原文标题：The BBC

Original source: Arthur Hayes

Original text compiled by: Yuliya, PANews

Within the global central banking community, Jerome Powell and Haruhiko Kuroda have formed a deep friendship. Since Kuroda stepped down as the Governor of the Bank of Japan (BOJ) a few years ago, Powell often seeks his advice or engages in casual conversations. At the beginning of March this year, a meeting between Powell and the new U.S. Treasury Secretary Scott Bessenet left him quite troubled. This meeting left him with a psychological shadow, prompting him to seek someone to confide in. One can imagine:

· In a conversation, Powell confided his troubles to Kuroda. Through their discussion, Kuroda recommended the "Jung Center," which specializes in serving central bank governors. This institution originated during the era of the Deutsche Bank and was founded by the renowned psychologist Carl Jung, aimed at helping top central bankers cope with stress. After World War II, this service expanded to London, Paris, Tokyo, and New York.

On the second day, Powell visited the office of psychologist Justin at 740 Park Avenue. Here, he underwent an intensive psychological counseling session. Justin keenly sensed that Powell was facing a dilemma of "financial control." During the counseling, Powell revealed the humiliating experience of meeting with Treasury Secretary Basent, an experience that severely undermined his self-esteem as the Chairman of the Federal Reserve.

· Justin comforted him by saying that this situation was not the first time it had happened. She suggested that Powell read Arthur Burns' speech "The Dilemma of Central Banking" to help him understand and accept this situation.

Federal Reserve Chairman Jerome Powell hinted at the latest meeting in March that quantitative easing (QE) may soon be restored, with a focus on the U.S. Treasury market. This statement signifies a significant shift in the global dollar liquidity landscape. Powell outlined a possible path for this, and the shift in policy is expected to be implemented as early as this summer. Meanwhile, although the market is still debating the pros and cons of tariff policies, this could be good news for the cryptocurrency market.

This article will focus on the political, mathematical, and philosophical reasons for Powell's concessions. It will begin with a discussion of President Trump's consistent campaign promises and why this mathematically requires the Federal Reserve and the U.S. commercial banking system to print money to buy Treasury bonds. Then, it will be discussed why the Fed never had the opportunity to maintain tight enough monetary conditions to bring inflation down.

The promise has been made and will surely be fulfilled

Recently, macroeconomic analysts have been discussing Trump's policy intentions. Some viewpoints suggest that Trump may adopt aggressive strategies until his approval rating drops below 30%; others believe that Trump's goal in his final term is to reshape the world order and reform America's financial, political, and military systems. In short, he is willing to tolerate significant economic pain and a sharp drop in approval ratings to achieve what he considers beneficial policies for the U.S.

However, for investors, the key lies in abandoning subjective judgments about the "right or wrong" of policies and instead focusing on probabilities and mathematical models. The performance of investment portfolios is more dependent on changes in global fiat currency liquidity rather than the strength of the US compared to other countries. Therefore, rather than trying to guess Trump's policy inclinations, it is better to concentrate on relevant data charts and mathematical relationships to better grasp market trends.

Since 2016, Trump has consistently emphasized that the U.S. has been treated unfairly over the past few decades due to trade partners taking advantage. Although there is controversy over the implementation of his policies, his core intention has remained unchanged. On the Democratic side, while their statements on adjusting the global order are not as strong as Trump's, they generally agree with this direction. Biden continued Trump's policies to restrict China from accessing semiconductors and other key areas of the U.S. market during his presidency. Vice President Kamala Harris also used tough rhetoric against China during her previous presidential campaign. Although there may be differences between the two parties in the rhythm and depth of specific implementations, their stance on pushing for change is consistent.

The blue line represents the U.S. current account balance, which is essentially the trade balance. It can be seen that starting from the mid-1990s, the U.S. imported far more goods than it exported, and this trend accelerated after 2000. What happened during this period? The answer is the rise of China.

In 1994, China significantly devalued the renminbi, starting its journey as a mercantilist export powerhouse. In 2001, U.S. President Bill Clinton allowed China to join the World Trade Organization, greatly reducing the tariffs on Chinese goods exported to the United States. As a result, the manufacturing base shifted to China, changing history.

Trump's supporters are precisely those who have been negatively affected by the outsourcing of American manufacturing. These individuals do not have college degrees, live in the American heartland, and possess little to no financial assets. Hillary Clinton referred to them as "deplorables." Vice President JD Vance affectionately called them and himself "hillbillies."

