February 20, 2024

How will the financial policies of the US and Europe affect bitcoin?

How will the financial policies of the US and Europe affect bitcoin?

In the penultimate week of September, the global investment community watched in amazement asoccurs in the US financial system: unexpectedly, banks felt a shortage of dollars, and on September 18, the US Federal Reserve System (FRS) lowered its base interest rate for the second time in the last two months to an interval of 1.75–2%. What is happening with the policy of the US Federal Reserve and how this situation can affect the Bitcoin exchange rate.

USD deficit

From September 17 to September 20, the Fed provided banksadditional liquidity in the amount of $ 278.2 billion (September 17 - $ 53.2 billion, and from September 18 to 20 - $ 75 billion every day), that is, in fact, increased the supply of cash dollars. This all knows one of the main structural divisions of the US Federal Reserve - the Federal Reserve Bank of New York.

At first this step was perceived as temporarymeasure: there is a shortage of dollars in the financial market, as a result of which the rate on interbank lending RP (repo) increased to 10% per annum. A repo transaction is the most common instrument for lending both by banks to each other and by the central bank of credit institutions. In the case of a repo transaction, financial resources are provided against the actual collateral of highly liquid securities, which in the American financial system are obligations of the US Treasury.

What was the reason?Nobel laureate economist Paul Krugman said it was probably just a technicality, although he admitted that “strange things are happening in the repo market: it’s worth noting that a similar liquidity crunch was at the heart of the 2008 financial crisis.”

At the same time, Heidi Muur, a famous analyst,on the contrary, she noted that this was about “a big problem facing the United States.” And, of course, this is not at all what was stated by Jerome Powell, the head of the US Federal Reserve, who tried at the very beginning of the difficulties to announce that “none of this has any impact on the American economy.”

Euro stole dollars

In fact, the deficit of US dollars against the background of liquidity reserves above the norm in the US banking system can be explained in a rational way.

European Central Bank (ECB) policyled to the fact that it became profitable for global investors to borrow funds in Europe in euros, and then lend this money in the US market at a higher rate (but not in the interbank lending market).

That is, the classic carry trade scenario arose,when investor earnings are based on the difference in rates in Europe and the USA. And for those banks in the United States that participate in such a scheme with their reserves, of course, it was not interesting to lend money at lower rates to their fellow banks until the repo rate soared.

However, there is a nuance: for borrowing in Europe, you need to have partial collateral in Eurodollars - that is, in dollars that carry trade lovers need to place on the accounts of European banks. Thus, the “missing” US dollars settled there. The ECB has outplayed the Fed in terms of rates: borrowing in euros has become cheaper than in US dollars.

The euro has become cheaper, both due to the ECB's policy ona decrease in key interest rates further beyond zero, and due to the weakness of the key economy of the eurozone - Germany. The Manufacturing PMI, which reflects the pulse of this country's industry, showed a value of 41.4. This is the first time the level has been this low in the last 123 months.

American bankers, in turn, began againonly interested in lending to their colleagues when the repo rate jumped to 10% per annum, but the US Federal Reserve was no longer happy with this situation, and it intervened.

Moreover, it became known that the US Federal Reserve willcontinue to fight the rise in repo rates, offering the banking sector $75 billion every day, resuming this practice on September 23 after a break over the weekend (even though by September 20 the repo rate was reduced to 1.7%). However, the US Federal Reserve intends to keep this rate below 2% in every possible way, since otherwise investors will no longer be interested in investing in US Treasury bonds - repo transactions will be more profitable. So far this has been achieved with difficulty: on September 23, the repo rate rose again, to 1.95%.

US Federal Reserve Strategy - Transfer and Print New Dollars

Providing additional liquidity isnot always freshly printed dollars, as, for example, in the case of the beginning of the “pumping” of financial market liquidity on September 17, when it was clear that corporate quarterly payments accumulated by the evening of September 16 were used for this purpose. However, this means that funds have been "pulled" out of the normal cash flow, which also shows that the shortage of dollar funds was real.

Or, as an unknown Wall Street insider noted in a CNN post:

“Everything smells very bad: direct pumping of money into the US financial system, as well as replenishing the budget with an ever-increasing volume of new dollars taken literally out of thin air.”

And this is no coincidence: the difference between the expenditures of the state treasury and the revenues to it must be increasingly covered by borrowing in the market.

According to the conservative estimate of the Budget CommitteeCongress' budget deficit for the next fiscal year, which begins Nov. 1, will be $1 trillion, although there are indications it will end up higher. The government debt situation is also a cause for concern.

Economist Daniel Lacalle is confident of this,noticed that the thesis that “every dollar of government borrowing is “backed” by $1 brought into the US financial system as savings” has ceased to be valid. In other words, US dollars really appear just like that, without any connection with real economic processes.

The US financial market has clearly begun to demand morefunds than before. The fact is that international investors in US Treasury bonds have become more active in selling them, and the US Federal Reserve has to buy them back, which already holds 2/3 of US debt securities issued in this way on its balance sheet. As a result, this desperate buying has led to a sharp drop in the profitability of such securities, and in the long term leads to their negative return on investment, as warned by ex-Congressman Ron Paul, as well as former head of the US Federal Reserve Alan Greenspan.

