You may not know anything about Central Banks (in the US, known as the Federal Reserve), who they are or what they do but whether you know it or not their decisions have a huge impact on your life and on the economy. We will see a lot more in the news about the Fed now as Trump gets set to name the successor to the current chairman, Janet Yellen, whose term will be over at the end of January 2018.
They have an ability to drive interest rates down or push them up, which in turn determines how much your mortgage goes up and down or how much you receive in your pension fund or your savings account.
They have been manipulating these rates for years and have caused numerous disruptions and bubbles in the economy that have not ended too well. Many people in the population have paid for these banker’s mistakes and don’t even realize it.
They have been seen as the lender of last resort in the event of economic disruptions (of which many of them they have caused) and for this reason the business environment has put great confidence in their abilities to fix things. Yet, lately, many are starting to question the Central Bank’s ability to make the right decisions.
Another thing to understand is debt and its role in the economy. This is what the US debt looks like currently, currently over $20 Trillion and growing in debt to be paid back.
http://www.usdebtclock.org/
It is pretty much agreed that it will be next to impossible for the US to pay this debt off. In addition, it is borrowed money that they have to pay interest on.
- If the Federal Reserve starts raising interest rates, the interest payments on this debt will balloon. They are now stuck.
- If the rest of the world starts to lose confidence in the US to pay back this debt they will lose confidence in the strength of the US dollar.
- This situation is not unique to the US or the USD. There are many countries around the world facing the same issue. Japan and the European Union, in particular.
- If the US dollar starts to decline or is unseated as a world reserve currency, its value will decrease (that means most things you buy with your dollars will become more expensive). Otherwise said, say "hello!" to inflation. You won’t run to Yen or Euros because the same thing will happen to those.
- So where do you go? Those who are against a centrally controlled financial system that they no longer have any confidence in have been looking for other options. Introducing a selection of decentralized crypto-currencies!
- There are still many questions about crypto-currencies and these Governments will not give up their power to control currencies that easy (see our post on how they could kill the cryptos). So you may also want to look at gold, silver, property or any other asset class that could provide protection to your purchasing power.
So, if you have turned to crypo-currencies and have made a profit, you can thank the Fed. Why? Because by losing faith in the Fed and central banks and fiat currencies, this could be one of the main reasons you invested in crypto-currencies!