The Federal Reserve is about to hit a milestone. Within a couple of weeks Jay Powell will have printed as much money in a year as his predecessors did in seven!
But this is only the beginning...
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Fed Milestone
It has been a year since the Fed started implementing “operation QE infinity”. And in a year they have managed to accomplish quite a lot.
After the 2008 financial crisis the Fed launched a number of QE plans. In a little less than 7 years they grew their balance sheet from basically nothing to about $3.5 trillion.
Fast forward to 2021… in one year the Fed added $3.48 trillion to their balance sheet…
*slow clap*
See for yourself.
The best thing is that we probably haven’t seen anything yet. When you look at the previous chart there is a clear breakdown:
First you have almost $3 trillions of emergency measures. That’s the initial spike similar to what happened in 2008.
Then you have a slower growth phase where the balance sheet grew by only $700 billion.
The point I’m getting at is that while the emergency measures are spectacular it is the long tail of quantitative easing that you need to worry about now.
In that respect it is easier to visualize by looking at the percentage growth of the Fed’s balance sheet from the start of the intervention in 2008 (resp. 2020).
By comparison to the last crisis we are only up 82%...
At this point you might object that “ok, this is what happened in 2008 but why would it play out the same this time?”
Good question.
This time around it is all about monetizing the debt.
It seems like Fed Chairman Jay Powell and former Fed Chairman now US Treasury Secretary Janet Yellen have things covered.
The US Treasury needs cash to finance the stimulus, potential student debt forgiveness and other infrastructure spending programs. It will find this cash by selling US debt. The Federal Reserve will be there to buy that debt with freshly minted US$.
You can already see on the chart below that after the Fed stopped their emergency measures one thing continues to go up: the amount of Treasury bonds they own...
Now there are many reasons why the Fed might actually increase the rate at which they purchase those Treasury bonds later this year.
First there is the Treasury General Account. The TGA is the account of the US Treasury at the Federal Reserve. This is where the US Treasury parks the unused cash it generates by selling debt.
Last year the TGA ballooned to more than 4 times the highest level it had ever seen. What that means is that the US raised a lot of cash but for the most part did nothing with it.
So at the moment the US does not need to issue a lot of new debt to deal with its obligations. Instead it can simply drain the TGA.
This is exactly what Janet Yellen said she would do a few weeks ago and we are already $500 billion down.
There is one more trillion to go but when you consider that the recent stimulus package will amount to a total of $1.9 trillion it is easy to see that we’ll be down to zero in no time.
And what happens when there is nothing left in the TGA? Well more debt has to be issued of course.
Potentially if the Congress manages to pass either another round of stimulus or some form of student debt forgiveness or some infrastructure bill, trillions might add up pretty quickly.
Finally there is the issue of the yield curve.
Right now the yield curve is pretty steep but the higher long term rates haven’t caused any dysfunctions in the stock market or in the economy at large. If those rates continue to rise and they start making trouble the Fed will need to put a cap on them.
There are a few ways of doing that but I don’t think any of them involve buying less Treasury bonds...
So this is where we are right now. In the midterm there is no scenario that won’t create an accelerated rate of currency debasement.
This is free publicity for Bitcoin.
Looking for a way to step out of the system? Worried about the long term purchasing power of your cash reserves? Unsure about what central bankers will do next?
Hedge your bets, invest in Bitcoin.
Tesla for Bitcoin
That’s it, you can now pay for your Tesla in BTC.
Time to start publishing a Tesla price index on top of the Big Sats index I guess...
Nice to see that Tesla will keep the coins instead of immediately converting them to cash. Most likely Technoking and his Master of Coin are betting that this method of payment will remain niche for a while. So they can certainly afford to hodl without creating any cashflow issue.
After all, if they are going to convert part of their cash reserves to BTC on a regular basis there is no point in doing the conversion back and forth.
This article from Business Insider suggests that few companies will do the same as Tesla.
I tend to agree. For now. Most companies don’t have any Bitcoin treasury program. Without such strategy I can’t see many large businesses deciding to bother with accepting Bitcoin.
But as adoption happens this will probably change.
Last Week
As I write those lines Bitcoin is still stuck in a drawdown but honestly things don’t look so bad.
So far the pullback bottomed at -19% which is significant but not huge. My view is that this is another consolidation between $50k and $60k.
If you check out the price action at the beginning of the year you’ll see that BTC spent about a month between $30k and $40k before we saw the next leg up. So I’d say there is no particular reason to worry.
Otherwise markets were again in consolidation mode last week. When it comes to the weekly moves nothing stands out.
Whether it is the bond market, stocks, gold or Bitcoin no one is very far away from the centre of their distribution of weekly returns.
Notably though the US 10-year yield broke its two months rising streak. That being said the trend still looks strong. I wouldn’t be surprised if this is just a pause on the way to 2% and more…
Remember that, until rates get too high and it causes some debt issues for businesses, the trend of rising yields is mainly affecting the gold market (more about the question of real yields for gold and Bitcoin over here).
Bitcoin is uncorrelated to the 10-year and these days both the NASDAQ and the SP500 have low correlations to rates.
That’s it for today. If you have learned something please subscribe and share to help the newsletter grow.
Cheers,
Nick
The Ecoinometrics newsletter decrypts Bitcoin’s place in the global financial system. If you want to get an edge in understanding the future of finance you only have to do two things:
Click on the subscribe button right below.
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