Author: Arthur Hayes, founder of BitMEX; Translator: 0xjs@Golden Finance
Keep—It—Simple—Stupid = KISS, simplicity is beauty.
Many readers forget the KISS principle when reacting to the policies of the Trump administration. The goal of Trump's media strategy is that every day after waking up, you will say to your friends, partner, or heart: "Oh my God, did you see what Trump/Elon/Robert Kennedy et al. did yesterday? I can't believe they did that." Whether you are emotional or depressed, the melodrama "The Emperor's Day" is interesting.
For investors, this constant state of excitement is not conducive to accumulating funds. One day you buy, and then quickly sell after digesting the next news headline. The market hits you in the process, and your funds are rapidly reduced.
Remember the KISS principle.
Who is Trump? Trump is a performer in the real estate industry. To succeed in the real estate industry, you must master the skills of borrowing huge amounts of money at the lowest possible interest rate. Then, in order to sell homes or rent space, you have to brag about how impressive the new building or development will be. I am not interested in Trump’s ability to generate sympathy in the global community, but rather his ability to finance his policy objectives. I believe Trump wants to finance his “America First” policies by going into debt. If not, he will let the market naturally wipe out the credit embedded in the system and trigger a recession worse than the 1930s. Does Trump want to be known as the 21st century’s Herbert Hoover or Franklin Delano Roosevelt (FDR)? American history disparages Hoover because historians believe he did not print money fast enough, and venerates Roosevelt because his New Deal policies were paid for with printed money. I believe Trump wants to be considered the greatest president ever, and therefore, he does not want to destroy the fabric of the empire with austerity.
To drive home the point, remember that Hoover’s US Treasury Secretary Andrew Mellon said the following when dealing with an over-leveraged US and global economy after the stock market crash:
“Liquidating labor, liquidating stocks, liquidating farmers, liquidating real estate. It will purge the system of corruption. High cost of living and high quality of life will go down. People will work harder and live more morally. Values will adjust and enterprising people will pick up the pieces left by less capable people.”
Current US Treasury Secretary Scott Bessent would be less testy.
If my view is correct that Trump will finance “America First” through debt, how does this affect my view of the future of global risk asset markets, especially cryptocurrencies? To answer this question, I have to form a view of the ways in which Trump is likely to increase the quantity of money/credit (i.e., print money) and reduce its price (i.e., interest rates). So I have to have a view on how the relationship between Scott Bessent’s US Treasury and Jerome Powell’s Fed will play out.
Who do Bessent and Powell serve? Is it the same person?
Bessent is a Trump 2.0 appointee and judging by his past and current interviews, his worldview is very much aligned with Trump’s.
Powell is a Trump 1.0 appointee but he is a traitor. He defected to the Obama and Clinton sides. Powell destroyed what little credibility he had left by implementing a massive 0.5% rate cut in September 2024. At the time the US economy was growing above trend and the embers of inflation were still there, no rate cut was needed. But Obama-Clinton puppet Harris needed a boost and Powell did his job and cut rates. The outcome was not as expected, but Powell announced after Trump's victory that he would complete his term and once again take a firm stand against inflation.
When you are overloaded with debt, a few things happen. First, interest payments eat up a large portion of your free cash flow. Second, because of your high debt levels, no one will lend you money, so you can't fund additional asset purchases. So you have to restructure your debt, which requires extending the maturity and reducing the coupon rate. This is a soft default because mathematically, doing both of these things at the same time reduces the present value of the debt burden. Once your actual debt burden is reduced, you can borrow again at an affordable rate. From these perspectives, both the Treasury and the Fed have a role to play in restoring America's financial health. The success of this effort has been hampered by the fact that Bessant and Powell serve different masters.
Bessant has publicly stated that the current debt situation in the United States must change. He wants to eventually extend the average maturity of the debt burden, which Wall Street calls "debt maturity." Many macro experts have suggestions for achieving this goal; I discuss this solution in detail in The Genie. However, the bottom line for investors is that the United States will softly default on its debt burden by reducing its net present value.
Given the global distribution of holders of U.S. debt, it will take time to achieve this restructuring. This is a geopolitical dilemma. So in the short term (I mean the next three to six months), we cryptocurrency inventors have nothing to worry about.
