4. The U.S. private sector (businesses and entrepreneurs)
5. U.S. federal government
6. The U.S. banking system
7. U.S. Treasury
8. Fed
9. Let’s trade this
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The translation of Arthur Hayes’ essay “Patience is Beautiful”
Any views expressed below are the personal opinion of the author and should not be considered a basis for investment decisions or as a recommendation or advice to engage in investment transactions
Before going to Miami for our Lord Satoshi annual celebration (also known as The Bitcoin Conference) I hung out in Tokyo. Spent most of his time walking around the metropolis, eating and drinking the sumptuous creations of a variety of talented people. In particular, I drink a lot of coffee – I’m a shameless coffee snob. And Tokyo makes excellent cups of black gold.
One morning I decided to go to a previously undiscovered area in search of a famous coffee roaster I had heard a lot about. I arrived at the site 30 minutes after it opened, and all the seats inside were already occupied by visitors and there was a line. In my naive estimation, the line looked pretty short, so I decided to stay. After about 15 minutes, none of us had even begun to be served, and the store was half-empty. I thought to myself: “Hmm, strange…why weren’t any of us allowed into the store to order?”
A woman came out, whom I mistook for the manager. She was the epitome of a typical Japanese hipster. The lady’s attire left a lasting impression. It was a very roomy top and pants, a baggy tweed vest, and a faux wool beret. She walked to the middle of the line and in a soft, respectful but firm tone said: “I just want to let you know that the wait will take about 45 minutes.. We make every cup of coffee by hand because we strive to create great coffee.”. The subtext was, “We’re not at all sorry that you’re going to be waiting outside for a long time, because our coffee is shit, and if you don’t like it, you can go fuck yourself.”
This was a signal for me to leave the stage, because I soon have to go to a lunch for cool teppanyaki. And I couldn’t wait outside all day for a cup of coffee (no matter how good it might be). However, I knew I would come back to try this coffee. My patience paid off, and two days later I showed up in front of the opening. It’s true that it was a different institution of their brand (but also in Tokyo). To my surprise, the same woman came out of the store. She recognized me, too: “I remember you from that day – sorry you waited so long.”. I smiled and expressed my joy at finally trying their product.
The coffee was sublimated and tasted amazing. I drank the Panamanian geisha variety.. The brewing method and quality of the grains were perfect. This variety gives floral notes in the cup, and the anaerobic treatment method allowed the flavor to become stronger. My patience paid off, and my taste buds told me thanks.
Patience will also be required in the financial markets. Since the beginning of the banking crisis in the U.S., I and others have been beating our proverbial drums and shouting to anyone who will listen that it will soon be solved. That when it comes down to it, the fiat banking systems of the US and the world will be saved by a new round of money printing from the central bank (which, in turn, should result in higher prices for risky assets). However, after the initial surge in Bitcoin and gold, these hard monetary assets bounced back slightly.
As for Bitcoin, volatility and spot and derivatives trading volumes declined. Some have begun to ask why, if we really are in the midst of a banking crisis, is Bitcoin not continuing to grow? And other questions along the same lines. They ask why the U.S. Fed hasn’t started cutting rates, and why America hasn’t started controlling the yield curve.
My answer to these naysayers? Patience. Nothing moves up or down in a straight line – we move in zigzags and curves. In an essay I wrote: We know the destination, but not the path itself.
Money printing, control of the yield curve, bank failures, etc.. д. – all of this will happen, starting in America. And it will eventually move to all major paper money systems.
The purpose of this essay is to find out why I believe the fireworks and a true bitcoin bull market will begin late in the third and early fourth quarter of this year.
In the meantime, between now and then relax, damn it. Take a vacation, enjoy nature and the company of your friends and family. Because this fall you better be strapped into your trader spaceship, and be ready to take off.
As I’ve said many times, the price of Bitcoin depends on the liquidity of fiat and technology. Most of my essays this year focused on global macroeconomic events affecting fiat liquidity. I hope that during the summer lull, I can move on to write exciting things happening on the bitcoin technology front and crypto in general.
