• Global central banks are trying to combat rising inflation by reducing their balance sheets (quantitative tightening) and increasing interest rates.
• Bitcoin, the global world’s biggest cryptocurrency, has seen its value soar roughly 50% year-to-date despite the increase in central bank balance sheets.
• Japan and China have continued to expand their balance sheets, even as other countries reduce theirs.
Central Banks Battle Inflation
The global world is currently facing extreme inflation and in an effort to rein it in, central banks are decreasing their balance sheets (quantitative tightening) and increasing interest rates. The US Federal Reserve’s net liquidity indicator reflects this tightening with a formula of: net liquidity = (fed balance sheet – (Treasury General Account + Reverse Repo)) / units.
Bitcoin Soars Despite Increase in Central Bank Balance Sheets
Despite the increase in central bank balance sheets, Bitcoin—the largest cryptocurrency—has seen its value rise almost 50% so far this year. Additionally, Japan and China have both continued to expand their respective balance sheets, offsetting the work of other countries trying to reduce theirs.
Fed Net Liquidity Indicator
The Fed Net Liquidity Indicator is used by the US Federal Reserve to measure tightness or looseness of monetary policy by quantifying how much money is being provided within a given period of time. The formula for this indicator is as follows: Net liquidity = (fed balance sheet – (Treasury General Account + Reverse Repo)) / units. All three metrics—Bitcoin price, aggregate central bank balances, and Fed net liquidity indicator—have increased from October 2022 levels until today.
Japan & China Expand Balance Sheets
Japan and China continue to increase their aggregate balance sheets despite high inflation levels which could potentially undo all of the work that the US, EU & UK are doing in order to combat rising prices. This indicates that these two countries may be putting additional emphasis on economic growth rather than controlling inflation at this point in time.
Conclusion
The current global climate has caused central banks across multiple countries to take drastic measures such as quantitative easing or increasing interest rates in order to combat rising inflation levels within their own economies. Despite all of this activity, Bitcoin has still managed to soar nearly 50%. Additionally, Japan & China have not followed suit with many other countries‘ actions but instead have chosen to expand their own balance sheets further indicating that they may prioritize economic growth over controlling inflation at this particular moment in time