The orange dashed line in the chart and the upper panel represent the balance of the U.S. financial account. It can be seen that it is almost a mirror image of the current account balance. China and other exporting countries can continue to accumulate huge trade surpluses because when they earn dollars by selling goods to the U.S., they do not reinvest those dollars back into their domestic markets. This means they have to sell dollars to buy their own currencies, such as the renminbi, which leads to an appreciation of their domestic currency, thus raising the prices of exported goods. On the contrary, they use these dollars to purchase U.S. Treasury bonds and U.S. stocks. This allows the U.S. to maintain large deficits without disrupting the Treasury bond market and to have the best-performing stock market in the world over the past few decades.

The yield on the U.S. 10-year Treasury bond (in white) has slightly decreased, while the total outstanding debt during the same period (in yellow) has increased by 7 times.

Since 2009, the performance of the MSCI US Index (white) has exceeded that of the MSCI Global Index (yellow) by 200%.

Trump believes that by bringing manufacturing jobs back to the United States, he can provide good jobs for about 65% of the population without a college degree, build up military power (because weapons, etc., will be produced in sufficient quantities to deal with equal or near-equivalent adversaries), and bring economic growth above trend levels, such as real GDP growth of 3%.

This plan has some obvious issues:

· First of all, if China and other countries do not have the US dollar to support government bonds and the stock market, prices will fall. US Treasury Secretary Scott Basset needs buyers to purchase the huge debts that must be rolled over and the ongoing federal deficits in the future. His plan is to reduce the deficit from about 7% to 3% by 2028.

The second question is that the capital gains tax from the stock market rise is a marginal revenue driver for the government. When the rich cannot make money from stock trading, the deficit increases. Trump's campaign agenda is not to stop military spending or cut benefits such as healthcare and Social Security, but to grow and eliminate fraudulent spending. Therefore, he needs capital gains tax revenue, even though the rich own all the stocks and, on average, they did not vote for him in 2024.

The Mathematical Dilemma of Debt Growth and Economic Growth

Assuming Trump successfully reduces the deficit from 7% to 3% before 2028, the government would still be a net borrower year after year, unable to pay off any existing debt stock. From a mathematical perspective, this means that interest payments will continue to grow exponentially.

This sounds bad, but the U.S. can mathematically escape the problem and deleverage its balance sheet through growth. If real GDP grows at 3% and long-term inflation is 2% (although this is unlikely), it means nominal GDP grows at 5%. If the government issues debt at a rate of 3% of GDP while the economic nominal growth rate is 5%, then mathematically, the debt-to-GDP ratio will decline over time. But there is a key factor missing here: what kind of interest rate can the government finance itself at?

In theory, if the nominal growth of the U.S. economy is 5%, government bond investors should at least demand a 5% return. However, this would significantly increase interest costs, as the current weighted average interest rate on the Treasury's approximately $36 trillion (and growing) debt payments is 3.282%.

Unless Beiset can find buyers to purchase government bonds at unreasonably high prices or low yields, the mathematical calculations cannot hold. As Trump is busy reshaping the global financial and trade system, China and other exporting countries cannot and will not buy government bonds. Private investors also will not, as the yields are too low. Only U.S. commercial banks and the Federal Reserve have the firepower to purchase debt at a level the government can afford.

The Federal Reserve can print money to buy bonds, which is called quantitative easing (QE). Banks can print money to buy bonds, which is called fractional reserve banking. However, the actual operation is not that simple.

The Federal Reserve is superficially busy with its unrealistic task of reducing manipulated and false inflation indicators below their fictitious 2% target. They are removing currency/credit from the system through balance sheet reduction, known as Quantitative Tightening (QT). Due to poor performance by banks during the 2008 Global Financial Crisis (GFC), regulators have required them to pledge more of their own capital against the Treasury bonds they purchase, referred to as the Supplementary Leverage Ratio (SLR). As a result, banks are unable to use unlimited leverage to finance the government.

However, it is very simple to change this situation and turn the Federal Reserve and banks into inelastic buyers of government bonds. The Federal Reserve can decide to at least end quantitative tightening and maximize the restart of QE. The Federal Reserve can also exempt banks from complying with SLR, allowing them to use unlimited leverage to purchase government bonds.

