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- BitMEX co-founder Arthur Hayes delves into Bitcoin
’s potential reaction to rising interest rates.
- Despite traditional views, Hayes suggests Bitcoin might benefit from the U.S. government’s colossal debt.
- The Federal Reserve’s policy decisions and the health of the economy play crucial roles in this scenario.
Delving into the unconventional perspective of Arthur Hayes, this article explores the intricate dynamics between Bitcoin, interest rates, and global monetary policies.
Bitcoin: Moving Contrary to Conventional Economic Wisdom?
Often, Bitcoin’s relationship with interest rates follows a certain conventional understanding. However, Arthur Hayes, a renowned macro-analyst and co-founder of BitMEX, challenges this paradigm in his recent blog post. He contends that the established economic models might falter, especially considering the colossal debt of the U.S. government. Hayes states, “Central banks and governments are flailing about trying to use the economic theories of yesteryear to combat the novel situations of the present.”
The Federal Reserve’s Tightening Grip
Over the past year, a significant change has been observed in the Federal Reserve’s approach. The benchmark rate has jumped from a meager 0.25% to a solid 5.25%. This decision was made to rein in inflation to a 2% target. While the efforts seem fruitful at the moment, Hayes foresees potential hiccups. He opines that inflation may persistently remain “sticky”, especially if the nominal GDP growth surpasses the yields of government bonds.
The Discrepancy in Growth Rates and Yields
Hayes, in his study relying on the Atlanta Fed’s GDPNow forecast, pinpoints an intriguing difference: a substantial Q3 GDP growth rate of 9.4% stands juxtaposed against a mere 2-year US Treasury yield of 5%. He elucidates, “Conventional economics says, as the Fed raised rates, growth in a very credit-sensitive economy would falter.” This assertion became evident when markets, inclusive of Bitcoin and stocks, nosedived in 2022, thereby evaporating capital gains tax revenues for the government.
Ripple Effects on the Economy
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But this downfall in tax revenue indirectly led to swelling government deficits. The obvious solution? Selling more bonds to service the old debt. However, for the U.S. government, this spells increased interest payouts to the nation’s affluent bondholders. Furthermore, these payments amplify in a high-rate setting. Hayes simplifies the phenomenon: “when rates rise, the government increases interest payments to the rich, the rich spend more on services, and GDP pumps even more.” If this trend continues, with the economy’s growth rate outpacing the government’s debt payouts, bondholders might be tempted to invest in riskier assets, such as Bitcoin.
Bitcoin’s Potential in a Changing Economic Landscape
Hayes has consistently communicated his belief in Bitcoin’s resilience, even in the face of tightening monetary policies. He opines that the Federal Reserve’s tactics could unintentionally inflate the money supply. Hayes expresses, “If the Fed believes that to kill inflation it must both raise interest rates and reduce the size of its balance sheet, then it is cutting its nose to spite its face.” It’s a perspective shared by other analysts, with Coinbase indicating Bitcoin’s 4-year cycles could be tied to central bank policies favouring low rates.
Hayes’ insights into the complex interplay between Bitcoin, interest rates, and governmental policies offer a fresh perspective in the crypto discourse. He neither undermines the positive influence of low rates on Bitcoin nor oversimplifies its relationship with central bank policies. As Hayes aptly concludes, “Things become non-linear—and sometimes binary—at the extremes. The U.S. and the global economy is at such an extreme.”