Another goal of this essay is to provide readers with a solid road map of how the fiat liquidity situation will unfold in the coming months. When we understand how liquidity in dollars and fiat currencies will grow by the end of the year, we can fully focus on which technological aspects of certain coins are most interesting.. That, after all, is our constant goal.
Preface
Bureaucrats, in charge of central banks and global monetary policy are thinking along the following lines. They think they can control a market of over 8 billion people. Their arrogance can always be felt in the way they talk about economic theories developed in academic circles several hundred years ago. They are sure of the nonsense they carry. But as much as they would like to believe, these men and women did not solve the money version of the Three Body Problem.
Note: The Three Body Problem in astronomy is one of the problems of celestial mechanics, consisting of determining the relative motion of three bodies interacting according to Newton’s law of gravity. Unlike the two-body problem, in the general case the problem has no solution in the form of finite analytical expressions.
Let’s see what this problem looks like in finance.
When the debt-output equation gets out of hand, the economic “laws” are broken. It’s similar to how water changes state at seemingly random temperatures. We can only learn about water behavior through ex post facto observation and experimentation, not by theorizing in an ivory tower.
Our financial masters refuse to actually use empirical data to determine how they should adjust their policies. Instead, they insist that the theories taught by their esteemed professors are correct regardless of objective results.
Over the course of this essay, I will delve into why, contrary to conventional monetary theory, because of current debt under productive production, rising interest rates will lead to more money and inflation, rather than falling. This creates a situation where no matter which path the Fed chooses, whether it raises or lowers rates, they will accelerate inflation and become a catalyst for the universal desire to exit the parasitic fiat monetary system.
As true believers in Lord Satoshi, we want to time our trade as carefully as possible during this massive exodus. I want to be stuck in fiat, making incredible profits as long as I can, and as long as I don’t have to dump my dollars and go all-in on Bitcoin. Of course, I am carried away by my own form of arrogance, believing that I can guess the most opportune moment to jump off a burning ship without catching fire. But what can I say? After all, we’re all prone to make mistakes.. But we should at least try to understand what the future might look like.
With that done, let’s move on to some theories about the (disputed) facts.
All major fiat money regimes have the same problems. It doesn’t matter where they are on the economic spectrum from capitalism to communism. That is, they all have three components: high debt, a shrinking working-age population, and a banking system in which the banks’ assets are low-yielding government and corporate bonds/credits. The global rise in inflation makes the global fiat banking system functionally insolvent.
Because of its role as the world’s largest economy and issuer of the reserve currency, the United States experiences these problems more acutely than anyone else and is in the hardest position.
The groupthink of central bankers is quite real because all high-level officials and central bankers studied at the same “elite” universities. They mastered versions of the same economic theories.
Hence, whatever the Fed does, all other central banks will eventually follow its lead.
With this in mind, I want to focus on the situation in Pax Americana. Let’s take a quick run through the participants in this tragedy.
The Fed is influential because it can print money and store assets on its balance sheet.
The U.S. Treasury is influential because it can borrow money by issuing debt to fund the federal government.
The U.S. banking system is influential because it can collect deposits and lend them out to create credit and fund businesses and the government. The solvency of the banking system is ultimately supported by the Fed and the U.S. Treasury with printed money or taxpayer money.
The U.S. federal government has influence because it can levy taxes and spend money on various government programs.
Private businesses and individuals have influence because they can decide where and how to keep their money. They also make the decision to take (or not take) money from the banking system.
foreigners, and especially other nations, have influence because they decide whether they should buy, own, or sell U.S. Treasuries.
By the end of this essay, I hope to bring each of these major decisions into one structure. It will show how we have reached a point where each participant has very little room to maneuver. This lack of flexibility allows us to predict with high confidence how each will respond to Pax Americana’s current monetary problems. And finally, since financial crises are still very much tied to the crop cycle, we can be pretty sure that the market will wake up and realize that shit went right on cue this September or October.
