Excess liquidity is about to dry up

Source: Liu Jiaolian

Overnight BTC continued to maintain around 97k, with a slight increase.

A noteworthy macro trend is that the excess liquidity of the US dollar seems to be on the verge of exhaustion. The intuitive data is that the Federal Reserve's RRP (overnight reverse repurchase) reservoir has less than 500 billion US dollars left, which has dropped by more than 2 trillion US dollars from the high of 2.6 trillion US dollars in early 2023.

Regarding the operating principle of RRP, in simple terms, banks lend US dollars to the Federal Reserve, which uses US bonds as collateral and calculates interest once a day overnight.

In the implementation note after each FOMC meeting of the Federal Reserve, we will see the following sentence:

"Conduct standing overnight reverse repurchase agreement operations at an offering rate of 4.25 percent and with a per-counterparty limit of $160 billion per day." (Note from the Teaching Chain: This sentence comes from the executive summary of January 29, 2025)

It can be seen that the interest rate given by RRP is exactly the lower limit of the range of interest rates adjusted by the Federal Reserve.

This means that investment opportunities in the market below 4.25% have lost their investment significance - you might as well put the US dollars in the Federal Reserve's RRP pool to eat the risk-free interest given by the printing press.

The actions of institutions are predictive. Starting in the second half of 2021, RRP soared, which shows that institutions expect the Federal Reserve to raise interest rates quickly, thereby withdrawing liquidity from the market and putting it into RRP in advance. Starting from mid-2023, RRP began to plummet, which also shows that institutions expect the Federal Reserve to cut interest rates, or more attractive investment opportunities have appeared in the market, resulting in the withdrawal of funds from RRP.

After all, the RRP liquidity accumulation of up to US$2.6 trillion that was once recovered from the market actually came from the unlimited QE (quantitative easing) during the 2020 epidemic rescue.

Jiaolian once pointed out that "Throughout 2020, the Federal Reserve printed money crazily, printing 21% of the total amount of US dollars printed in the 107-year history of the US dollar in one year, equivalent to an increase of 26.6% of the US dollar in one year." The chart shows that in 2020 alone, the US dollar liquidity surged by about US$4.5 trillion.

In order to cope with the inflationary impact brought about by the flood of liquidity, the Federal Reserve used the "Star Absorbing Method". The RRP reservoir once absorbed and accumulated excess liquidity of up to 2.6 trillion US dollars, which is more than half of the large amount of water released in 2020. It can be said that it has made great contributions.

In the QT (quantitative tightening) process that the Federal Reserve immediately launched and continued to this day, the RRP reservoir has acted as a buffer for "secretly crossing Chencang".

On the one hand, if better investment opportunities appear in the market, such as gold or BTC, funds will be withdrawn from RRP and returned to the market.

On the other hand, RRP also provides a source of purchasing power for the Treasury to issue bonds for financing. As long as the rate of return given by the Treasury is good enough, funds can be attracted from RRP to TGA, the Treasury account. This part of the money will be quickly spent through US government spending projects and flow back to the market.

Therefore, we can regard TGA/RRP as a hedge against the Fed's QT.

In fact, the liquidity released by TGA/RRP to the market has indeed overwhelmed the liquidity recovered from the market by the Fed's QT.

Why do we see BTC rising all the way from 2023 with the Fed's high interest rates and QT, breaking through $100,000 and setting a new record high? Why do we see gold rising steadily? Why do we see US stocks continue to sing and dance? In the final analysis, the Fed's QT has become a sleight of hand. Excess liquidity is being rapidly released from RRP to the market.

The magic of finance lies in the transfer of wealth across time and space. Many people don't understand when the dealer's harvest of themselves will happen.

The US dollar was flooded in 2020, accumulated in RRP in 2021-2022, and released in RRP in 2023-2024.

If the USD is regarded as a kind of dog coin, then the harvest does not occur when 4.5 trillion is "minted" in 2020, nor when 2.6 trillion is "locked" in 2021-2022, but when 2.5 trillion is "sold" in 2023-2024. In this process, the dealer sells the dog coin USD to you in exchange for the real value (such as useful goods) or hard currency (such as BTC, gold) in your hand.

People who have experienced the beating of the currency circle will generally see through all the financial harvesting methods in the world.

The dealer issued a lot of dog coins at zero cost. How to operate to reap the maximum profit? Direct brainless shipment will definitely not sell for a good price.

First of all, we must first carry out a large-scale "airdrop" to attract leeks and establish the so-called "consensus". ——This is the "helicopter money" in the years around 2019-2020, which made the world envious.

Then they will engage in "locking positions" and "interest on deposits", give high returns, artificially create scarcity, and make it difficult to find a currency. ——This is the Fed's violent interest rate hike, high interest rate deposits, and attracting global liquidity backflow.

It is also necessary to start public opinion propaganda, through various paid cooperative media and KOLs shouting orders all over the world, hyping up the market, hyping up expectations, and covering every leek without dead ends. ——This aspect is too easy for the United States, which is the world's first-class in remote breeding technology, to control global public opinion, global media, and remote breeding technology.

Only when a huge trend is fooled, causing leeks all over the world to rush in desperately, then it is the last step, against the charge of leeks, decisively shipping and selling, and selling the chips in hand to this group of stupid leeks in batches and rhythmically. ——We are currently in this critical closing stage.

From the perspective of trading and harvesting, it is easier to understand why the Fed's operations are hesitant about cutting interest rates.

What inflation, what employment, are all excuses. The most important thing is that it must try to maintain the strength of the US dollar throughout the high-level shipment process, that is, it must not let the leeks see through the truth and stop the charge.

Just like a dealer of a dog coin, when shipping at a high level, it is necessary to cooperate with the concoction of various favorable factors and constantly test the market support strength, which is actually the confidence and strength of the leeks' charge. Try to maintain the price level during the shipment process, and don't extinguish the market all at once, so as to finally achieve the best price for selling chips and maximize the final profit.

Unlike some meme dog coins that run away after cutting a handful, the US dollar plate cannot be cut only a handful, but must be played for a long time.

After all, it only takes a few minutes to send a meme dog on the chain. So if you play with a plate, you can start another plate to play a new one. And to establish a set of US dollar system, it takes a lot of time and effort.

But the US dollar is not even as good as the dog. The total amount of Dogcoin is hard-coded in the smart contract on the chain, and the dealer may not be able to over-issue it at will. After harvesting a wave, if you want to continue next time, you can only smash the market and wash the market, and recover the chips at a low level. It is very difficult, and if you are not careful, you will be attacked by retail investors. Therefore, most meme Dogcoins choose to abandon the market directly, "hand it over to the community", and then issue a new coin to start over. The US dollar can be controlled by the dealer and over-issued at will, and the dealer will win.

Therefore, it is better to regard each batch of US dollars over-issued by QE as a new Dogcoin. It’s just that these Dogcoins have a brand continuity, all called USD. This is easy to understand.

The Federal Reserve does QT quantitative tightening to recover the previous batch of Dog USD. This is like recycling old chips, laying the foundation for the next wave of casting and distribution of new chips, and starting a new harvest.

So, if we use the language of the cryptocurrency world to describe the fact that the RRP reservoir is about to dry up, it basically means:

The previous USD market is almost finished and ready to end. Once it is finished, we should start preparing to launch the next USD market and start a new round of coin issuance and harvesting.