What to expect as Federal Reserves ends QT
His speech comes as the Fed ends quantitative tightening (QT) while the odds of a cut at the upcoming meeting continue to climb, which is a positive for the crypto market.
The Fed ends QT today, which is a positive for the crypto market.
Yah, I suspected the ending of QT was a positive for the crypto market, but perhaps not so positive for most everyone else, as you will read. I’ve previously listened to discussions about stable coins being used or tied into a US attempt to reduce it’s massive debt. Particularly considering all the changes the Trump White house has made to benefit digital currency. Must have made those changes for some reason?- Whitehouse.gov
The piece from the Atlantic is written by David Frum- If he was the only one talking about this issue I’d probably opt not to use this article. But he is not the only one talking about the problem, so I can’t discount what he’s written.
The Atlantic via Archive.ph
The GENIUS act– see link at Whitehouse.gov^
On July 18, President Donald Trump signed into law the boastfully named GENIUS Act. If the law wreaks havoc on the financial system, as seems highly likely, that name will become a grim joke: What genius thought that letting the cryptocurrency industry write its own rules would be a good idea?
The Guiding and Establishing National Innovation for U.S. Stablecoins Act purports to create a regulatory framework for a type of cryptocurrency called stablecoins. Despite their reassuring name, stablecoins—which promise a constant value relative to real-world currencies, usually the U.S. dollar—are by far the most dangerous form of cryptocurrency. Their danger lies in the way they are meant to be safe.
Most people understand that cryptocurrencies are volatile and speculative. Bitcoin, ether, and other name-brand cryptocurrencies fluctuate in value day by day, year by year. Stablecoins are meant to do away with these fluctuations, yet they pose what may be a larger threat to the wider financial system. The GENIUS Act, like the Markets in Crypto-Assets regulation adopted by the European Union in 2023, offers safeguards that will likely enlarge the stablecoin market considerably. If—or when—the coins explode, the GENIUS Act more or less ensures that the U.S. government will have to bail out the stablecoin issuers and their holders on a scale of hundreds of billions of dollars.
DC’s GENIUS Plan: Use Stablecoins to Soak Up Its Own Debt aka Financial Repression
Since the debt is owed in nominal terms, one way to reduce the debt would be to issue more dollars to buy it back. This would lead to higher inflation. Although technically not a default, higher inflation would effectively reduce the real (inflation-adjusted) repayment lenders receive.
That said, even an independent Federal Reserve could end up effectively monetizing the debt. Should debt continue on its unsustainable path, for example, concerns about the ability of the government to repay might lead to volatility in the bond market. The Federal Reserve would likely respond by acting as a buyer of last resort, expanding its balance sheet and ultimately causing higher inflation. Still, there is probably some limit to how much the Fed would monetize the debt, so long as it maintains its independence.
Financial Repression
That leaves financial repression. Financial repression is defined as a formal requirement by the government that certain financial institutions purchase government debt. The government might prevent certain financial institutions from holding any financial assets other than government debt. Alternatively, the government could require financial institutions to hold a specific fraction of assets in US Treasury securities. The effect of such policies is to increase the demand for the government’s debt, which weakens the tendency for rising debt issuance to lead to higher borrowing costs.
Enter the GENIUS Act.
Stablecoins are digital dollars, similar to the digital dollars in traditional bank accounts. Both are claims to a physical dollar issued by the financial institution. Whereas the digital dollars in one’s bank account reside on a ledger controlled by the financial institution and are transferred over the payment rails of the traditional financial system, stablecoins reside (and are transferred) on the blockchains of various cryptocurrency projects.
Stablecoin issuers are financial intermediaries. One deposits a dollar to receive a stablecoin. The issuer sets a fraction of the dollars it receives aside to meet redemption requests, and uses the remaining fraction to buy interest-earning assets. This is where the financial repression comes in. The GENIUS Act requires that these stablecoin issuers hold their assets in cash, short-term US Treasury securities, or as reserve balances at the Federal Reserve.
The hope is that stablecoins will expand global access to dollars. The issuers will then invest a fraction of those dollars into US government debt. To the extent that these stablecoin holders were not previously holding dollars or dollar-denominated assets, the new policy could significantly increase the demand for US government debt and keep borrowing costs down.
This isn’t mere happenstance. A number of current and former members of Congress are on record arguing that stablecoins expand the reach of the US dollar globally, reinforcing dollar dominance, while also creating a growing, passive demand for US government debt.
In short, the GENIUS Act may look like a forward-looking regulatory framework for a new technology — and it is. But it is also a clear step toward a modern form of financial repression, which appears to be the government’s favored strategy for managing its increasingly unsustainable debt.