Harvest
Patience me, Now we’ll have to do some more customization before we get to the details. I’m going to lay out a few axioms that I believe will occur or intensify in the fall.
Inflation will hit a local low this summer and accelerate again by the end of the year.
I’m talking specifically about consumer price inflation (CPI) in the United States. Due to a statistical phenomenon known as the base effect, high monthly inflation rates (CPI MoM) will fall. We will see lower CPI MoM in the summer of 2023. If the CPI in June 2022 was 1%, then this June we will see 0.4% (monthly). The YoY CPI will then decline year-over-year.
As shown in the chart, some of the highest MoM CPI numbers of last year came in May and June. These metrics are accounted for in the current data on an annualized basis. In 2023. MoM CPI was 0.4%. This means that if we simply take the average and replace all readings from May through December 2022. by 0.4%, you get the following graph:
The Fed doesn’t care about real inflation-they care about this imaginary thing called core inflation. It deprives people of everything that really matters (like food and energy). The chart below does the same analysis for core CPI:
The conclusion is that the Fed’s 2% core inflation target will not be met in 2023. Which means, if the rhetoric of Powell and other Fed governors is to be believed, the regulator will continue to raise the rate of inflation. This is important because it means that rates paid on money held in reverse repurchase mechanisms (RRP) and interest on reserve balances (IORB) will continue to rise. It will also contribute to higher rates on U.S. Treasury bills (with a maturity of less than 1 year).
Don’t get bogged down trying to figure out why these inflation figures don’t match how prices are actually changing for you or your family. This is not an exercise in intellectual honesty. We just want to understand the indicators that affect how the Fed adjusts its discount rates.
The U.S. federal government can’t cut its deficit because of entitlement spending.
Baby boomers are the wealthiest and most powerful members of the American electorate, and they are also aging and sick. This turns politics into political suicide. They are beginning to cut the social and health benefits promised to boomers.
For a country that is at war almost every year of its existence, it is also political suicide to agitate a politician to cut the defense budget.
HHS + SSA = Old Age and Medical Benefits.
Treasury = Interest paid on outstanding debt.
Defense = War.
Rights plus defense spending will only increase in the future. This means that the U.S. government’s budget deficit will continue to grow. It is estimated that deficits of $1 trillion to $2 trillion a year will be the norm over the next decade. And unfortunately, there is no political will on either side to change this trajectory.
The end result will be a constant giant flood of debt that the market must absorb.
foreigners
As I have written many times, there are many reasons why foreigners have become net sellers of U.S. Treasury debt (UST, US Treasury debt). Here are some factors:
Property rights depend on whether you are a friend or foe of the ruling politicians of Pax Americana. We have already seen the rule of law give way to the rule of national interest when the U.S. froze Russian government assets because of the war in Ukraine. So as a foreign UST holder, you cannot be sure that you will be allowed access to your capital when you need it.
For many countries, China has become a larger trading partner than America. This means that from a purely commercial point of view, it makes more sense to pay for goods in Chinese yuan (CNY) rather than dollars. Thus, more and more products are being billed in Chinese yuan. This leads to less demand for dollars and USTs on the margin.
For the past two decades, USTs have lost purchasing power in terms of energy. Gold has retained this ability. So in a world where energy is scarce, it is better to save in gold rather than UST on margin.
Graph. TLT ETF (20+ year Treasury bonds) divided by spot price of WTI oil (white)
And gold divided by WTI oil price (yellow)
Long-term U.S. Treasuries lagged the oil price by 50% in total yield. But gold has outperformed the price of oil by 190% since 2002.
The end result is that the percentage of foreign ownership of UST is falling. Governments outside the U.S. are not buying new securities, yet they are actively selling shares of existing USTs.
So here is the first important conclusion! If there is a large amount of debt to sell, you can’t count on foreigners to buy it.
US private sector (businesses and entrepreneurs)
There is one thing that bothers me the most about this cohort. I ask myself, what are they going to do with their savings?”</nbsp;
Remember that during COVID, the U.S. government handed out stimulus payments (stimmies) to everyone. America gave more such checks than any other country to combat the catastrophic economic effects of the lockdown.
