A trillion liquidity wave is coming, Bitcoin will soar like a rocket

Equity investors have been shouting: "Stablecoin, Stablecoin, Stablecoin; Circle, Circle, Circle."

Why are they so optimistic? Because the U.S. Treasury Secretary said this:

The result is a chart comparing the market capitalization of Circle and Coinbase. Remember, Circle has to pay 50% of its net interest income to Coinbase. However, Circle's market capitalization is surprisingly close to 45% of Coinbase's. This inevitably raises some thoughts...

Another result is this heartbreaking chart ( because I hold Bitcoin instead of $CRCL):

This chart shows the price of Circle divided by the price of Bitcoin, with an index of 100 as a baseline from when Circle was listed. Since the IPO, Circle's performance has outpaced Bitcoin by nearly 472%.

Crypto enthusiasts should ask themselves: Why is the Treasury Secretary so optimistic about stablecoins? Why does the Genius Act receive bipartisan support? Do American politicians really care about financial freedom? Or is there something else going on?

Perhaps politicians do care about financial freedom at an abstract level, but hollow ideals do not drive real action. There must be other more pragmatic reasons that have led them to change their stance on stablecoins.

In retrospect, in 2019, Facebook attempted to integrate the stablecoin Libra into its social media empire, but was forced to put it on hold due to opposition from politicians and the Federal Reserve. To understand the Treasury Secretary's enthusiasm for stablecoins, we need to examine the main issues he faces.

The main issues faced by the U.S. Treasury Secretary are strikingly similar to those faced by their predecessors. Their boss (, the President of the United States, and the members of Congress ) like to spend money but are unwilling to raise taxes. Therefore, the responsibility of raising funds falls on the Treasury Secretary, who needs to provide funding for the government through borrowing at reasonable interest rates.

However, the market soon showed a lack of interest in long-term government bonds of highly indebted developed economies—especially in the context of high prices/low yields. This is the "fiscal dilemma" that finance ministers have witnessed over the past few years:

The trampoline effect of global government bond yields:

The following is a comparison chart of the 30-year government bond yields: UK ( white ), Japan ( gold ), USA ( green ), Germany ( pink ), France ( red ).

If rising yields are already bad enough, then the actual value of these bonds is even worse:

Actual value = Bond price / Gold price

TLT US is an ETF that tracks long-term government bonds with maturities of over 20 years. The chart below shows TLT US divided by the price of gold, using 100 as the benchmark index. Over the past five years, the real value of long-term government bonds has plummeted by 71%.

If past performance is not enough to raise concerns, then the current and former finance ministers still face the following limitations:

The bond sales team of the Ministry of Finance must design an issuance plan to meet the following needs:

• Approximately $2 trillion in federal deficit each year
• $3.1 trillion debt maturing in 2025

This is a chart that details the main expenditure items of the U.S. federal government and their year-on-year changes. Please note that the growth rate of each major expenditure item is on par with or even faster than the growth rate of U.S. nominal GDP.

The previous two charts show that the weighted average interest rate of outstanding national debt is lower than the points on the yield curve of all national debts.

• The financial system issues credit using nominally risk-free government bonds as collateral. Therefore, interest must be paid; otherwise, the government will face nominal default risk, which would destroy the entire fiat currency financial system. Since the overall yield curve of government bonds is higher than the current weighted average interest rate of debt, as maturing debts are refinanced at higher rates, interest expenditures will continue to increase.
• The defense budget will not decrease, after all, the United States is currently involved in wars in Ukraine and the Middle East.
• Healthcare spending will continue to increase, especially in the early 2030s, as the baby boomer generation enters a peak period of requiring substantial medical services, with these costs primarily borne by large pharmaceutical companies funded by the U.S. government.

Control the 10-year Treasury yield to not exceed 5%

• When the 10-year yield approaches 5%, the MOVE Index ( measuring bond market volatility ) surges, and financial crises often follow.

Issuing debt to stimulate the financial market

• According to data from the Congressional Budget Office, although the data only goes up to 2021, the U.S. stock market has continued to rise since the global financial crisis in 2008, and capital gains tax revenue has surged accordingly.
• The U.S. government needs to tax the annual returns on the stock market to avoid a huge fiscal deficit.

The policies of the U.S. government have always favored serving wealthy asset owners. In the past, only white men who owned property had the right to vote. Although modern America has achieved universal suffrage, power still derives from a minority that controls the wealth of publicly traded companies. Data shows that about 10% of households control over 90% of the wealth in the stock market.

A notable example is during the 2008 global financial crisis, when the Federal Reserve printed money to rescue banks and the financial system, but banks were still allowed to repossess people's homes and businesses. This phenomenon of "the rich enjoying socialism while the poor bear capitalism" is precisely why the mayoral candidates in New York City are so popular among the poor -- the poor also hope to share in some of the benefits of "socialism."

