The Federal Reserve released the minutes of its May interest rate meeting overnight. As expected, the tone of the minutes was slightly hawkish, which surprised the market and led to a quick retreat. BTC (Bitcoin) temporarily fell back to the range of 69k-70k. You may wonder if those who were short will jump on the bandwagon now that BTC has reversed course. They won’t. When it goes up, they wait for a pullback. When it pulls back, they wait for a further pullback. Unless it falls to 25k or even 15k, they probably won’t be able to catch this train. But think about it, if BTC encounters a major problem, such as a fatal bug causing collective panic, or if a quantum computer manages to crack it, and it falls to 15k or even 10k, 5k, will they buy? Will they dare to buy? Will they be willing to buy? No, definitely not! They have already been scared and ran away in a panic.
In the Inner Reference on May 21st, “The Reason for the 20% Surge in ETH”, it mentioned that BitMEX founder Arthur Hayes wrote an article, in which he mainly argued that the Federal Reserve could use the yen as a channel to implement large-scale easing while maintaining its high interest rate tightening policy, and push BTC to reach $1 million.
His logical reasoning is as follows:
First, if the US raises interest rates and maintains high interest rates in the long term, the yen will depreciate significantly against the US dollar, causing imported inflation for Japan, which is maintaining negative interest rates, and forcing the yen to exit negative interest rates. This event was mentioned in the March 20th article “Will the Federal Reserve Kneel under Mrs. Watanabe’s Pomegranate Skirt when Japan Ends Negative Interest Rates?” by Liu Jiaolian.
Second, the yen cannot raise interest rates significantly. On the one hand, the Bank of Japan holds a large amount of Japanese government bonds, and a significant interest rate hike would cause an implosion. On the other hand, if the yen dares to raise interest rates significantly, it may trigger China’s “financial nuclear strike” against the United States – quickly liquidating all US bond holdings and exchanging them all for gold, and announcing the RMB’s anchoring to gold. This would blow up several large institutions in the US that are heavily shorting gold, and export deflation to the world, including the US. Employment in the US manufacturing sector will further decline, and the current president will face questioning in the upcoming election due to employment issues.
Although Liu Jiaolian appreciates Arthur Hayes’ “catch the thief first” strategy, he does not fully agree with his judgment. China will not act recklessly as he thinks. As for the rise in gold that he sees as a point to blow up the US, it is actually what Liu Jiaolian pointed out in his article “Fighting Bulls from a Distance: The Great Financial Collapse” on September 19th last year.
Third, since the road of significant interest rate hikes for the yen has been blocked, the Bank of Japan only has one option left: to borrow US dollars from the Federal Reserve and go to the market to sell dollars and push up the yen.
Fourth, Japan, as a junior partner of the United States, and the Bank of Japan, as the central bank of Japan, have unlimited currency swap agreements with the Federal Reserve. In theory, as long as the Bank of Japan prints unlimited yen and gives it to the Federal Reserve, it can exchange it for an unlimited amount of US dollars. Liu Jiaolian also introduced this in his March 20th article. In fact, in addition to the Bank of Japan, the Federal Reserve’s designated junior partners also include the central banks of the UK, Canada, Europe, and Switzerland. These are like official backdoors and loopholes of the Federal Reserve, several strong pipelines that can release targeted liquidity through currency swaps at any time.
Fifth, if the Bank of Japan sells a large amount of excess US dollars and pushes up the yen, it can achieve several effects at the same time: stabilizing the exchange rate of the yen against the US dollar, which will save itself; continuing to buy US bonds, which will help the United States; and avoiding significant interest rate hikes and their adverse consequences.
Sixth, as everyone can see, this is nothing but the Federal Reserve indirectly buying US bonds through the Bank of Japan to achieve disguised quantitative easing. The depreciation of the US dollar injects liquidity into the market. Although the Federal Reserve has not personally bought US bonds, it has achieved indirect purchases by lending money to Japan. Isn’t this a financial version of “proxy war” called “proxy QE”? Hahaha~
Don’t worry, Liu Jiaolian also thoughtfully found two more channels for the Federal Reserve to release liquidity. Recently, Canada and the UK have been legislating or discussing the issue of UBI (universal basic income), and these two junior partners can also exchange unlimited amounts of US dollars with the Federal Reserve. Why not let the junior partners pay for the universal basic income instead of squeezing it from taxes, and let the Federal Reserve pay the bill!
Therefore, this “proxy QE” through the channels of the junior partners is even better than the official QE directly conducted by the Federal Reserve! Why? The US dollars printed through the official QE of the Federal Reserve are given to the Treasury, which the US government uses to buy military weapons or pay for healthcare insurance. But in the case of proxy QE, the US dollars printed are given to the junior partners, who then indirectly distribute them to the public. The public will not only spend the money on food and drinks, but also make investments, such as buying BTC, with the remaining money.
Obviously, in terms of the monetary transmission path, the path from proxy QE to BTC is shorter, and the fresh US dollars from the Federal Reserve’s printing press will reach the cryptocurrency market and push up BTC faster!
However, financial markets always anticipate and buy expectations! If speculative capital detects that the US dollar is about to set off on its way to push up BTC, they will immediately rush to buy and push up BTC, which will have the effect of an early rally. This is called “pricing in” in financial markets.
Therefore, Arthur Hayes suggests keeping a close eye on the data of the USD/JPY currency swap to discover any anomalies in advance.
He believes that once there is a deviation in this data, the speculative capital of various institutions will flock to push BTC quickly to $1 million.
Liu Jiaolian checked the data of the USD/JPY currency swap from January to now.
In over five months, there have only been 7 transactions with a cumulative amount of only 19 million USD… Um, this is a bit too little, and Arthur Hayes’ generous theory seems to be in vain. Of course, he also admits that if the Bank of Japan really wants to aggressively raise interest rates or allows the yen to depreciate freely, then his reasoning will not come true.
This reminds Liu Jiaolian of another person who made a radical prediction that BTC would soon reach $1 million in the first half of 2023 – Balaji, the former CTO of the well-known compliant cryptocurrency exchange Coinbase. Friends who have forgotten can review Liu Jiaolian’s articles on March 19th, 2023, “Balaji and Medlock’s Million Dollar Bet” and May 6th, 2023, “Balaji Throws Money, Willing to Bet and Lose!”.
Balaji’s logical reasoning at that time had similarities to Arthur Hayes today. Back then, the collapse of Silicon Valley banks and other events forced the Federal Reserve to provide emergency liquidity support and launch the BTFP, an unlimited borrowing tool for domestic banks. If you are not familiar with the BTFP, you can review Liu Jiaolian’s article on March 14th, 2023, “Bitcoin Soars Nearly 20% in a Single Day as the Inflection Point of the Federal Reserve’s Interest Rate Hike Emerges”, and I won’t elaborate on it here. Balaji believed that this was the Federal Reserve opening an unlimited liquidity “backdoor”, so he inferred that the disguised large-scale easing was about to begin, with a massive influx of US dollars into the market, pushing BTC to quickly rise to $1 million.
Of course, as everyone has seen, BTC did not rise to $1 million within three months. Balaji also lost more than $1 million in bets.
So this time, Arthur Hayes has seen another Federal Reserve “backdoor” for releasing liquidity and has put forward the same script. In this script, the Federal Reserve pours out massive amounts of US dollars through this backdoor, flooding into the market, pushing BTC to $1 million.
However, the clever thing about Arthur Hayes is that he did not give a specific timetable. And he proposed that whether all of this will happen depends on the data of the USD/JPY currency swap.
Well then, let’s watch and see!
(Source: Liu Jiaolian on WeChat, Bitpush News)
