Over a few days, the value of a single Bitcoin rose five-fold to over $250.
Prices then dipped, as investors took profits. But, in subsequent months, they’ve steadily risen again, to around $210 at the start of last week. Since then, Bitcoin has surged anew, all the way to $325. The bulk of that gain has come since Thursday, when the ECB confirmed it would be cutting rates and opening the door to more Eurozone QE – in all likelihood, provoking yet more money-printing in the US and UK too, as the “ugly contest” goes on.
Bitcoin’s rise is admittedly, for now at least, partly speculative. The price has been volatile – yet this volatility has been around a very strong upward trend. More fundamentally, this independent cyber-currency, insulated from a global banking system that many see as irresponsible, is also an incredibly sophisticated response to the on-going problem of deliberate currency debasement by governments in some of the world’s largest economies. What’s more, Bitcoin is supporting a growing number of actual transactions.
Almost 12m Bitcoins have been mined, so far facilitating purchases amounting to billions of dollars, with the currency accepted by a growing number of web-based businesses, and even some physical shops. From a vendors’ perspective, after all, the system is costless, secure and involves no bank charges or hefty debit-card fees.
Some recent Bitcoin developments are stunts, or rather disturbing. News emerged last week of a Norwegian who bought $20 of Bitcoins four years ago and forgot about them. Having found them again, and come to realize their hugely increased value in Norwegian krone, he bought an apartment in Oslo. Last week also saw the opening of the world’s first Bitcoin ATM – in Vancouver, Canada. On the same day we had the re-emergence of a web-site called Silk Road, where drugs and arms can be purchased, with Bitcoin providing the necessary cloak of anonymity.
Yet Bitcoin isn’t illegal. Legitimate institutional investors, themselves exasperated at QE, are getting involved, taking small “pilot positions”. The big development for me, though, was the publication last week of a “Bitcoin Primer” by the Chicago branch of the Federal Reserve.
“Should Bitcoin become widely accepted,” opined the world’s most powerful central bank, “it is unlikely it will remain free of government intervention … That said, it represents a remarkable conceptual and technical achievement, which may well be used by existing financial institutions (which could issue their own Bitcoins) or even by governments themselves”.
It will be extremely tough to control Bitcoin – unless governments close down the entire global internet, which is probably impossible. Yet what I find truly remarkable about the statement above is that the Fed can now envisage a time when nations themselves attempt to rely on cyber-currencies, which cannot be debased, in a kind of gold standard throwback, but without the geological and political vagaries of mining physical gold.
Dismiss Bitcoin as a speculative craze if you want to. I view it, for all its faults, as the genesis of an extremely important and far-reaching financial innovation.