The Federal Reserve has announced that commercial banks no longer need to hold hard currency relative to how much they are giving out. The case for a deflationary currency has never been clearer.
Demand for dollars is at record highs now. With almost all other global currencies dropping, everyone is looking for cash as the market continues its downward spiral. However, there simply are not enough dollars to go around — which is why the Fed has a new novel idea.
0% Reserve Requirements for Banks
Due to the coronavirus pandemic, drastic measures have been taken on both the fiscal and monetary level. The Federal Reserve has taken the crisis in stride and decided to announce a major shift in how we do banking: starting on March 26, reserve requirements will be 0%.
Understanding reserve requirements is relatively simple. It essentially is the minimum amount a commercial bank must hold in reserve relative to the deposit liabilities it owes to customers. What this effectively means is that banks don’t need to hold any currency in reserve, regardless of how large their customer deposits are. This is a drastic change from precedent.
Could this soon become the ‘new normal?’ It’s unclear. Many countries in the world today already have very low reserve requirements, but the U.S. Federal Reserve is looking to now abolish such restrictions completely. We don’t know how long this new 0% rule will go on for either.
The Case for a Deflationary Currency
Since the demand for dollars is increasing, we would expect the government to eschew the tendency to print more. Instead, we may soon see serious levels of inflation.
We have seen bank runs around the world, but the situation is quickly spiraling out of control. Amid Italy’s lock-down, cash payments were strictly limited. It is not beyond the imagination to think this could also happen in the United States or elsewhere. With no reserve requirements, banks would be able to loan out money at will – but what happens when a large portion of its customers want to take out funds? Such a situation does not seem so far-fetched given current fears.
So, the case for Bitcoin amid this uncertainty has never been clearer. If we do end up seeing an inflationary spiral, everyday people will be looking for alternatives. Bitcoin, in particular, will definitely start to look especially attractive.