TechFlow news — On August 24, Arthur Hayes, founder of BitMEX, wrote in his blog that the Federal Reserve is currently both raising interest rates and shrinking its balance sheet, two policies that offset each other. Rate hikes increase the U.S. government's debt interest payments, effectively providing fiscal stimulus to the wealthy, while quantitative tightening directly removes liquidity from the banking system. On the other hand, the Fed controls money market rates by paying interest on reverse repurchase agreements (RRP) and bank reserves—yet these interest payments also expand the money supply.
According to Hayes, today’s U.S. fiscal situation differs significantly from that of the 1980s, with government debt now standing at four times GDP compared to one-fourth GDP back then. Today, rate hikes not only fail to tighten financial conditions but also make it harder for the U.S. government to finance its debt through bond issuance.
Hayes predicts that as the U.S. Treasury market becomes increasingly unstable, the Fed will eventually be forced to abandon its control over interest rates and instead focus solely on monetary quantity. This would lead to sharp rate cuts or even a restart of quantitative easing. Meanwhile, to curb inflation and restore fiscal sustainability, the Fed may eliminate interest payments on banks’ reserve deposits, thereby forcing commercial banks to purchase government bonds.
Hayes advises investors to hold cash and cryptocurrencies as hedges against inflation. He believes that due to the dominance of fiscal policy, cash and certain assets such as cryptocurrencies could become safe-haven instruments against inflation and other economic risks.