Powell and the Fed have broad control over the amount of credit and its price. The Fed is legally allowed to print money to buy debt securities, which increases the amount of money/credit, that is, prints money. The Fed also sets short-term interest rates. Given that the United States cannot default on nominal dollar denominated debt, the Fed determines the risk-free rate for dollars, the effective federal funds rate (EFFR). The Fed has four main levers to manipulate short-term interest rates: the reverse repurchase program (RRP), interest on reserve balances (IORB), the federal funds floor, and the federal funds ceiling.We don't need to go into the money markets, we just need to understand that Powell can unilaterally increase the quantity of dollars and reduce their price.
If Bessant and Powell were in cahoots, it would be very easy to analyze the future path of dollar liquidity and the reactions of China, Japan, and the European Union to US monetary policy.
The Fed's Law of Recessions: If the US economy is in recession or the Fed is worried that the US economy will be in recession, it will cut interest rates or print money.
Let's test this law with recent economic history. Thanks to Bianco Research for this excellent table.
This is a list of the direct causes of recessions in the United States since World War II. A recession is defined as negative quarterly GDP growth. I will focus specifically on the period from the 1980s to the present.
This is a chart of the lower bound of the federal funds rate. Each red arrow represents the beginning of an easing cycle that coincides with a recession. As you can see, it is clear that the Fed will cut interest rates at least during a recession.
Fundamentally, Pax Americana and the global economy it rules are financed by debt. Large corporations issue debt to finance the expansion of future production and current operations. If cash flow growth slows significantly or falls outright, the ultimate repayment of the debt is called into question. This is problematic because corporate liabilities are largely assets of banks. Banks hold corporate debt assets to support their customer deposit liabilities. In short, if debt cannot be repaid, then the "value" of all existing legal credit bank instruments is called into question.
In addition, in the US, most households are heavily indebted. Their consumption patterns are based on mortgages, auto loans, and personal loans as marginal payments. If their cash flow generation capacity slows or declines, they will not be able to meet their debt obligations. Similarly, the banking system holds the above debt and supports its deposit liabilities.
During a recession or before cash flow generation slows or contracts, the Fed must avoid large-scale defaults or a significant increase in the probability of defaults on corporate and/or household debt. This would lead to corporate and consumer debt defaults, which would trigger systemic financial distress. In order to protect the solvency of the debt-financed economic system, the Fed actively or passively cuts interest rates and prints money every time a recession occurs or the risk of a recession increases.
Trump manipulated Powell to ease financial conditions by causing a recession or convincing the market that a recession is coming.
To avoid a financial crisis, Powell will do some or all of the following: cut rates, end quantitative tightening (QT), restart quantitative easing (QE), and/or suspend the supplementary leverage ratio for banks to buy Treasuries.
How did Trump unilaterally cause a recession?
The marginal driver of America's exceptionalism in economic growth has always been government itself. Whether the spending is fraudulent or necessary, government spending creates economic activity. In addition, government spending has a money multiplier. This is why the Washington, D.C. metropolitan area is one of the wealthiest in the U.S., because there are a ton of professional vampires sucking blood out of the government. It's hard to estimate the exact money multiplier directly, but conceptually, it's easy to understand that government spending has a follow-on effect.
It's confusing:
The median household income in Washington, D.C. is $122,246, which is well above the national median.
This makes Washington, D.C. the 96th-highest household income in the U.S.
As a former president, Trump is well aware of the extent of fraud, deception, and waste within the government. The establishment in both parties has no interest in curbing this phenomenon because everyone benefits from it. Given that the Trump faction is neither a Democrat nor a Republican, they have no qualms about exposing the shortcomings of government spending programs. The creation of an advisory committee backed by Trump’s seal of approval, called the Department of Government Efficiency (DOGE), and headed by Elon Musk, is the centerpiece of a move to rapidly and dramatically reduce government spending.
How does DOGE do this when many of the largest spending items are non-discretionary? If the payments are fraudulent, they can be stopped. If computers can replace the government employees who administer these items, human resource costs will plummet. The question then becomes, how much fraud and inefficiency goes into government spending each year? If DOGE and Trump’s word is to be believed, it’s in the trillions of dollars per year.