These stimulus payments were invested in the U.S. banking system. Since then, the private sector has been spending free money on whatever it wants.
U.S. entrepreneurs were happy to keep their money in the bank when the returns on deposits, money market funds and short-term Treasury bills were virtually zero. As a result, deposits in the banking system swelled. But when the Fed decided to fight inflation by raising interest rates at the fastest pace in its history, the private sector suddenly had a choice:
Into continue earning virtually 0% at the bank.
Or
Transfer them to a mobile banking app and invest in a money market fund or a U.S. Treasury bill, with up to 10 times the yield, in minutes.
The choice was clear. Representatives of private businesses decided to transfer money from low-yielding bank accounts in more profitable assets. Hundreds of billions of dollars started flowing out of the U.S. banking system late last year.
The big question for the future is: Will this situation continue? Will companies and individuals continue to move money from zero-return bank accounts into money market funds with 5% or 6% returns?”
Logic tells us the answer is an obvious and resounding “of course yes.”. Why not, if all it takes is a few minutes on their smartphones to increase their interest income tenfold?”</nbsp;
The U.S. private sector will continue to suck money out of the U.S. banking system until banks offer competitive rates that at least match the Fed funds rate.
The next question: if the U.S. Treasury sells debt, what type of debt would people want to buy (if any)? That’s a simple question, too.
Everyone feels the impact of inflation and therefore has a very high preference for liquidity. Everyone wants access to their money immediately because they don’t know the future path of inflation. Given that inflation is already high, they want to buy things now before they get more expensive in the future. If the Treasury offered you a one-year bill with a yield of 5% or a 30-year bond with a yield of 3%, which would you prefer? Given that the yield curve is inverted?
Certainly you want a 1-year bill. Not only do you get a higher return, but you get your money back faster. And you only have a 1-year inflation risk compared to a 30-year inflation risk. The U.S. private sector will choose short-term USTs. They will buy money market funds and exchange-traded funds (ETFs) that hold only short-term debt.
Note: an inverted yield curve means that long-term returns are less than short-term debt. Naturally, you expect to get more income if you lend money for a longer period of time. But inverted yield curves are not natural and indicate a serious dysfunction in the economy.
US federal government
I already touched on this above. But now I’ll expand on the same theme in a more colorful and engaging way.
Imagine there are two politicians.
Oprah Winfrey wants everyone to be happy and live a better life. She advocates that everyone should have food on the table, a car in the garage with a full gas tank, and the best medical care for the rest of their lives. She also promises not to raise taxes to pay for all these social benefits. How will she pay for all the goodies? Oprah will borrow money from the rest of the world to do so. She believes this is possible because the U.S. is the global issuer of the reserve currency.
Scrooge McDuck is a cheapskate and hates debt. He won’t give any government benefits because he doesn’t want to raise taxes or borrow money for things the government can’t afford. If you have a job that allows you to stock your refrigerator, fill up your pickup truck, and buy top-notch health care, rejoice. But if you can’t afford it, that’s your problem. Scrooge doesn’t believe it’s the government’s job to give you freebies. He wants to preserve the value of the dollar and make sure investors have no reason to invest in anything else.
This is a picture of U.S. Treasury Secretary Andrew Mellon, also known as Scrooge. During the Great Depression, he said the famous phrase, “Eliminate the labor force, eliminate the stockpiles, eliminate the farmers, eliminate the real estate. That will clean out the rot in the system. The high cost of living and the high standard of living will go down. People will work more, live more moral lives. Values will change. And then the enterprising people will take the wreckage of benefits from the less competent.” As you might imagine, this statement was not received well by the people.
Imagine being in a late stage of empire, where income inequality has risen sharply. In a democratic republic, elections are governed by the “one man, one vote” rule. In this case, mathematically, the majority of the population has a lower than average income. Who wins? Oprah wins every time. Free shit paid for by someone else with a money printer always wins.
