Bitcoin is ahead of the Fed. War, inflation, recession, how long before Jérôme Powell pulls out his money printing press?
We take stock
The US central bank is expected to raise its key rate by 0.50 or 0.75% this Wednesday evening at 8 pm The rate will then drop to 3.25%. More importantly, the reduction of its balance sheet should accelerate at a rate of 95 billion per month. The latter has a weight of 8830 billion, a decrease of 130 billion from April.
In May, the New York Fed predicted that the balance sheet would shrink to $5.9 trillion by 2025. That means private bank reserves would fall to about 8% of GDP.
For Jonathan M. Wright of Johns Hopkins University (the seraglio…), who was interviewed by the Brookings institute on September 14, “Such a drop would probably be too good”. “When private bank reserves last reached this level (September 2019), market turbulence threatened the Fed’s ability to control short-term interest rates.”
And losing control of short-term lending rates means the system would collapse. Bulk…
Wright therefore expects the Fed’s balance sheet to shrink to about $7.5 trillion by the end of 2023, before it starts growing again. “My hypothesis is QE money [Quantitative Easing] he will never be pulled back into the Fed”said Mr. Wright.
“One of my favorite graphics.
They called into the vacuum “we’re reducing our balance sheet”, only to have it explode upwards (in 2019).
The Fed cannot reduce its balance sheet significantly for very long without breaking something and becoming a buyer of last resort. »
Your servant has this opinion. It’s only a matter of time before the Fed pulls out its printing press.
Exchanges will remain under pressure until then, however, which could weigh on bitcoin. In fact, the correlation between Bitcoin and the S&P500 has been steadily increasing since the end of last year.
Knowing that Ray Dalio, who manages one of the world’s largest investment funds, estimates that a prime rate of 4.50% would lead to an additional 20% decline in the S&P500 (or -40% overall).
Considering the inflation rate which is still over 8%, there is a good chance that the big man in charge of the FED will continue to raise the cost of money.
Especially since their European counterpart has already hinted that he will raise the ECB rate to 5%. The President of the ECB has even promised to raise rates until inflation is under control. But we are close to 10% and there is no indication that things will settle down.
On the contrary, the German producer price index, which is a key indicator of inflation, rose 46% in August! The proxy war between NATO and Russia in Ukraine did not plead for lower energy prices either.
It is even rumored that Vladimir Putin will declare war on Ukraine tonight. In other words, Moscow will take off the gloves. It is no longer a “special operation”, but a war.
And the kiss had come
The worst is yet to come this winter. German Foreign Minister Annalena Burbock said on Monday: “we are at war”.
Economy Minister Robert Habeck said yes “gas stocks are not enough if the winter is harsh”. “Small businesses will not be able to survive the rise in energy prices “.
And to make matters worse, the dollar continues to appreciate like never before. In other words, inflation will be even worse since the dollar is the main currency used in international trade.
The Dollar Index rose 14% in 2022, the biggest annual rise since the index’s launch in 1985. This appreciation is fueled by the Fed’s aggressive interest rate hikes that prompt global investors to withdraw money from other markets and place it in the United States. .
The gloomy economic outlook in Europe and China is also contributing to the greenback. The old continent must wean itself off Russian energy while the Middle Empire sees its real estate bubble burst.
For the United States, a stronger dollar means cheaper imports. This helps to moderate inflationary pressures. On the contrary, the rest of the world is suffering the pressure of the effects of the rise of the dollar.
All this to say that it doesn’t really make sense to sell bitcoin in this hyper-inflationary environment. But as it is, the masses still see it as a risky asset. We’ll see if this attitude changes this winter, when inflation reaches triple digits…
Not to mention the economic recession and public deficits that will inevitably explode. Which suggests that the central banks are bluffing and will have to print soon.
In 2019, the Fed was back to printing just nine months after it began shrinking its balance sheet, culminating in a 34% crash on Wall Street. We are at 6 months…
The ECB will also have to go to the checkout. Italy’s 10-year bond rate hit 4%, the highest rate since the European debt crisis in 2014. QE is likely to resume after the September election. For Christmas.
Meanwhile, you have to turn your back and enjoy these inexpensive BTC. No chain analysis this week. Glassnode would rather focus on Ethereum which has just disarmed against Bitcoin in the hashrate race…
Get a summary of the news in the world of cryptocurrencies by subscribing to our new service daily and weekly so you don’t miss any of the essential Cointribune!
Journalist reporting on the Bitcoin revolution. My papers deal with bitcoin through geopolitical, economic and libertarian prisms.
