jakiro
Author:Arthur Hayes, founder of BitMEX; compiled by: Bitchain Vision
Praise to Mr. Satoshi Nakamoto!Time and compound interest exist equally for all.
Even for governments, there are only two ways to pay: dip into savings or borrow.For the government, savings are equivalent to taxes.Taxes are less popular, but spending is.Therefore, politicians prefer to issue debt when distributing benefits to the common people and the powerful.Politicians always like to borrow money from the future to win reelection in the present, because when the bills come due, they are long gone.
If all governments, because of the incentives of their officials, are inherently inclined to issue debt rather than raise taxes to distribute benefits, then the next question is:How do buyers of government debt fund these purchases?Did they dip into savings/equity, or borrow money to finance the purchase?
In terms of “American Governance,” answering these questions is critical to my vision of the future of dollar currency creation.If the marginal buyers of Treasuries are financing their purchases, then we can observe who is lending them money.Once we know the identity of the debt buyer, we can determine whether they are creating money out of thin air or using their equity to lend.If, after answering all the questions, we discover that a Treasury buyer creates money to lend, then we can make the following logical leap:
Government issuance of debt increases the money supply.
If this holds true, then we can estimate the maximum amount of credit this buyer can extend (assuming there is a cap).
These questions are important because I will argue:If government borrowing continues as predicted by the too-big-to-fail banks, the Treasury Department and the Congressional Budget Office, the Fed’s balance sheet will grow as well.If the Fed’s balance sheet grows, this is positive for U.S. dollar liquidity and will ultimately push the price of Bitcoin and other cryptocurrencies higher.
Let’s analyze these questions step by step and evaluate this logic puzzle.
Q&A time
Question 1: Will U.S. President Trump raise taxes to cover the deficit?
Answer: No.He and the Republicans recently extended the 2017 tax cuts.
Question 2: Is the Treasury Department borrowing money to finance the federal deficit and will it continue to do so in the future?
Answer: Yes.
These are estimates from “too big to fail” banks and some U.S. government agencies.As you can see, the deficit is projected to be about $2 trillion, to be financed by issuing about $2 trillion in debt.
Given that the answer to the first two questions is yes, then:
Annual federal deficit = annual Treasury debt issuance
Let’s take a step-by-step breakdown of the major buyers of Treasury bonds and how they finance their purchases.
Treasury buyers
foreign central bank
If the “American Rule” dares to confiscate even the money of Russia (a nuclear power and the world’s largest commodity exporter), then no foreign holder of U.S. Treasury bonds will be safe.Aware of the risk of expropriation, foreign central bank reserve managers would rather buy gold than U.S. Treasuries.Therefore, gold only started to really surge after Russia invaded Ukraine in February 2022.
U.S. private sector
According to the U.S. Bureau of Labor Statistics, the personal savings rate in 2024 is 4.6%.In the same year, the U.S. federal deficit accounted for 6% of GDP.Given that the deficit is larger than the savings rate, the private sector is unlikely to be a marginal buyer of Treasury debt.
commercial bank
Are the four major U.S. commercial banks (Note: JPMorgan Chase, Bank of America, Citigroup, Wells Fargo) buying large amounts of Treasury bonds?No.
As shown in the figure, in fiscal year 2025, the four major banks purchased approximately $300 billion in Treasury bonds.In the same fiscal year, the Treasury Department issued $1.992 billion in Treasury bonds.While this group is undoubtedly an important buyer of Treasury bonds, they are not the last marginal buyers.
Relative Value (RV) Hedge Funds
According to a recent Federal Reserve paper,RV funds are marginal buyers of U.S. Treasuries.
“Our findings suggest that Cayman Islands hedge funds are increasingly becoming marginal foreign buyers of U.S. Treasury notes and bonds. As shown in Figure 5, between January 2022 and December 2024, when the Fed is reducing the size of its balance sheet through a rollover of Treasury maturities,Cayman Islands hedge funds bought net $1.2 trillion in Treasuries.Assuming these purchases were comprised entirely of Treasury notes and bonds, they absorbed 37% of net issuance of notes and bonds, nearly as much as all other foreign investors combined.”