The question becomes why Jerome Powell's Fed will help Trump achieve his policy goals? The Fed clearly helped Harris's campaign by cutting interest rates by 0.5% in September 2024, and after Trump's victory, he was stubborn in his demands to increase the amount of money to lower long-term Treasury yields. To understand why Powell ended up doing what the government asked him to do, perhaps going back to the historical context of 1979.

The Chairperson Who Was Sidestepped

Currently, Powell is in a very awkward position, watching helplessly as the dominant force of fiscal policy undermines the credibility of the Federal Reserve in combating inflation.

In simple terms, when government debt is too large, the Federal Reserve has to give up its independence to finance the government at low interest rates rather than truly fighting inflation.

This is not a new issue. Former Federal Reserve Chairman Burns encountered a similar situation in the 1970s. In his 1979 speech "The Pain of Central Banking," he explained why central banks find it difficult to control inflation:

"Since the 1930s, political and philosophical trends in the United States and elsewhere have altered economic life, resulting in a persistent inflationary tendency."

Simply put: The politicians made me do this.

Burns pointed out that the government has become increasingly proactive in intervening in the economy, not only to relieve suffering but also to subsidize "valuable" activities and restrict "harmful" competition. Despite the growth of national wealth, American society was tumultuous in the 1960s. Minority groups, the poor, the elderly, and the disabled felt unfairly treated, and young people in the middle class began to reject existing systems and cultural values. Just like then and now, "prosperity" was not evenly distributed, and people demanded the government address this issue.

Government actions and public demands interact and escalate continuously. When the government began addressing the "unfinished tasks" such as reducing unemployment and eliminating poverty in the mid-1960s, it awakened new expectations and demands.

Now, Powell faces a similar dilemma, wanting to be a tough anti-inflation hero like Volcker, but may actually be forced to yield to political pressure like Burns.

The history of government intervention to address the issues of key voter demographics dates back decades. The actual effects of such interventions often vary by situation, and the outcomes are not always the same.

The many results generated by the active interaction between the government and citizens have indeed had a positive impact. However, the cumulative effect of these actions has injected a strong inflationary tendency into the U.S. economy. The surge in government programs has gradually increased the tax burden on individuals and businesses. Nevertheless, the government's willingness to tax is noticeably lower than its tendency to spend.

There is a general consensus in society: solving problems is the responsibility of the government. The main way the government addresses issues is by increasing expenditures, a practice that deeply embeds inflation factors into the economic system.

In fact, the expansion of government spending is largely driven by a commitment to full employment. Inflation is increasingly seen as a temporary phenomenon—or, as long as it remains moderate, it is considered an acceptable state.

The Federal Reserve's Inflation Tolerance and Policy Contradictions

Why does the Federal Reserve tolerate 2% inflation each year? Why does the Federal Reserve use terms like 'transitory' and 'inflation'? A 2% inflation rate compounded over 30 years would lead to an 82% increase in price levels. But if the unemployment rate rises by 1%, the sky is going to fall. These are things worth pondering.

Theoretically, the Federal Reserve system had the ability to stifle inflation at its nascent stage or to end it at any point thereafter. It could have restricted the money supply, creating enough tension in the financial and industrial markets to quickly terminate inflation. However, the Federal Reserve did not take such action, as it was also influenced by the philosophical and political trends that were changing American life and culture.

The Federal Reserve appears to maintain independence, but as a government agency that philosophically tends to address broad social issues, it neither can nor will stop the inflation that requires intervention. The Federal Reserve has effectively become a facilitator, creating the inflation that it was originally supposed to control.

In the face of political realities, the Federal Reserve has indeed adopted a tight monetary policy at certain times—such as in 1966, 1969, and 1974—but the duration of its restrictive stance was not long enough to completely end inflation. Overall, monetary policy began to be governed by the principle of "nurturing a low level of inflation while still adapting to much of the market pressure."

This is exactly the path taken by Powell during his tenure as the current Chairman of the Federal Reserve regarding monetary policy. This reflects the so-called "fiscal dominance" phenomenon. The Federal Reserve will take necessary measures to provide financial support to the government. There can be different opinions on the merits of policy objectives, but the message conveyed by Burns is very clear: when one becomes the Chairman of the Federal Reserve, it implicitly agrees to do whatever is necessary to ensure that the government can finance itself at an affordable level.

Current Policy Shift

Powell showed signs of the Federal Reserve continuing to yield to political pressure at the recent Federal Reserve press conference. He had to explain why, in the face of strong economic indicators in the United States and loose monetary conditions, the pace of quantitative tightening (QT) should be slowed. The current unemployment rate is low, the stock market is at historical highs, and inflation remains above the 2% target, all of which should support a tighter monetary policy.