The number one goal of any politician is to get re-elected. Therefore, no matter which political party they belong to, politicians will always prioritize spending money they don’t have. This is how they gain the support of the majority of the population.
There is no serious rebuke from long-term debt markets or hyperinflation right now. So there is no reason to abandon the “free crap” strategy. This means that going forward I do not expect any significant changes in the spending habits of the U.S. federal government. Trillions of dollars the government will still borrow every year to pay for goodies.
US banking system
I already said that the U.S. banking system – and all other key banking systems – screwed up. Fast forward to why.
As a result of COVID funding made by governments around the world, assets in the banking system have skyrocketed. Banks followed the rules and lent these deposits to governments and businesses at very low rates. It worked for a while because banks paid 0% on deposits, but earned 2% to 3% by lending to others on a longer term basis. But then there was inflation, and all the major central banks (among them the Fed was the most aggressive) raised short-term interest rates. They have become much higher than what government bonds, mortgages, and business loans brought in 2020 and 2021. Depositors could now make much more money by buying money market funds that invested in the Fed’s RRPs or short-term USTs. So depositors began withdrawing money from banks to get higher returns.
Banks could not compete with the government because it would destroy their profitability. Imagine a bank with a loan portfolio that has a yield of 3%, but deposit payments of 5%. Someday this bank will go bankrupt. As a result, bank shareholders began to sell off bank shares because they realized that these banks mathematically could not make a profit. This led to a self-fulfilling prophecy in which the solvency of a number of banks was called into question by the rapid decline in their stock prices.
I had an interview with Zoltan Pozar at the Bitcoin Miami conference. I asked him what he thought of the U.S. banking system. Zoltan replied that the system is ultimately reliable, and it’s just a few lousy apples. Various Fed governors and U.S. Treasury Secretary Janet Yellen are saying the same thing. I strongly disagree.
The banking system will always end up being saved by the state.. But unless the systemic problems facing banks are addressed, they will be unable to perform one of their most important functions: channeling the nation’s savings into long-term government bonds.
The banks now face two options:
Option 1: sell assets (EU debts, mortgages, car loans, commercial real estate loans, etc.. etc.) with huge losses, and then raise deposit rates to bring customers back to the bank.
This option recognizes implicit losses in the balance sheet, but ensures that the bank cannot be profitable on an ongoing basis. The yield curve is inverted, meaning that a bank will pay a high short-term interest rate on deposits without being able to lend those deposits for a longer term at a higher rate.
The 10-year U.S. Treasury yield minus the 2-year U.S. Treasury yield
Banks can’t buy long-term government bonds because that would lock in a loss – remember this point, it is extremely important!
The only thing banks can buy is short-term government bonds or leave their money with the Fed (IORB) and earn slightly more than they pay out in deposits. Banks will be lucky if they get a 0.5% net interest margin (NIM) by following this strategy.
Option 2: Do nothing, and when depositors scatter, exchange their assets with the Fed for freshly printed dollars.
This is essentially what the bank term financing program (BTFP) is all about. I talked about this in great detail in my essay “Kaiseki”:
“Kaiseki” – new essay by Arthur Hayes
17.03.03.2023
20 min
10644
read
The problem here is not the bank providing for collateral the strange assets. The problem is different – the bank can’t increase its deposit base and then take those deposits and buy long-term government bonds.
US Treasury
I know, that the media and markets are preoccupied with the topic of when the U.S. debt ceiling will be reached and whether the two political parties will find a compromise to raise it. Never mind the circus – they will raise the debt ceiling (as always, given the much darker alternative). And when that happens, sometime this summer, the U.S. Treasury will have something to do.
The U.S. Treasury is set to issue trillions of dollars in debt to fund the government. It is important to pay attention to what the repayment profile of the debt sold. Obviously, it would be great if the U.S. Treasury could sell trillions of dollars worth of 30-year bonds, because the yield on those bonds is almost 2% lower than the notes with a maturity of <1 year. But can the market handle it? No, no, no!"