A potentially outrageous example is who the Social Security Administration (SSA) sends checks to. If we believe DOGE’s claims, the department is distributing nearly a trillion dollars to deceased individuals and people whose identities have not been properly verified. I don’t know the truth of this claim. But imagine you were a SSA benefit scammer and knew that Elon and “the big guys” digging into the data could tip off the Department of Justice about the fraudulent payments you’ve received over the years. Would you continue your scheme or run? The point is, fraudulent activity will likely decrease due to the threat of detection. As they say in China, kill the chicken to scare the monkey. So while the mainstream media is making a big deal about Elon and DOGE, I’m sure it’s hundreds of billions, if not a trillion dollars.
Let’s look at the human resources side of the government spending equation. Trump and DOGE are firing hundreds of thousands of government employees. Whether the unions are strong enough to mount a legal challenge to the wholesale elimination of “useless” government workers remains to be determined. But the consequences are already being felt.
The biggest risk is that the layoffs we’re seeing so far are just the tip of the iceberg. The size and timing of future layoffs will determine whether the labor market can keep functioning,” DeAntonio explained. “We currently expect the size of the federal workforce to decline by about 400,000 people through all of 2025 due to the ongoing hiring freeze, delayed resignations, and DOGE-initiated layoffs. –Fox Business
Even though Trump 2.0 is just over a month into his presidency, DOGE’s impact is evident. Jobless claims are surging in Washington, D.C. House prices are falling. Consumer discretionary spending, likely fueled by massive fraud and deception by the U.S. government, is disappointing financial analysts’ forecasts. The market is starting to talk about the “R” word (Recession).
Home prices in Washington, D.C. are down 11% since the start of the year, according to new analysis from real estate trading platform Parcl Labs, which tracks the impact of the actions of the Department of Government Efficiency (DOGE) on the city’s housing market. –Newsweek
The U.S. is almost certainly headed for a severe economic contraction due to massive layoffs across the government and the abrupt cancellation of federal contracts, Rothstein said in an article for Bluesky. – Economic Times
R stands for recession, the scarlet letter of the economy.Powell doesn’t want to be a modern-day version of Hester Pring, the transgender man, so he has to respond.
Powell has shifted his policy stance several times since 2018, and he is certainly influenced. The question for investors is whether Powell will act proactively to save the financial system from collapse or reactively after a large financial institution goes bankrupt.The path Powell chooses is purely political.So, I can’t predict.
All I know is that $2.08 trillion of US corporate debt and $10 trillion of US Treasury bonds must be rolled over this year. If the US is on the brink of or in the middle of a recession, the cash flow shock will make rolling over these massive bills at current interest rates nearly impossible. Therefore, the Fed must and will act to preserve the sanctity of the US-run financial system.
The problem for us crypto investors is the speed and scale of the US credit outflow. Let’s analyze the main steps the Fed will take to reverse the situation.
It is estimated that every 0.25% reduction in the federal funds rate is equivalent to $100 billion in quantitative easing or money printing. Assume that the Fed cuts interest rates from 4.25% to 0%. This is equivalent to $1.7 trillion in quantitative easing. Powell may not cut rates to 0%, but you can bet that Trump will allow Elon to continue cutting spending until Powell gets rates down to the desired level. When rates reach an acceptable level, Trump will rein in his aggression.
The recently released minutes of the Fed's January 2025 meeting detail that some board members believe quantitative tightening must end sometime in 2025. Quantitative tightening is the process by which the Fed shrinks the size of its balance sheet, thereby reducing the amount of dollar credit. The Fed conducts $60 billion of quantitative tightening each month. Assuming the Fed begins its actions in April, this means that the end of quantitative tightening in 2025 will inject $540 billion of liquidity relative to previous expectations.
To absorb the supply of US Treasuries, the Fed could restart QE and grant banks an SLR (Supplementary Leverage ratio) exemption. With QE, the Fed can print money and buy Treasuries, thereby increasing the amount of credit. The SLR exemption allows US commercial banks to use unlimited leverage to buy Treasuries, thereby increasing the amount of credit. The key is that both the Fed and the commercial banking system are allowed to create money out of thin air. Both restarting QE and granting SLR exemptions are decisions that only the Fed has the power to make.
If the federal deficit remains in the $1-2 trillion per year range and the Fed or banks absorb half of the new supply, it means that the money supply will increase by $500 billion to $1 trillion per year.50% is conservative because during COVID-19, the Fed bought 40% of new issuance. Nonetheless, by 2025, large exporters (China) or oil producers (Saudi Arabia) have stopped or significantly slowed down using their dollar surpluses to buy Treasuries; thus, the Fed and banks can manipulate more.
