The crypto market is expected to recover with a pump in September, but the alt season requires Bitcoin to break through $70,000.

Water is essential for brewing delicious coffee, and similarly, liquidity is crucial for accumulating Bitcoin. This is a theme I emphasize repeatedly in my articles. However, we often overlook its importance and focus on trivial matters that we think will affect profitability.

If you can identify the sources, directions, reasons, and timing of fiat currency liquidity, it is difficult to incur losses in investments. Since financial assets are priced in dollars and U.S. Treasuries, the quantity of global currency and U.S. dollar debt is the most critical variable.

What we need to focus on is not the Federal Reserve, but the U.S. Treasury. This helps us determine the specific situation of fiat currency liquidity fluctuations.

We need to return to the concept of "fiscal dominance" to understand why Yellen made Powell her "beta cuck towel bitch boy". In a fiscal dominance period, the necessity of funding the state outweighs the central bank's concerns about inflation. This means that bank credit and nominal GDP growth must remain high, even if this leads to inflation persistently exceeding the target.

Time and compound interest determine the timing of the transfer of power from the central bank to the treasury. When the debt-to-GDP ratio exceeds 100%, the growth rate of debt mathematically outpaces the growth rate of the economy. Beyond this event horizon, the institutions controlling the supply of debt are crowned as emperors. This is because the treasury decides the timing, quantity, and duration of debt issuance. Furthermore, as the government now relies on debt-driven growth to maintain the status quo, it will ultimately instruct the central bank to cash the treasury's checks using the printing press. The independence of the central bank is no longer important!

The outbreak of COVID and the U.S. government's lockdowns combined with stimulus checks have caused the debt-to-GDP ratio to quickly exceed 100%. It was only a matter of time before Yellen went from "grandma" to "bad girl."

Before the U.S. fell into a vicious cycle of inflation, Yellen had a simple way to create more credit and boost asset prices. The Federal Reserve's balance sheet has two sanitized pools of funds that, if released into the market, would promote bank credit growth and drive up asset prices. The first is the reverse repurchase pool (RRP), where money market funds deposit cash overnight at the Fed and earn interest. The second is bank reserves, on which the Fed pays interest in a similar manner.

When funds are on the Federal Reserve's balance sheet, they cannot be re-collateralized into the financial market to generate broad monetary or credit growth. By providing reserve interest and reverse repurchase interest incentives to banks and money market funds, the Federal Reserve's quantitative easing (QE) plan has created inflation in financial asset prices rather than leading to rapid growth in bank credit. If QE had not had this sterilization, bank credit would flow into the real economy, increasing output and commodity/service inflation. Given the current total debt, strong nominal GDP growth along with commodity/service/wage inflation is exactly what the government needs to increase tax revenue and reduce leverage. Therefore, "bad girl" Yellen stepped in to correct the situation.

Yellen is indifferent to inflation. Her goal is to create nominal economic growth so that tax revenues increase, reducing the U.S. debt-to-GDP ratio. Given that no political party or its supporters have committed to cutting spending, the deficit will persist for the foreseeable future. Additionally, since the scale of the federal deficit is the largest in peacetime history, she must utilize all available tools to finance the government. Specifically, this means transferring as much funding as possible from the Federal Reserve's balance sheet to the real economy.

Yellen needs to provide banks and money market funds with what they want. They want a cash-like instrument with no credit and minimal interest rate risk to replace the cash yield held at the Federal Reserve. Treasury bills with maturities of less than one year, which yield slightly more than reserve balance interest ( IORB ) or reverse repo rates ( RRP ), are the perfect substitutes. Treasury bills are assets that can be leveraged in the market, generating credit and asset price growth.

Does Yellen have the ability to issue $3.6 trillion in treasury bonds? Of course she can. The federal government is running a $2 trillion annual deficit, which must be financed by debt securities issued by the Treasury.

However, Yellen or her successor in January 2025 does not necessarily have to issue treasury bonds to finance the government. She could sell less liquid, higher interest rate risk long-term government bonds. These securities are not cash equivalents. Additionally, due to the shape of the yield curve, the yield on long-term debt securities is lower than that of treasury bonds. The profit motive of banks and money market funds makes it impossible for them to exchange anything other than treasury bonds for the funds held by the Federal Reserve.

As the reverse repurchase plan (RRP) retreats from its high, Bitcoin rebounds from its low. This is a close relationship. When funds leave the Federal Reserve's balance sheet, it increases liquidity, leading to a rise in the prices of limited financial assets such as Bitcoin.

Why is this happening? Let's consult the Treasury Borrowing Advisory Committee ( TBAC ). In its latest report, TBAC clearly outlines the relationship between increasing the issuance of Treasury bills and the funds held by money market funds in the RRP.

A large overnight reverse repo balance may indicate strong demand for Treasury bills. During 2023-24, overnight reverse repo funds were almost transferred one-to-one to Treasury bills. This rotation facilitated the smooth absorption of record Treasury bill issuance.

As long as the yield on treasury bills is slightly higher than the reverse repurchase rate, money market funds will transfer cash into treasury bills - currently, the yield on 1-month treasury bills is about 0.05% higher than the funds in RRP.

The next question is whether the bad girl Yellen can guide the remaining $300 billion to $400 billion from the RRP into Treasury bills. If you doubt the bad girl Yellen, you might face sanctions! Ask those poor souls from developing countries what happens when you lose the opportunity to access dollars to buy basic necessities like food, energy, and medicine.