Till the end of 2024, some $9.3 trillion in debt needs to be rolled over. As you can see, the U.S. Treasury is unwilling or unable to issue the lion’s share of debt on a long-term basis and instead funds short-term. This is bad news because short-term rates are higher than long-term rates, which increases interest costs.
That’s it.
And now a table of major potential buyers of US Treasury bills, notes and bonds:
No major buyers want or can buy long-term UST. Consequently, if the U.S. Treasury tried to flood the market with trillions of dollars worth of long-term debt, the market would demand a much higher yield.
Imagine if the 30-year yield doubled from 3.5% to 7% – it would collapse bond prices and mark the end of many financial institutions. Why? Because regulators have encouraged these financial institutions to accumulate long-term debt, using nearly endless amounts of borrowed funds. You’re all cryptolumans and you know what that means: REKT!”
The U.S. Treasury yield curve
Janet Yellen is no fool. She and her advisors know that it is impossible to issue the debt they need on the long end of the yield curve. So they will issue debt where demand is off the charts: at the short end of the yield curve. Everyone wants high short-term interest rates, which are likely to get even higher as inflation resumes later this year.
As the U.S. Treasury sells $1 trillion to $2 trillion worth of debt, short-term bond yields will rise. This will further exacerbate the problems of the banking system because depositors get better credit for the government than for the bank. This, in turn, ensures that banks cannot make profits with negative net interest margins on newly originated loans. And, therefore, will not be able to support the government by buying long-term bonds. Петля смерти быстро затягивается.
ФРС
А теперь к финалу. Sir Powell’s place is a real mess. Each voter pulls the central bank in a different direction.
Low rates
The Fed controls/manipulates short-term interest rates by setting the rate at RRP and IORB. Money market funds can earn income in RRP and banks can earn income in IORB. Without these two tools, the Fed is unable to color the tape where it wants to.
The Fed could aggressively cut interest rates on both instruments, which would immediately make the yield curve steeper. There are advantages here: banks are becoming profitable again. They will be able to compete with the rates offered by money market funds, rebuild their deposit base, and start lending long term to businesses and government again. U.S. banking crisis ends. The U.S. economy is coming down as everyone gets cheap credit again.
The U.S. Treasury can issue more debt with longer maturities because the yield curve is positively sloped. Short-term rates will fall, while long-term rates will remain unchanged. This is a good option because the interest cost of long-term debt will not change, but the attractiveness of this debt as an investment will increase.
The disadvantage is that inflation will accelerate. The value of money will fall, and the things the electorate cares about – like food and fuel – will continue to rise faster than wages.
Rate hikes
If Powell wants to keep fighting inflation, he should keep raising rates. For you Taylor Rule economic knuckleheads, U.S. rates are still deeply negative.
There are negative consequences of further rate hikes:
The private sector will still prefer Fed lending through money market funds and RPP. They won’t put money in the bank. U.S. banks will continue to fail and get bailouts due to falling deposit base. The Fed’s balance sheet may not face a mess. But the Federal Depository and Insurance Corporation (FDIC) will be chock-full of crappy loans. Ultimately, this causes inflation again, as depositors are paid back in full with printed money, and they get more and more interest income by lending to the government, not the bank.
The inversion of the yield curve will continue. This would deprive the U.S. Treasury of the ability to issue long-term debt in the amount it needs.
I want to expand a little on the idea of why raising rates will also cause inflation. I agree with the point of view that the amount of money is more important than its price. But we need to focus on the number of dollars invested in global markets.
As rates rise, there are three baskets in which global investors receive returns in the form of printed dollars. Printed money comes from either the Fed or the U.S. Treasury. The Fed prints money and gives it away as interest to those who invest in the reverse repo mechanism, or to banks that hold reserves at the Fed. Remember: if the Fed wants to continue to manipulate short-term rates, it must have these options.
The U.S. Treasury pays interest to debt holders in large amounts if it issues more debt and/or if interest rates on newly issued debt go up. Both of these things are happening now.
