January 27, 2023

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 was surprised to see that occurs 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 temporary.measure: there was a deficit of dollars in the financial market, as a result of which the interbank lending rate RP (REPO) increased to 10% per annum. REPO transaction is the most widespread lending tool both by banks of each other and by the central bank of credit organizations. In the case of a REPO transaction, financial resources are provided against the actual pledge of highly liquid securities, which are obligations of the US Treasury in the American financial system.

What was the reason? Nobel laureate in economics Paul Krugman said that it was probably just a technical matter, although he admitted that "strange things are happening on the repo market: it is worth noting that a similar situation with a lack of liquidity was at the heart of the 2008 financial crisis."

At the same time, Heidi Muur, a well-known analyst,on the contrary, she noted that it was a "big problem that the United States faced." And, of course, this is not at all what Jerome Powell, the head of the US Federal Reserve, who tried at the very beginning of the difficulties to announce that “all this does not have any influence on the American economy,” said.

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, because of the ECB policy onlower key interest rates further beyond zero, and because of the weakness of the key eurozone economy - Germany. Manufacturing PMI, reflecting the pulse of industry in this country, showed a value of 41.4. For the first time, the level was at such a low level over the past 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 struggle with the growth of repo rates, offering the banking sector $ 75 billion every day, resuming this practice on September 23 after the weekend break (even though the repo rate was reduced to 1.7% by September 20). However, the US Federal Reserve intends to keep this rate in every way below 2%, because otherwise investors will no longer be interested in investing in US Treasury bonds - repos will be more profitable. So far this has been working out 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 liquidity of the financial market on September 17, when it was clear that corporate quarterly payments accumulated by the evening of September 16 were used. However, this means that the funds were “pulled out” of the usual cash flow, which also shows that the dollar deficit turned out to be real.

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

“Everything smells very bad: a direct pumping of money to the US financial system, as well as replenishing the budget with an ever-increasing amount, literally taken from the air, of new dollars.”

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.

Conservative Budget Committee AssessmentCongress, the budget deficit in the next fiscal year, which begins on November 1, will be $ 1 trillion, although there is reason to believe that in the end it will be higher. The public debt situation is also cause for concern.

The economist Daniel Lacalle, whonoticed that the thesis that “every dollar of state borrowing has a“ security ”in the form of $ 1 brought to the US financial system as a savings” has already ceased to be valid. In other words, US dollars appear really just like that, without any connection with real economic processes.

US financial market has clearly become more demandingfunds than before. The fact is that international investors in US Treasury bonds began to sell them more actively, and the Fed has to buy them, which already holds on the balance sheet 2/3 of US debt securities so formalized. As a result, this desperate purchase led to a sharp drop in the yield of such securities, and in the future leads to their negative return on investment, as warned by former Congressman Ron Paul, as well as former Fed Chairman 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 .

The vagueness of which sanctions, right up toclaims from Interpol (fictitious and real), even more strikes the interests of institutional investors regarding Bitcoin. That is why the launch of Bakkt on Monday, September 23, initially turned out to be a small purchase volume of supplying futures for bitcoins in the first nine hours (28 bitcoins). But then the dynamics still accelerated, and in 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 should stay away from - the eloquent tweet of Mati Greenspan, a senior analyst at the eToro cryptocurrency trading platform, speaks about this. This is not surprising: if US President Barack Obama allocated about $ 700 billion to “extinguish” the 2008 crisis, then this amount concerned economic problems to a greater extent, and was also extended over time. The US Federal Reserve will get to this figure already in early October, and the support program will stretch until at least October 10: as the US Federal Reserve Deputy Chairman Richard Clarida said, the policy of large-scale throwing money into the US financial system will be constant.

Morgan Creek Investment PartnerCapital Anthony Pompliano compared the scale of dollars already thrown in with the capitalization of bitcoin (about $ 200 billion) and said that in such a situation, investor confidence will inevitably go from the dollar to the oldest cryptocurrency. Moreover, Trump is dissatisfied with the pace of the US Federal Reserve rate cut and will strive to ensure that it is even in the negative range. However, Pompliano wrote to Trump that his policy would not be able to support the "artificial growth" of the US stock market.

Donald Trump was wrong

Cheap dollar for investors and stock growthThe market is at the heart of Trump's strategy of accumulating Wall Street support for his re-election. And on September 18, the famous edition of The Project Syndicate also made a similar statement.

Pompliano is also confident that the manipulation of the US Federal Reservehave consequences not only on the financial sector, but also on the economy. And the main response of the investment community will be bitcoin - an expert is convinced of this. Analyst Max Kaiser 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 also higher than the return on investment in various assets since the crisis of 2008-2009. Gabor Gurbaks, VanEck’s digital asset strategist, also draws public attention to the fact that the real devaluation of the US dollar is actually higher than it might seem.

The head of the BitMEX crypto exchange Arthur Hayes said 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 emergence of new cryptocurrencies, such as Libra. This serves as evidence that the cryptocurrency ecosystem is developing harmoniously when it focuses not only on bitcoin, but also on a wide variety of altcoins.

Peter Schiff, a well-known economist, has already stated thatTrump “destroys 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 balance of the US Federal Reserve at the beginning of the week amounted to $ 3.845 trillion and continues to grow.

The head of the cryptocurrency exchange Binance Changpen Zhao spoke unusually sharply against the 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 Krueger 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 these risks.