BTC#20: DEBT, LIQUIDITY, and YCC CRISIS FOR BTC VALUE

Governments are massive borrowers world over. US lately talked about another $1.9T stimulus. Such massive fiat borrowing leads to rise in yields of bonds.  Stocks don't like rising bond yields. The most expensive stocks become the most sensitive stocks to the rising yield. Those are the FAANG stocks. Yield curve control (YCC) occurs when a central bank publicly announces and executes purchases of government bonds at a specific maturity to ensure that yields are maintained at the desired level. Because bond prices are inversely related to their yields, buying bonds and pushing up their price leads to lower rates.

The Australian Central Bank just began Yield Curve Control by buying their own debt last night in 2/28/2021. By keeping yield artificially low, YCC weakens the value of a currency more drastically than QE . When YCC is placed on the bond market, hard assets and commodities usually spike. Things like BTC and gold should go up. Interestingly gold is not reacting this way, and BTC is already rallying strongly today. The longer the YCC is kept, BTC should skyrocket. The Fed is using the Central Banks of Japan and Australia as their test cases to see how markets react to these experiments. My prediction is by summer as yields rise and the cost of funding government rises, the Fed will enact YCC to cool off the risks of a higher bond yield. Real rates in the bond market are already negactive according to Black Rock’s CIO. Later in 2021 , when rates become obvious negative rates it will like pouring jet fueld on BTC price. I will bet that gold lags because it is a dead monetary system compared to the living organism that is BTC.

Collateral effects:  it's like if they're coordinating all around the World for the YCC so that when the worlds’ CDBC are ready and in place, they'll drop directly to NIRP and implement depletion of your bank account if currency isn't used before a certain date. China’s CCP has already done this with the digital yuan. Pretty totalitarian approach is what I believe governments will take. you're not using your currency : that money will go to the gvnt accounts so they'll pay off their debt

If you're using your currency: velocity could kickout quickly, inflation could take off, real economy will rapidly crash/deflate and government will pay their debts off with all the confiscated money using cheaper dollar & more taxations. All nations are on schedule for the great reset using the Great Facade of COVID. COVID IS THE POLITICAL COVER TO AVOID A PUBLIC REVOLUTION.

In May of 2020 the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (collectively, the agencies) approved an interim final rule that permits depository institutions subject to the supplementary leverage ratio (SLR) to elect to temporarily exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the SLR denominator. The interim final rule strengthens the ability of electing depository institutions to continue taking deposits, lending, and conducting other financial intermediation activities during this period of stress caused by the coronavirus, also known as COVID-19. The interim final rule is in effect through March 31, 2021.

Things will get more exciting this year if SLR change is not extended by 3/31/2021.  Powell announced yesterday that he will make a decision on the SLR on 3/17/21.  This is what is holding the stock market and BTC price in check for the last two weeks.  

Treasuries held by US banks:

Consider what JP Morgan said recently:

I said it last year, this change in SLR and YCC will be permanent until they totally devalue fiat money and get CBDC as their currency. It will not be a temporary patch.

Why do I think this devaluation is closer than Wall Street thinks? 

Gold is acting opposite to how it should. And the Fed cannot just use SLR or YCC because when employing yield curve control isn’t capable of exercising as much control as they will need with a hyperinflating currency while employment is in the tank. Why?  In the US, the Fed already owns 40% of all 10-year Treasuries. So they will have to revert to the permanent peg they used in WW2. We also have record debt (30T) and massive unemployment from COVID (30M). 

Quantitative easing has either be continued for ever or the economic system including the currencies will collapse. In both cases the winner is Bitcoin. That is why I am very bullish. BTC is like the bankers in WW2. They were selling to both sides as the fought each other.

In addition to discussing SLR extension to assist the Treasury market, Zoltan Pozsar on Operation Twist or a weaker USD:

If Fed is proactive to gain control until their CBDC is ready, they might try to do another Operation Twist, where they sell some short-end Treasuries to provide the needed collateral and buy additional long-end Treasuries, within the context of their otherwise automatic $80B/month Treasury buying plan. Otherwise, we could see T-bill rates go lower or even mildly negative in the months ahead as T-bond rates continue to push up higher, and cause financial plumbing issues.

Lots of moving parts here because a TGA drawdown of this size would be a first. Operation twist ended the gold market rally in 2011. Interesting times to own Gold and BTC.

SUMMARY:

I have been in Clubhouse for two weeks discussing the issues in this blog.  The consequences of the 3/17/21 Fed decision on the SLR is massive. 

The Federal Reserve can create base money out of thin air in a process they call “quantitative easing” or QE for short, but has very limited methods to inject it into the broad money supply. They can only buy bonds and certain other assets with it. They have no way to send money to real people and businesses in the economy, outside of financial markets.

The Treasury Department, on behalf of Congress and the President, can send money out to people and businesses, but needs to issue bonds associated with that spending, which just moves money around. The bonds pull capital out from one place (the lenders) and puts it in another place (where it is spent). Therefore, the government also doesn’t have many ways to directly increase the broad money supply within the context of the existing legal structure.

However, the combination of the Treasury Department and the Fed working together, with the Treasury Department sending checks out into the broad money supply and the Fed creating new base money to buy the bonds associated with that spending (rather than extracting that money from real lenders buying the bonds with existing money), outright increases the broad money supply,If the do not extend the SLR this might be our reality below. 

Living the dream is not about living the fiat dream.

It's about avoiding the fiat nightmare by banking on yourself using BTC as your bank.