Reuters reported: "The Federal Reserve said on Wednesday that starting next month, it will slow the pace of its balance sheet reduction as the issue of the government borrowing limit remains unresolved, a shift that may continue for the remainder of the process."

According to historical archives from the Federal Reserve, although former Federal Reserve Chairman Paul Volcker was known for his strict monetary policies, he chose to ease them in the summer of 1982 in the face of economic recession and political pressure. At that time, House Majority Leader James C. Wright Jr. met with Volcker multiple times, trying to make him understand the impact of high interest rates on the economy, but to no significant effect. However, by July 1982, data showed that the economic recession had bottomed out. Volcker subsequently indicated to Congress members that he would abandon the previously set tight monetary policy targets and predicted a "highly likely" economic recovery in the second half of the year. This decision also echoed the Reagan administration's long-standing expectations for recovery. It is worth noting that, despite being regarded as one of the most respected Federal Reserve Chairmen, Volcker also failed to completely resist political pressure. At that time, the U.S. government's debt situation was far better than it is today, with debt as a percentage of GDP at only 30%, while it has now risen to 130%.

Evidence of Fiscal Dominance

Last week, Powell proved that fiscal dominance still exists. Therefore, in the short to medium term, the QT targeting Treasury bonds will stop. Furthermore, Powell stated that while the Fed may maintain the natural reduction of mortgage-backed securities, it will net purchase Treasury bonds. Mathematically, this keeps the Fed's balance sheet constant; however, this is essentially quantitative easing for Treasury bonds. Once officially announced, the price of Bitcoin will rise significantly.

In addition, due to the requirements of banks and the Treasury Department, the Federal Reserve will provide SLR exemptions for banks, which is another form of quantitative easing for government bonds. The ultimate reason is that the aforementioned mathematical calculations would not work otherwise, and Powell cannot stand by and watch the U.S. government get into trouble, even if he detests Trump.

Powell mentioned the balance sheet adjustment plan at the FOMC press conference on March 19. He stated that the Federal Reserve will stop the net reduction of assets at some point, but no related decision has been made yet. At the same time, he emphasized that he hopes to gradually let MBS (Mortgage-Backed Securities) exit the Federal Reserve's balance sheet in the future. However, he also mentioned that the Federal Reserve may allow MBS to mature naturally while keeping the overall size of the balance sheet unchanged. The specific timing and manner of these adjustments have not yet been determined.

Finance Minister Besant discussed the Supplementary Leverage Ratio (SLR) in a recent podcast, noting that if the SLR is removed, this policy could become a constraint for banks and may lead to a decrease in U.S. Treasury yields by 30 to 70 basis points. He pointed out that every basis point change corresponds to an economic impact of about 1 billion dollars per year.

Additionally, Federal Reserve Chairman Powell stated at the press conference following the March Federal Open Market Committee (FOMC) meeting that he believes the inflation effects arising from the tariff policies proposed by the Trump administration may be "temporary." He thinks that while tariffs may trigger inflation, this effect is not expected to last long. This judgment of "transitory" inflation gives the Federal Reserve room to continue its accommodative policies in the face of inflation triggered by tariff increases. Powell pointed out that the current baseline view is that the price-driving effects of tariffs will not persist long-term, but he also emphasized that there is still uncertainty regarding future conditions. Analysts believe that this statement indicates that the impact of tariffs on asset prices may be weakening, especially for those assets that rely solely on statutory liquidity.

Federal Reserve Chairman Powell stated at the FOMC meeting in March that the inflation effects caused by tariffs may be "transitory." He believes that this "transitory" inflation expectation allows the Federal Reserve to continue implementing accommodative policies even in the case of a significant rise in inflation due to tariffs.

At the post-meeting press conference, Powell emphasized that the current fundamental expectation is that the price increases caused by tariffs will be temporary, but he also added, "We cannot determine the specific situation in the future." Market analysts pointed out that for assets reliant on fiat currency liquidity, the impact of tariffs may have gradually weakened.

In addition, the "Liberation Day" that Trump plans to announce on April 2 and the potential tariff increase do not seem to have a significant impact on market expectations.

Dollar Liquidity Calculation

It is important to note the changes in forward-looking U.S. dollar liquidity relative to previous expectations.

· Previous steps of Quantitative Tightening (QT) for government bonds: Reduce by 25 billion dollars monthly.