In the recent 2024 Q3 financing announcement (QRA), the Treasury stated that it will issue $271 billion in Treasury bills by the end of this year. That's good, but there is still money in the RRP. Can she do more?

Let me quickly talk about the Treasury's repurchase plan. Through this plan, the Treasury repurchases illiquid non-Treasury debt securities. The Treasury can fund purchases by reducing its general account (TGA) or issuing Treasury bonds. If the Treasury increases the supply of Treasury bonds and reduces the supply of other types of debt, it will net increase liquidity. Funds will leave the RRP, which is positive for dollar liquidity, and as the supply of other types of government bonds decreases, holders will turn to the risk curve to substitute these financial assets.

As of November 2024, the latest repurchase plan will total the purchase of $30 billion worth of non-Treasury securities. This is equivalent to reissuing $30 billion in Treasury securities, bringing the total outflow of RRP funds to $301 billion.

This is a robust liquidity injection. But how powerful is the bad girl Yellen? How much does she hope for the victory of the minority American presidential candidate Kamala Harris? I refer to her as "minority" because Harris changes her phenotypic affiliation based on different audiences on different occasions. This is her unique ability. I support her!

The Treasury can inject massive liquidity by reducing the TGA from about $750 billion to zero. They can do this because the debt ceiling will take effect on January 1, 2025, and under the law, the Treasury can spend the TGA to avoid or delay a government shutdown.

Bad girl Yellen will inject at least $301 billion, up to $1.05 trillion, before the end of the year. Bang! This will create a brilliant bull market covering all types of risk assets, including cryptocurrency, just in time for the elections. If Harris still can't beat that orange person, then I think she needs to turn into a white male. I believe she has this superpower within her/his capabilities.

In the past 18 months, injecting $2.5 trillion into the financial market through the reverse repurchase program (RRP) is quite impressive. But there is still a large amount of dormant liquidity eager to be released. Can Yellen's successor create a situation after 2025 that withdraws funds from the bank reserves held by the Federal Reserve and injects them into the broader economy?

During a period dominated by finance, anything is possible. But how to do it?

Profitability banks will exchange one income-generating cash instrument for another as long as the regulatory treatment is the same for both, and the latter has a higher yield. Currently, the yield on Treasury bills is lower than the reserve balances held by the Federal Reserve, so banks will not purchase Treasury bills.

But what will happen next year when reverse repos are almost zero, and the treasury continues to sell a large amount of treasury bonds to the market? An ample supply and money market funds unable to buy treasury bonds with funds parked in reverse repos means that prices must fall and yields will rise. Once the yield on treasury bonds is a few basis points higher than the excess reserve rate, banks will take advantage of their reserves to buy a large amount of treasury bonds.

Yellen's successor - I bet it's Jamie Dimon - will not be able to resist the ability to continue dumping Treasury bonds into the market for the political benefit of the ruling party. Another $3.3 trillion in bank reserve liquidity is waiting to be injected into the financial market. Shout with me: Treasury bonds, baby, Treasury bonds!

The banks have effectively gone on strike, no longer purchasing long-term government bonds. Bad girls Yellen and Powell almost caused a collapse of the banking system, as they filled the banks with government bonds and then raised interest rates from 2022 to 2023... Rest in peace, Silvergate Bank, Silicon Valley Bank, and Signature Bank. The remaining banks do not want to take risks anymore and are wary of what might happen if they greedily purchase high-priced government bonds again.

Example: Since October 2023, U.S. commercial banks have only purchased 15% of non-Treasury bond securities. This is very bad for Yellen because she needs banks to step up when the Fed and foreign entities exit. I believe that as long as banks buy Treasury bonds, they will be happy to fulfill their responsibilities because the risk characteristics of Treasury bonds are similar to bank reserves, but with higher yields.

The change in the USD-JPY currency pair from 160 to 142 has triggered a strong reaction in the global financial markets. Many were reminded last week to sell whatever they could. That moment was a textbook example of relevance. The USD-JPY will reach 100, but the next wave will be driven by the repatriation of foreign capital by Japanese companies, not just by hedge fund investors unwinding their yen carry trades. They will sell U.S. Treasuries and U.S. stocks (, primarily large tech stocks like NVIDIA, Microsoft, and Google ).

The Bank of Japan attempted to raise interest rates, and the global market reacted strongly. They compromised and announced that raising interest rates was not under consideration. From the perspective of fiat currency liquidity, the worst-case scenario is that the yen trades sideways, with no new low-cost yen positions being established. As the threat of yen arbitrage trading diminishes, bad girl Yellen's market intervention has once again become the focus.

Without water, you will die. Without liquidity, you will face collapse.

Why has the cryptocurrency risk market been moving sideways or declining since April of this year? Most taxes were generated in April, which led the Treasury to reduce borrowing. We can see that the number of treasury bonds issued between April and June has decreased.

Due to the net reduction of treasury bills, liquidity in the market has been removed. Even with an overall increase in government borrowing, the net reduction of cash-like instruments provided by the Treasury will lead to a decrease in liquidity. Therefore, cash remains trapped on the Federal Reserve's balance sheet, in the reverse repurchase program, unable to be pushed out.