Trading strategy:
Buy spot Treasury bonds
Contrast
Sell the corresponding Treasury futures contract
Thanks to Joseph Wang for this chart.SOFR (Secured Overnight Funding Rate, Secured Overnight Financing Rate) trading volume is a proxy indicator for measuring the scale of RV funds’ participation in the government bond market.As you can see, the increase in debt load corresponds with the increase in SOFR volume.This suggests that RV funds are marginal buyers of Treasury bonds.
RV Hedge Fund makes this trade to earn the difference between the two instruments.Because the spread is so tight (measured in basis points; 1 basis point = 0.01%), the only way to really make money is to finance Treasury purchases.This leads to the most important part of this article to understand what the Fed will do next: How will the RV Fund finance its Treasury purchases?
The RV Fund finances its Treasury bond purchases through repurchase agreements.In a seamless transaction, the RV Fund collateralizes the Treasury securities it purchases, borrows cash at an overnight rate, and then uses the borrowed cash to settle the Treasury purchase.If cash is abundant, repo rates will trade at or slightly below the federal funds rate ceiling.Why?
Let’s review how the Fed manipulates short-term interest rates.The Federal Reserve has two policy rates: the upper and lower bounds for the federal funds rate; currently they are 4.00% and 3.75%.To force the effective short-term rate (SOFR, or Secured Overnight Financing Rate) to fall within that range, the Fed used some blunt tools.I will give a brief introduction in order of interest rates from lowest to highest:
Reverse Repo Facility (RRP)
Eligible objects: money market funds and commercial banks
Purpose: Cash held here overnight earns interest paid by the Federal Reserve.
Interest Rate: Federal Funds Rate Floor
Interest on Reserve Balances (IORB)
Eligible objects: commercial banks
Purpose: Banks earn interest on the excess reserves they deposit with the Federal Reserve.
Interest rate: between the lower and upper bounds on the federal funds rate
Standing Repo Facility (SRF)
Eligible objects: commercial banks and other financial institutions
Purpose: To allow financial institutions to pledge eligible securities (primarily Treasury bonds) and obtain cash from the Federal Reserve when cash is tight.In effect, the Fed prints money and exchanges it for collateralized securities.
Interest Rate: Federal Funds Rate Ceiling
Putting them together, we get this relationship:
Federal funds rate floor = RRP < IORB < SRF = Federal funds rate ceiling
Here is a chart of real-world values to help visualize the relationship between these key U.S. dollar money market rates.At the top, orange (SRF) and green (federal funds rate ceiling) are equal.Immediately below that is the red line (IORB).The magenta line (SOFR) typically fluctuates between upper and lower limits.Yellow (the federal funds rate floor) and white (RRP) are equal.
SOFR is a composite index based on various types of repo transaction rates.Unlike LIBOR, which is based on bank quotes, SOFR is based on actual market transactions.This is the Fed’s target interest rate.If SOFR trades above the federal funds rate ceiling, it means cash is tight, this is a problem.Because once cash is tight, SOFR will soar and the dirty fiat financial system will stagnate.This is because both marginal buyers and suppliers of liquidity use leverage.If they are unable to reliably roll over their liabilities at the federal funds rate, they will first suffer huge losses and then stop providing liquidity to the system.The concern is that without access to cheap leverage, no one will participate in the Treasury market.(Note: SOFR soared to 4.22% last Friday, October 31, and the Federal Reserve cut interest rates again last week, so SOFR should remain around 4.00%)
What causes SOFR to trade above the federal funds rate cap?To answer this question, we must first ask who are the marginal providers of cash in the repo market?Money market funds and commercial banks provide cash to the repo market.Let’s examine why they do this by assuming they are profit maximizing entities.
The goal of money market funds is to take on the least credit risk possible and earn short-term interest rates.This means that money market funds earn returns primarily by parking money in RRPs, lending cash in the repo market, and buying Treasury bills.In all three cases, they take on the credit risk of the Fed or the U.S. Treasury, which is essentially risk-free because the government can always print money to pay off its debt.Until the RRP balance is depleted, the billions or trillions of dollars parked there will provide cash for the repo market.This is because the RRP rate < the SOFR rate, so profit-maximizing money market funds take cash out of the RRP and lend it to the repo market.ButThe RRP balance is now zero because interest rates on Treasury bonds are very attractive; money market funds maximize profits by lending money to the U.S. government.
