One crypto exchange’s former CEO is weighing in on the state of the economy after the Federal Reserve recently announced that it doesn’t plan to lower interest rates anytime soon.
In a series of tweets, BitMEX co-founder Arthur Hayes hypothesizes how the Fed might be able to reduce assets and liabilities on its balance sheet while also prompting the stock market to rally.
“Let’s play a little game called ‘Hide Those Treasuries.’
The Rules:
The Fed is reducing its balance sheet, dollar liquidity negative.
The US Treasury is issuing bonds to pay for large and increasing fiscal spending, dollar liquidity negative.
But we want stonks to pump, what to do?”
Hayes says it’s unlikely that foreign investors or the Fed itself will buy the U.S. Treasury bonds he believes will be used to send out another round of stimulus checks before the upcoming midterm elections. He thinks that banks could buy the Treasuries and then profit off of leverage, which would cause stocks to rise.
“What if the US banks can buy Treasuries, and then flip them to the Fed in exchange for dollars?
Then the banks take those dollars and leverage them through the financial markets. Net result, more dollar liquidity, stonks pump! Yay.”
The crypto veteran adds that while banks and the Fed both might not want to directly buy bonds due to balance sheet liabilities, together they can utilize the Fed’s standing repo facility (SRF) policy, which allows the Fed to buy and sell securities overnight, to achieve mutual goals.
“Every night the Fed accepts Treasuries from the banks, and gives them fresh dollars.
Banks don’t get hit with capital charges, and get very cheap dollar liquidity that can get leveraged in the financial economy… [then] stonks pump.”
Hayes says the New York Fed will be doing an SRF-related “test run” in September which has the capacity to handle $500 billion, then adds,
“Will the Fed activate it? I don’t know. But we should keep an eye on it, therefore I added it to my US dollar liquidity index.
The SRF is a great way to soak up Treasury issuance that is required for pre-election stimmiez.”
The crypto entrepreneur wraps up his tweetstorm by suggesting that rather than worry about interest rates, people need to track how well quantitative tightening is actually draining liquidity from the Fed’s balance sheet.
Hayes thinks whether or not the Fed’s gambit is successful will determine if Bitcoin (BTC) rallies or keeps falling.
“Dollar liquidity number go up, stonks and BTC pump.
Dollar liquidity number go down, stonks and BTC dump.
You might as well throw away all those useless economics textbooks that talk about earnings and other nonsense.”
At time of writing, Bitcoin is up 1.57% on the day and valued at $20,145.
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