Together, the interest paid by the Fed through RRP and IORB and the interest paid on U.S. Treasury debt are stimulative. But shouldn’t the Fed be cutting back on money and credit with its quantitative tightening (QT) program? Yes, that is correct.. But let’s analyze what the net effect is and how it will evolve in the future.
As we can see, the QT effect has been completely negated by interest paid in other ways. The amount of money increases even as the Fed reduces its balance sheet and raises rates. Will this continue in the future. And if so, on what scale? Here’s what I think:
The U.S. private sector and banks prefer to keep money in the Fed, so RRP and IORB balances will rise.
If the Fed wants to raise rates, it must raise the interest it pays on the money held in RRP and IORB.
The U.S. Treasury will soon need to finance a deficit of $1 trillion to $2 trillion. And it should do so at higher and rising short-term rates. Given the maturity structure of all U.S. debt, we know that actual monetary interest costs can only grow mathematically.
Taking these three things together, we realize that the net effect of U.S. monetary policy at this point is stimulative, and the money printer is stamping more and more toilet paper. Remember, this is happening because the Fed is raising rates to fight inflation. But if raising interest rates in the end increases the money supply, then it follows that raising rates actually increases inflation. Crazy!”
Of course, the Fed could increase the QT rate to offset these effects. But that would require that at some point the Fed become a direct seller of USTs and MBS, in addition to foreigners and the banking system. If the largest debt holder (the Fed) also sells, UST market dysfunction will intensify. This would have spooked investors, and long-term yields would have jumped. Then participants will rush to sell everything they can before the Fed does the same. So here’s the deal.
Let’s trade this
Between now and the fall harvest, several important things will happen.
First, the U.S. government debt ceiling will rise this summer. This will allow the U.S. Treasury to begin issuing debt to finance the government. As the U.S. Treasury extends debt maturities and issues new debt, the net effect will be an increase in outstanding debt. This will lead to higher interest rates. Debt issuance could temporarily deplete dollar liquidity as the total treasury account (TGA) grows. But over time, the Treasury spends money, TGA declines, and dollar liquidity increases.
Second, as I said above, inflation will bottom out and begin to slowly rise. Which means the Fed may pause rate hikes in June, but then rekindle the fire by raising rates at the July meeting. In late August, by the way, there will be a celebration of central bankers in Jackson Hole. By then, discount rates could be close to 6%. Higher rates will increase the amount of money paid in interest on RRP and IORB balances.
Finally, depositors will continue to move money from banks that are not too big to fail (TBTF, Too Big To Fail ) to TBTF banks and/or money market funds. Money market funds will put money in RRPs and TBTF banks will put money in IORBs. In both cases, RRP and/or IORB balances are increasing. TBTF banks are full of cash, and so they pay virtually no interest on deposits and take any extra money received and place it in the Fed (hence the rise of the IORB). This increases the amount of money the Fed prints to pay interest on deposits held at these facilities.
Accumulating all this, the daily amount of dollar liquidity in the system will continue to grow. The rate of change in the dollar infusions will also accelerate, because the more balances grow, the more interest is paid. Compound interest is a geometric progression.
Bitcoin has experienced a drawdown of about 10% from its April highs. All this interest paid is actually an incentive program for wealthy asset owners. What do wealthy asset owners do when they have more money than they need? They buy risky assets. Gold, bitcoin, AI technology stocks and so on. They will be the beneficiaries of this “wealth,” which is printed by the government and distributed as interest.
I expect Bitcoin to hold at today’s. I don’t believe we will retest $20,000 or come close to it. As money slowly flows into global risky asset markets, a strong support base will form. Volatility and trading volumes are always not particularly high in the summer. So I’m not surprised that bored Degenes have given up crypto-trading at this point. I will use this lull period to gradually increase my allocation in Bitcoin after refilling TGA.
And then…. And then more and more pundits will speculate about what happens to the billions of dollars that the Fed and the U.S. Treasury are handing out left and right as interest. Once again, everyone will know that money printing is in full swing. А когда принтер в работе, у Bitcoin начинается бум!
