The current economic situation in the United States is not only casting a shadow over the country’s financial system, but also has far-reaching consequences for global markets, including cryptocurrencies such as Bitcoin. The following article examines the interactions between monetary policy, inflation, interest rate policy, government debt, the banking crisis, and market reactions in several chapters. The aim is to paint a comprehensive picture of the current situation and highlight the risks that exist – and the strategies investors might consider.
The Expansionary Money Supply and its Significance
Despite restrictive interest rate policy, the global money supply continues to grow. Last week alone, an increase of over $230 billion was recorded. This development contradicts the official narrative of an allegedly tight monetary policy. Bitcoin in particular shows a historical correlation with the global money supply: when the latter rises, the price of the cryptocurrency also rises in the medium term. This behavior underscores Bitcoin’s role as a potential store of value in inflationary phases.
Inflation and Trueflation on the Rise
In addition to traditional consumer price indices, there are alternative indicators such as “trueflation,” which aggregates real-time data on price developments. This was recently above 2%, indicating an upward trend. Such values suggest that the declines in inflation at the end of 2023 were more temporary in nature. In addition, planned or discussed new import tariffs are already pushing up prices, even though many of them have not yet officially come into force. In the current economy, moderate inflation is systemically desirable as it acts as a driver of growth – deflation, on the other hand, would jeopardize revenues, employment, and investment.
Interest Rate Developments and Market Reactions
Although many market participants want interest rates to be cut, there is currently little economic reason for the US Federal Reserve to take this step. Inflation has not fallen significantly and the labor market remains stable. The Federal Reserve is primarily focused on two goals: price stability and full employment. The financial markets, on the other hand, are betting on monetary easing and are sensitive to any change in the likelihood of future interest rate cuts. Rising yields on US government bonds reflect this tension.
Federal Funds Effective Rate USA (Image: Fred)
The End of Trump’s Tariffs
A US trade court has ruled that key tariffs imposed during the Trump era are unlawful. Although an appeal is still pending, this decision provides short-term relief for the markets. However, uncertainty remains in the long term, especially since tariffs can be reactivated at any time as a political instrument. They also contribute indirectly to inflation, as companies make price adjustments in advance.
Relevant article: Comprehensive analysis of the new US tariff policy and its global implications
Liquidity Bottlenecks and Possible Measures
To meet growing demand for liquidity, the US Treasury is considering easing the Supplementary Leverage Ratio (SLR). This rule requires banks to hold equity reserves for their assets, such as government bonds. If this rule is relaxed, banks could free up more capital and invest it in the bond market. This would help both the government (as the issuer of bonds) and the markets, but it carries systemic risks as it makes banks more vulnerable to market turmoil.
The Role of the US Federal Reserve and Quantitative Measures
In parallel with the planned SLR relaxation, the US Federal Reserve is slowing down its quantitative tightening (QT) program, which involves selling assets to withdraw money from the system. In the future, there could even be a return to quantitative easing (QE) – i.e., the targeted purchase of bonds by the central bank to provide liquidity. Such monetary policy measures often act as training wheels for the markets, but can lead to price distortions and bubbles in the long term.
The Refinancing Problem of US Government Debt
The US has to refinance several trillion US dollars of government debt this year. In concrete terms, this means that old bonds have to be replaced with new ones – but at higher interest rates. This increases the government’s interest burden and restricts its fiscal leeway. This becomes particularly problematic when the bond market is already struggling with high yields and demand is low.
Related article: Trump and the new world order – implications for Bitcoin?
The Underestimated Banking Crisis and Silent Losses
A key structural problem affects US banks: many institutions hold government bonds on their balance sheets that have lost a lot of value. As long as these losses are not realized, they only appear on the balance sheet as “unrealized losses.” However, in the event of a sudden need for capital – such as a bank run – these can lead to acute liquidity problems, as the example of Silicon Valley Bank has shown. Official figures currently put unrealized losses at around US$500 billion, but according to the chairman of the FDIC, the true figure could be even higher.
The Cycle of Government Bonds, Bank Reserves, and Systemic Risks
In order to stabilize the system, there could be another massive influx of capital into the bond market. The strategy: banks should buy additional bonds to support their prices – and thus reduce their own losses. However, this is a risky cycle based on confidence in sufficient liquidity. If this fails to materialize, systemic disruptions could ensue. In the worst case, new money would have to be printed – a familiar remedy, but one that undermines the purchasing power of currencies in the long term.
Bitcoin as a Potential Beneficiary
Despite minimal interest rate cuts, Bitcoin has recently reached new all-time highs. This development is closely linked to expansionary monetary policy and systemic risks in the banking sector. Bitcoin is increasingly seen as a hedge against inflation and financial instability. In addition, around $7.5 trillion is currently parked in US money market funds. If interest rates fall again, these capital reserves could be shifted to riskier markets, such as stocks or cryptocurrencies. Bitcoin could also benefit from this.
Relevant article: The new Bitcoin conglomerate – A new geopolitical financial strategy is taking shape!
Outlook
The current financial situation in the US is complex and fragile. A combination of rising money supply, persistent inflation, high government debt, and risks in the banking sector is creating a tense market environment. Measures such as the easing of capital requirements, delayed quantitative tightening, or possible interest rate changes do indicate room for maneuver, but they do not solve the structural problems. For many investors, the question therefore arises as to how they can protect themselves in the long term. In this context, Bitcoin is increasingly seen as a strategic store of value – a development that is not only of interest to crypto enthusiasts.
Author
Ed Prinz is Chairman of https://dltaustria.com, Austria’s most renowned non-profit organization specializing in blockchain technology. DLT Austria is actively involved in educating and promoting the value and application possibilities of distributed ledger technology. This is done through educational events, meetups, workshops, and open discussion forums, all in voluntary collaboration with leading industry players.
Disclaimer
This is my personal opinion and not financial advice.
For this reason, I cannot guarantee the accuracy of the information in this article. If you are unsure, you should consult a qualified advisor whom you trust. This article does not make any guarantees or promises regarding profits. All statements in this and other articles are my personal opinion.