With money market funds out of the game, commercial banks have to fill the gap.They will be happy to lend reserves to the repo market because IORB < SOFR.The factor that limits a bank’s willingness to provide cash at a “reasonable” level (that is, SOFR <= the federal funds rate ceiling) depends on the abundance of its reserves.Various regulatory requirements force banks to maintain certain amounts of reserves, and once balance sheet capacity is reduced, they must charge increasingly higher interest rates to provide cash to the repo market.Since the Federal Reserve began quantitative tightening in early 2022, banks have lost trillions of dollars in reserves.
Starting in 2022, the two marginal providers of cash—money market funds and banks—both have less cash available to supply the repo market.At some point, neither is willing or able to provide cash into the repo market at a rate equal to or below the federal funds rate ceiling.At the same time, the supply of cash capable of supplying the repo market at reasonable rates dwindles, while demand for said cash rises.Demand rises as former President Joe Biden and now Trump continue to spend huge amounts of money, which requires the issuance of more Treasury debt.The marginal buyers of this debt – the RV funds – must finance these purchases in the repo market.If they can’t reliably get funding on a daily basis at a rate that’s equal to or just below the federal funds rate ceiling, they won’t buy Treasuries, and the U.S. government won’t be able to finance itself at an affordable rate.
As a result of a similar situation in 2019, the Federal Reserve created the SRF.The Fed can use its money printing press to provide unlimited amounts of cash at the SRF rate as long as an acceptable form of collateral is provided.Therefore, RV funds can be confident that no matter how tight cash becomes, they will always have access to funding at the federal funds rate cap in a worst-case scenario.
If the SRF balance is above zero, then we know the Fed is using printed money to cash politicians’ checks.
Treasury bond issuance = increase in dollar supply
The chart above is (SOFR – Ceiling on the Federal Funds Rate).When this difference is close to zero or positive, cash is tight.During these periods, SRF (bottom half of the graph, in billions of dollars) will see significant usage.Using an SRF enables borrowers to avoid paying higher, unmanipulated SOFR interest rates.
Stealth Quantitative Easing (QE)
There are two ways the Fed can ensure there is enough cash in the system to facilitate the repurchases needed for RV funds to purchase Treasury securities.The first is to create bank reserves by purchasing securities from banks.This is the textbook definition of quantitative easing.The second is free lending to the repo market through the SRF.
As I’ve said many times, quantitative easing is a dirty word.Even the most financially illiterate civilian now understands that QE = printing money = inflation.When inflation rises, ordinary citizens vote for the opposition party.Given that Trump and Bessant want the economy to run too hot, they don’t want to be blamed for high inflation caused by a credit-fueled economic expansion.So the Fed will do its best to declare with all seriousness that its policy mix is not quantitative easing and will not fan the flames of inflation.Finally,This means that SRF will become a channel for printed money to enter the global financial system, rather than using quantitative easing to create more bank reserves.
This will buy some time, but the exponential expansion of Treasury issuance will eventually force the SRF to be used again and again.Please remember,Not only does Bessent need to issue $2 trillion a year to fund the government, it must also issue trillions more to roll over maturing debt.Stealth quantitative easing will begin soon.I don’t know when it started.But if current money market conditions persist and the national debt grows exponentially, then the balance of the SRF, the lender of last resort, must also grow.As SRF balances grow, the number of fiat dollars in the world also expands.This phenomenon will reignite the Bitcoin bull run.
People need to conserve strength between now and the start of invisible QE.Market volatility is expected, especially until the U.S. government shutdown ends.The U.S. Treasury is borrowing money through its debt auctions (dollar liquidity negative) but not spending it (dollar liquidity positive).
The Treasury General Account (TGA) is about $150 billion above the $850 billion target,This additional liquidity will not be released into the market until the government reopens its doors.This liquidity drain is one of the reasons for the current weakness in the crypto market.
Given that the four-year cycle anniversary of Bitcoin’s all-time high in 2021 is approaching,Many people will mistake this period of market weakness and dullness for a top and sell their positions— assuming they weren’t wiped out in the altcoin crash a few weeks ago.
This is a mistake,The mechanics of the U.S. dollar currency market don’t lie.This corner of the market is shrouded in arcane jargon, but once you translate the terms into “printing money” or “burning money,” it’s easy to know how to dance.
