Changes in monetary policy and the outlook for the Bitcoin bull run

After the summer vacation in the Northern Hemisphere ended, I went to the Southern Hemisphere to ski for two weeks. Most of the time was spent on backcountry skiing trips. This activity requires attaching climbing skins to the bottom of the skis to move uphill. Once at a high point, the skins are removed, the gear is adjusted, and then you can fully enjoy the powder snow.

A typical four to five hour skiing day includes 80% uphill skiing and 20% downhill skiing. This activity consumes a significant amount of energy. The body burns calories to maintain temperature and internal balance. The leg muscles are continuously working whether going uphill or downhill. My basal metabolic rate is about 3000 kilocalories, and with the energy required for leg movements, the total energy expenditure exceeds 4000 kilocalories daily.

To meet the enormous energy demands, a full day's food intake combination is crucial. I have a hearty "real food" breakfast that includes carbohydrates, meats, and vegetables. However, as I enter the cold forest and start going uphill, these initial energy reserves quickly deplete. To manage my blood sugar levels, I prepare some snacks that I usually don't eat. I have a Snickers and syrup every 30 minutes on average, even when I don't feel hungry.

The combination of periodic sugar spikes and slowly burning real food can sustain performance throughout the day. This description of meal prep leads to a discussion about the relative importance of currency price and quantity. Currency price is like candy, providing a quick glucose boost. Currency quantity, on the other hand, is like slowly, sustainably burning real food.

At last Friday's Jackson Hole conference, Powell announced a policy shift and committed to lowering policy rates. Officials from the Bank of England and the European Central Bank also stated they would continue to lower interest rates. This announcement led to a general rise in risk assets and a weakening of the dollar. However, the anticipated rate cuts will reduce the interest rate differential between major currencies and the yen, potentially reigniting the risk of yen carry trades, unless the money supply is increased in the form of central bank balance sheet expansion.

The USD/JPY exchange rate immediately fell after Powell's announcement, which was expected as USD interest rates decreased while JPY interest rates remained flat or increased, narrowing the anticipated interest rate differential. The rapidly appreciating yen poses a danger to the global financial markets. The interest rate cuts by the three major economies have led to the appreciation of the yen, which could trigger a negative market response. We are facing a struggle between the positive forces of interest rate cuts and the negative forces of yen appreciation. Considering the scale of global financial assets financed in yen, the negative impacts of a rapidly appreciating yen may outweigh the benefits of a minor interest rate cut.

The Federal Reserve is trying to obtain the "sugar high" of interest rate cuts before the economy needs it. From an economic perspective, the Federal Reserve should actually raise interest rates. Since 2020, the CPI in the United States has risen by 22%, and the Federal Reserve's balance sheet has increased by more than $3 trillion. The government deficit has reached a record level, partly because the cost of issuing bonds has not yet constrained the behavior of politicians. If the Federal Reserve truly wants to maintain confidence in the dollar, it should raise interest rates to curb economic activity. This would lower prices, but it would also lead to increased unemployment and limit government borrowing.

The United States is a highly financialized economy that requires the continuous rise in the prices of fiat assets to make the public feel wealthy. Therefore, Yellen began intervening in the Federal Reserve's interest rate hike cycle in September 2022. Powell may have made an improper decision to cut interest rates under political pressure.

The US economy does not crave interest rate cuts, but Powell will provide stimulus. Given that the monetary authorities are extremely sensitive to falling stock prices, Powell and Yellen will soon expand the Federal Reserve's balance sheet in some form to offset the impact of the yen's appreciation.

Powell's reasons for cutting interest rates are problematic. The Biden administration's Labor Department made significant downward revisions to employment data just days before the meeting. This puts Powell in a dilemma, as he cannot cut rates based on declining inflation, nor can he do so based on a weak labor market. However, political considerations seem to outweigh economic ones.

If the yen accelerates its appreciation, the Federal Reserve may first stop quantitative tightening and then consider restoring quantitative easing. Yellen may also increase dollar liquidity by issuing more government bonds. If the USD/JPY exchange rate quickly falls below 140, they may not hesitate to provide the "real food" that the market needs.

For cryptocurrency holders, the current legal liquidity conditions are very favorable:

1. Central banks around the world are lowering the cost of funds, especially the Federal Reserve is still cutting interest rates while inflation is above target.

2. Yellen promised to issue a large amount of Treasury bonds and conduct repurchase operations before the end of the year to inject liquidity into the market.

3. The U.S. Treasury still has a large amount of funds available to stimulate the market.

4. The Bank of Japan is concerned about the speed of the yen's appreciation and will consider market conditions for future interest rate hikes.

Although some are concerned that the Federal Reserve's interest rate cuts are a sign of recession, if the Federal Reserve cuts rates amid high inflation and strong economic growth, they may increase the money printing. This will lead to inflation, which may be detrimental to certain businesses, but very beneficial for assets with limited supply like Bitcoin.