During the Federal Reserve's implementation of quantitative easing ( QE ) policy, the work of the Treasury Secretary was relatively simple. The Federal Reserve printed money to buy bonds, allowing the U.S. government to borrow at low costs and also boosting the stock market. However, now the Federal Reserve must at least superficially show a stance against inflation, unable to cut interest rates or continue implementing QE, and the Treasury has to bear the heavy responsibility alone.

In September 2022, the market began to marginally sell off bonds due to concerns over the persistence of the largest peacetime deficit in U.S. history and the Fed's hawkish stance. The yield on 10-year Treasury bonds nearly doubled within two months, and the stock market fell nearly 20% from its summer highs. At this time, the former Treasury Secretary introduced a policy referred to by Hudson Bay Capital as "radical debt issuance" (ATI), which involved issuing more short-term Treasury bonds (Treasury bills) rather than coupon bonds, reducing the Fed's reverse repos (RRP) balance by $2.5 trillion and injecting liquidity into the financial markets.

This policy has successfully achieved the goals of controlling yields, stabilizing the market, and stimulating the economy. However, the current RRP balance is nearly exhausted, and the issue facing the current Treasury Secretary is: how to find trillions of dollars to purchase government bonds in the current environment of high prices and low yields?

The market performance in the third quarter of 2022 was extremely difficult. The following chart shows the comparison between the Nasdaq 100 Index ( in green ) and the 10-year Treasury yield ( in white ). As yields soared, the stock market experienced a significant decline.

The ATI policy effectively reduced the RRP( red) and promoted the rise of financial assets such as the Nasdaq 100( green) and Bitcoin( fuchsia). The yield on the 10-year Treasury bond( white) has never exceeded 5%.

Large "too big to fail" banks in the US (TBTF) have two funds that can be ready to purchase tens of trillions of dollars in government bonds whenever there is sufficient profit potential. These two funds are:

• Current/Fixed Deposits
• Reserves held by the Federal Reserve

This article focuses on eight TBTF banks, as their existence and profitability rely on government guarantees of their liabilities, and banking regulatory policies tend to favor these banks over non-TBTF banks. Therefore, as long as they can achieve a certain level of profit, these banks will comply with the government's demands. If the Secretary of the Treasury asks them to purchase government bonds, he will offer risk-free returns in exchange.

The enthusiasm of the Secretary of the Treasury for stablecoins may stem from the ability of TBTF banks to release up to $6.8 trillion in Treasury bond purchasing power through the issuance of stablecoins. These dormant deposits can be re-leveraged in the fiat financial system, thereby driving the market upwards. In the following sections, we will detail how to achieve Treasury bond purchases through the issuance of stablecoins and how to enhance the profitability of TBTF banks.

In addition, it will briefly explain that if the Federal Reserve stops paying interest on reserves, it could release up to $3.3 trillion for purchasing government bonds. This would become another policy that, while technically not quantitative easing ( QE ), has a similar positive impact on fixed-supply monetary assets ( such as Bitcoin ).

Now, let's get to know the new favorite of the Finance Minister------stablecoin, this "heavy weapon of currency".

Stablecoin Liquidity Model

My predictions are based on the following key assumptions:

Government bonds receive full or partial exemption from the supplementary leverage ratio ( SLR )

• Meaning of exemption: Banks do not need to hold equity capital for their government bond investment portfolio. If fully exempted, banks can purchase government bonds with unlimited leverage.
• Recent policy changes: The Federal Reserve has just voted to reduce banks' capital requirements for Treasury securities, and this proposal is expected to free up as much as $5.5 trillion in bank balance sheet capacity for purchasing Treasuries over the next three to six months. The market is forward-looking, and this buying power may flood into the Treasury market ahead of time, thereby lowering yields, all else being equal.

Banks are profit-oriented organizations that minimize losses

• Lessons on the Risks of Long-term Treasury Bonds: From 2020 to 2022, the Federal Reserve and the Treasury encouraged banks to purchase large amounts of Treasury bonds, and banks rushed to buy long-term coupon bonds with higher yields. However, by April 2023, due to the fastest rise in the Federal Reserve's policy interest rates since the 1980s, these bonds incurred huge losses, leading to the collapse of three banks within a week.
• The safety net of TBTF banks: In the TBTF banking sector, the "hold to maturity" bond investment portfolio of American banks has exceeded their entire equity capital in losses. If forced to mark to market, the bank would face bankruptcy. To address the crisis, the Federal Reserve and the Treasury effectively nationalized the entire U.S. banking system through the "Bank Term Funding Program" (BTFP). Non-TBTF banks may still incur losses, and if bankruptcy occurs due to losses on government bonds, their management will be replaced, and the bank may be sold cheaply to some trading platform or another TBTF bank. Therefore, the Chief Investment Officer of the bank (CIO) is cautious about purchasing large amounts of long-term government bonds.