Rate Cuts: $1.7 Trillion
+
Stop QT: $0.54 Trillion
+
Restart QE/SLR Waivers: $0.50 Trillion to $1 Trillion
=
Total = $2.74 Trillion to $3.24 Trillion
In the US alone, the Fed and Treasury created about $4 Trillion in credit between 2020 and 2022 in response to the COVID pandemic.
Doge-inspired money printing could be 70% to 80% of COVID levels.
Bitcoin has risen about 24x from its 2020 low to its 2021 high simply because the US printed $4 trillion in money. Given that Bitcoin’s market cap is much larger now than it was then, let’s be conservative and say that Bitcoin could rise 10x if the US printed $3.24 trillion in money. For those asking how Bitcoin could reach $1 million during the Trump presidency, this is how it would be done.
Despite the current downturn in the market, I paint a very optimistic future picture for Bitcoin. Let’s look at my assumptions so that readers can judge for themselves whether they are reasonable.
Trump will finance “America First” through debt.
Trump is using DOGE to purge political opponents addicted to fraudulent revenue streams, cut government spending, and increase the likelihood of a recession from a slowdown in US government spending.
The Fed will use a range of policies to increase the quantity of money and reduce the price of money before or after a recession.
It’s up to you to decide whether this makes sense given your worldview.
I woke up on Monday morning to Trump’s hype. On Truth Social, Trump reiterated that the US will establish a strategic reserve consisting of Bitcoin and a bunch of shitcoins. The market surged on this “news”. This is nothing new, but the market saw Trump’s reaffirmation of crypto policy intentions as an excuse for a violent dead cat bounce.
If this reserve is to have a positive impact on prices, then the U.S. government must be able to actually buy these cryptocurrencies. There are no secret idle dollars waiting to be deployed. Trump needs the help of Republican lawmakers to raise the debt ceiling and/or revalue gold to match current market prices. These are the only two ways to fund a strategic reserve of crypto. I'm not saying Trump won't keep his word, but it may take longer to start buying than leveraged traders can hold out before being liquidated. So, play down this rally.
Bitcoin and the broader cryptocurrency market are the only truly global free markets left. Bitcoin's price tells the world in real time how the global community feels about the current state of fiat liquidity.
Bitcoin reached a high of $110,00 on the eve of Trump's coronation in mid-January 2025 and fell to a local low of $78,000, a drop of about 30%. Although US stock market indices are still close to their all-time highs, Bitcoin is screaming that a liquidity crisis is coming. I believe in the signals Bitcoin is sending, and therefore, a serious correction in the US stock market is coming, driven by recession fears.
If Bitcoin leads the market on the downside, it will also lead on the upside. Given that a minor financial turmoil can quickly turn into a full-blown panic due to the large amount of leverage embedded in the system, if my predictions are generally correct, we won't have to wait too long for the Fed to act. As the dirty fiat financial system, led by the U.S. stock market, catches up and starts printing money, Bitcoin will bottom first and then start to rise. I firmly believe that we are still in a bull cycle, so the worst bottom will be the all-time high of the previous cycle at $70,000. I am not sure we will go that low. A positive USD liquidity signal is that the U.S. Treasury General Account is declining, which acts as a liquidity injection.
Given my high confidence in my assumptions about the type of financiers Trump is and his ultimate goals, Maelstrom would add to my position if Bitcoin trades between $80,000 and $90,000. If this truly is a dead cat bounce, I would expect to add to my position again if Bitcoin trades below $80,000.
If the S&P 500 and Nasdaq 100 fall 20% to 30% from their all-time highs, coupled with the near-bankruptcy of a major financial institution, we could experience global correlation at some point. This means all risk assets will get hammered, and Bitcoin could drop below $80,000 again, possibly to $70,000. Whatever happens, we would be prudent to buy the dip without leverage to weather the eventual dirty fiat financial market turmoil before the global economy, led by the US, can rev up and push Bitcoin to $1 million or more.
Watch out for China. China wants to keep the RMB stable against the dollar, for better or worse. If the supply of dollars increases, he can instruct the People's Bank of China to increase the supply of RMB and ensure the USD/RMB exchange rate remains stable.
KISS.
Let the politicians do their thing, go your own way, and buy Bitcoin.
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