Strange interest rate cut by the US Federal Reserve

Relieve dollar liquiditythere should be a reduction in the base interest rate - and the US Federal Reserve did so on September 18, by adopting a decision that entered into force on September 19. But rate cuts are usually a tool to “warm up” the economy. However, until September 18, the American economy showed:

  • growth for 122 months - the longest period in US history;
  • job growth over 107 months (also the longest period);
  • the unemployment rate is at around 3.7%, which is only 0.1% higher than the minimum since 1969.

What to warm up in such a situation? Global players quickly realized that the Fed’s desire to help the US financial system in a very difficult period for the value of the dollar: inflation in annual terms is at 2.4%, that is, at its highest value over the past 11 years.

Leave less money to banks for bitcoins

Meanwhile, it is obvious that the US Federal Reserve is not so fastreacted to higher rates for repo transactions. It all looks as if there was no free money in the US financial system, because the increase in the US Federal Reserve interventions that began after this means more market supervision, where players begin to realize that their participation in cryptocurrency purchases may entail sanctions from US regulators or international financial institutions .

Uncertainty of what sanctions, evenclaims from Interpol (fictitious and real), further strikes institutional investors' interests in Bitcoin. This is why the launch of Bakkt on Monday, September 23, resulted in a small volume of purchases of deliverable Bitcoin futures in the first nine hours (28 Bitcoins). But then the dynamics accelerated anyway, and within 24 hours the volume of transactions amounted to 72 bitcoins.

Dollar fades before bitcoin

However, the situation with what happens tothe availability of US dollars in the US interbank market is very worrying for investors. At the same time, on September 23, the most popular among various assets were precious metals: silver and platinum (gold is no longer in such high demand).

What about the dollar itself?The dollar already looks like a dubious financial instrument that you need to stay away from - this is evidenced by the eloquent tweet of Mati Greenspan, senior analyst at the eToro cryptocurrency trading platform. This is not surprising: if US President Barack Obama allocated about $700 billion to “extinguish” the 2008 crisis, this amount concerned problems in the economy to a greater extent, and was also extended over time. The US Federal Reserve will reach this figure in early October, and the support program will stretch at least until October 10: as US Federal Reserve Deputy Chairman Richard Clarida stated, the policy of large-scale injection of money into the US financial system will be permanent.

Partner at Morgan Creek Investment CompanyCapital Anthony Pompliano compared the scale of the dollars already injected with the capitalization of Bitcoin (about $200 billion) and said that in such a situation, investor confidence will inevitably move away from the dollar to the oldest cryptocurrency. Moreover, Trump is dissatisfied with the pace of lowering the US Federal Reserve rate and will do his best to ensure that it is even in the negative range. However, Pompliano wrote to Trump that his policies would not be able to support the “artificial growth” of the US stock market.

Donald Trump was wrong

Cheap dollar for investors and stock growthmarket is the essence of Trump's strategy to accumulate Wall Street support for his re-election. And on September 18, the well-known publication The Project Syndicate also made a similar statement.

Pompliano is also confident that the manipulations of the US Federal Reservehave consequences not only for the financial sector, but also for the economy. And the main answer from the investment community will be Bitcoin - the expert is convinced of this. Analyst Max Kaiser also agrees with him, who is confident that Bitcoin will be a global response to the loss of confidence in the US dollar.

Moreover, the profitability of Bitcoin since the beginning of the yearexceeds the results in all major popular areas of investment, and is also higher than the return on investments in various assets since the crisis of 2008–2009. VanEck digital asset strategist Gabor Gurbacs is also bringing public attention to the fact that the real devaluation of the US dollar is actually higher than it may seem.

The head of the BitMEX crypto exchange, Arthur Hayes, stated thatthe return of the US Federal Reserve to the “cheap dollar” policy will bring the price of Bitcoin to the level of $20,000, and in the future - up to $100,000, including due to the expansion of the cryptocurrency sphere and the appearance of new cryptocoins in it, such as Libra. This serves as proof that the cryptocurrency ecosystem is evolving harmoniously by focusing not only on Bitcoin, but also on a wide variety of altcoins.

Peter Schiff, a renowned economist, has already stated thatTrump is “destroying the dollar,” and compared what is happening with the worst practices in this area—the search for a global alternative to it by global investors has already begun. The US Federal Reserve's balance sheet at the beginning of the week amounted to $3.845 trillion and continues to grow.

The head of the Binance crypto exchange, Changpeng Zhao, spoke unusually sharply against fiat, saying that:

“Bitcoin is an asset that does not require any rescue measures.”

He believes that continuing to work in the dollar sector means behaving in poverty, but as Zhao emphasized:

“This is inevitable, so the sooner you opt for cryptocurrencies, the better.”

Why is Bitcoin better than any other asset?Analyst Alex Kruger explains: the actions of Trump and the US Federal Reserve create a systematic risk, that is, the risk of a total crisis, and Bitcoin has just shown its immunity to this kind of risk.