· After April 1, the pace of government bond QT: Decrease by 5 billion dollars each month

· Net Effect: The annualized positive change in US dollar liquidity is 240 billion.

· Effect of QT Twist: A reduction of up to $35 billion MBS per month.

· If the Federal Reserve's balance sheet remains unchanged, it can purchase: up to $35 billion in Treasury bonds per month or an annualized $420 billion.

Starting from April 1, an additional $240 billion in relative dollar liquidity will be created. In the near future, by the latest in the third quarter of this year, this $240 billion will rise to an annualized $420 billion. Once quantitative easing begins, it will not stop for a long time; as the economy requires more money printing to maintain the status quo, it will increase.

How the Treasury manages its general account (TGA) is also an important factor affecting the liquidity of the US dollar. The TGA is currently around $360 billion, down from about $750 billion at the beginning of the year. Due to the constraints of the debt ceiling, the TGA is used to maintain government spending.

Traditionally, once the debt ceiling is raised, the TGA is replenished, which negatively impacts dollar liquidity. However, maintaining excessively high cash balances is not always economically reasonable; during former Treasury Secretary Yellen's term, the target TGA balance was set at $850 billion.

Considering that the Federal Reserve can provide liquidity support as needed, the Treasury may adopt a more flexible TGA management strategy. Analysts expect that in the quarterly refinancing announcement (QRA) at the beginning of May, the Treasury may not significantly increase the target for TGA relative to current levels. This will alleviate the potential negative dollar liquidity shock that may arise after the increase in the debt ceiling, providing a more stable environment for the market.

2008 Financial Crisis Case Study

During the global financial crisis (GFC) of 2008, gold and the S&P 500 exhibited different responses to the increase in fiat currency liquidity. Gold, as a counter-establishment commodity financial asset, reacted more swiftly to liquidity injections, while the S&P 500 relied on legal support from the national system, which could lead to a slower response in situations where the solvency of the economic system is questioned. Data shows that during the most severe stages of the crisis and the subsequent recovery period, gold outperformed the S&P 500. This case study indicates that even with a significant increase in current US dollar liquidity, the negative economic environment may still adversely affect the price trends of Bitcoin and cryptocurrencies.

On October 3, 2008, the U.S. government announced the launch of the Troubled Asset Relief Program (TARP) in response to the market turmoil triggered by the bankruptcy of Lehman Brothers. However, the program failed to stop the continued decline of financial markets, with both gold and U.S. stocks falling. Subsequently, Federal Reserve Chairman Ben Bernanke announced the initiation of a large-scale asset purchase program (later known as Quantitative Easing 1, or QE1) in early December 2008. As a result, gold began to rebound, while U.S. stocks continued to decline until the Federal Reserve officially initiated its money printing actions in March 2009, at which point they began to recover. By early 2010, the price of gold had risen by 30% compared to the time of Lehman Brothers' bankruptcy, while U.S. stocks had only increased by 1% during the same period.

Bitcoin Value Equation

Bitcoin did not exist during the financial crisis in 2008, but it has now become an important financial asset. The value of Bitcoin can be simplified as:

Bitcoin Value = Technology + Fiat Currency Liquidity

Bitcoin's technology is working well, and there haven't been any major changes recently, for better or worse. As a result, Bitcoin's trading is based solely on the market's expectations of the future fiat money supply. If the analysis of the Fed's major shift from quantitative tightening to quantitative easing of Treasuries is correct, then bitcoin hit a local low of $76,500 last month and will next begin to climb towards its year-end target of $250,000.

Although this prediction is not an exact scientific conclusion, referencing the performance patterns of gold in similar environments indicates that Bitcoin is more likely to reach $110,000 before it tests $76,500 again. Even if the U.S. stock market continues to decline due to tariff policies, corporate earnings expectations collapsing, or weakening foreign demand, Bitcoin still has a high probability of continuing to rise. Investors should be cautious in deploying funds, avoid using leverage, and purchase small positions relative to the total size of their portfolio.

However, Bitcoin could still reach $250,000 by the end of the year. This optimistic expectation is based on multiple factors, including the possibility that the Federal Reserve may drive the market by releasing liquidity, as well as the potential for the People’s Bank of China to relax monetary policy to maintain the stability of the RMB to USD exchange rate. In addition, European countries may increase military spending due to security concerns, which could be achieved by printing euros, potentially also indirectly stimulating market liquidity.

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