A trillion liquidity wave is coming, and Bitcoin is expected to soar like a rocket.

Stock market investors have been shouting about "stablecoins" and "Circle". Why are they so optimistic? Because the U.S. Treasury Secretary said so:

This led to a chart comparing the market capitalization of Circle and Coinbase. Keep in mind that Circle must surrender 50% of its net interest income to Coinbase. However, Circle's market capitalization is surprisingly close to 45% of Coinbase's. This inevitably raises questions...

Another result is the chart comparing the price of Bitcoin with Circle. Since Circle's listing, its performance has been nearly 472% higher than Bitcoin.

Cryptocurrency enthusiasts should ask themselves: Why does the Treasury Secretary have such confidence in stablecoins? Why can the "Genius Act" gain bipartisan support? Do American politicians really care about financial freedom? Or is there something else going on?

Politicians may care about financial freedom on an abstract level, but hollow ideals cannot drive actual action. There must be other, more realistic reasons that have caused them to change their stance on stablecoins.

Looking back at 2019, Facebook attempted to integrate the stablecoin Libra into its social media empire, but it was put on hold due to opposition from politicians and the Federal Reserve. To understand the Treasury Secretary's enthusiasm for stablecoins, we need to examine the main issues he is facing.

The main issues faced by the U.S. Treasury Secretary are similar to those faced by their predecessors. Their boss likes to spend money but is unwilling to raise taxes. The heavy responsibility of raising funds falls on the Treasury Secretary, who needs to provide funding for the government through borrowing at reasonable interest rates.

However, the market quickly showed little interest in the long-term government bonds of highly indebted developed economies—especially in a high price/low yield environment. This is the "fiscal predicament" that finance ministers have witnessed over the past few years:

The trampoline effect of global government bond yields:

30-year government bond yield comparison chart: UK, Japan, USA, Germany, France

If the rise in yields is already bad enough, then the actual value of these bonds is even more of a blow.

Actual Value = Bond Price / Gold Price

TLT US is an ETF that tracks government bonds with maturities of over 20 years. The chart shows TLT US divided by gold prices with a base index of 100. Over the past five years, the real value of long-term government bonds has plummeted by 71%.

If past performance is not enough to raise concerns, then the finance minister also faces the following constraints:

The bond sales team of the Ministry of Finance must design an issuance plan to meet the following demand:

• An annual federal deficit of about 2 trillion dollars
• 3.1 trillion dollars in debt maturing in 2025

This is a chart that details the main expenditure items of the United States federal government and their year-on-year changes. Please note that the growth rate of each major expenditure item is on par with or even faster than the growth rate of the nominal GDP of the United States.

The previous two charts show that the weighted average interest rate of outstanding national debt is below all points on the national debt yield curve.

• The financial system issues credit secured by government bonds. Therefore, interest must be paid; otherwise, the government will face the nominal risk of default, which will destroy the entire fiat financial system. As the yield curve of government bonds is overall higher than the weighted average interest rate of current debt, interest expenses will continue to increase as maturing debt is refinanced at higher rates.
• The defense budget will not decrease, after all, the United States is currently involved in wars in Ukraine and the Middle East.
• Healthcare spending will continue to rise, especially in the early 2030s when the baby boom generation reaches a peak period of needing extensive medical services, with these costs primarily borne by large pharmaceutical companies funded by the U.S. government.

Control the 10-year Treasury yield to not exceed 5%

• When the 10-year yield approaches 5%, the MOVE index ( measuring bond market volatility ) soars, and financial crises often follow.

Issuing debt to stimulate financial markets

• According to data from the Congressional Budget Office, although the data is only up to 2021, the U.S. stock market has continued to rise since the global financial crisis in 2008, and capital gains tax revenue has surged accordingly.
• The U.S. government needs to avoid massive fiscal deficits by taxing the annual returns on the stock market.

The policies of the U.S. government have always favored the wealthy asset owners. In the past, only property-owning white men had the right to vote. Although modern America has achieved universal suffrage, power still originates from a minority that controls the wealth of publicly traded companies. Data shows that about 10% of households control more than 90% of the stock market wealth.

A notable example is during the 2008 global financial crisis, when the Federal Reserve printed money to rescue banks and the financial system, yet banks were still allowed to reclaim people's homes and businesses. This phenomenon of "the rich enjoying socialism while the poor endure capitalism" is exactly why mayoral candidates in New York City are so popular among the poor—because the poor also hope to share in some of the benefits of "socialism."

When the Federal Reserve implemented quantitative easing ( QE ) policies, the work of the Treasury Secretary was relatively simple. The Federal Reserve printed money to buy bonds, which not only allowed the U.S. government to borrow at low costs but also boosted the stock market. However, now the Federal Reserve must at least outwardly show a stance against inflation, unable to lower interest rates or continue implementing QE, leaving the Treasury Department to bear the burden alone.

In September 2022, the market began to marginally sell off bonds due to concerns about the persistence of the largest peacetime deficit in U.S. history and the Fed's hawkish stance. The yield on 10-year Treasuries nearly doubled in two months, and the stock market fell nearly 20% from its summer peak. At this time, the former Treasury Secretary introduced a policy known as "radical debt issuance" (ATI), which reduced the Fed's reverse repo (RRP) balance by $2.5 trillion by issuing more short-term Treasury bills ( rather than coupon-bearing bonds, injecting liquidity into the financial markets.

This policy has successfully achieved the goals of controlling yields, stabilizing the market, and stimulating the economy. However, the current RRP balance is nearly depleted, and the issue facing the current Treasury Secretary is: how to find trillions of dollars to purchase government bonds in an environment of high prices and low yields?

The market performance in the third quarter of 2022 was extremely difficult. The chart shows a comparison between the Nasdaq 100 index and the 10-year Treasury yield. As the yield soared, the stock market saw a significant decline.

![Arthur Hayes: A $10 Trillion Liquidity Tsunami is Coming, Bitcoin Will Soar Like a Rocket])https://img-cdn.gateio.im/webp-social/moments-492661e9cb0dd158a4b24ced5755dce8.webp(

The ATI policy effectively lowered the RRP and drove up financial assets such as the Nasdaq 100 and Bitcoin. The yield on the 10-year Treasury bond has consistently remained below 5%.

![Arthur Hayes: A $10 Trillion Liquidity Wave is Coming, Bitcoin Will Soar Like a Rocket])https://img-cdn.gateio.im/webp-social/moments-07d3aa79ea8a0a77150835d78a0aa263.webp(

The large "too big to fail" banks in the United States have two capital pools ready to purchase trillions of dollars in government bonds whenever there is sufficient profit potential. These two capital pools are:

• Current/Fixed Deposit
• Reserves held by the Federal Reserve

This article focuses on eight TBTF banks, as their existence and profitability rely on government guarantees for their liabilities, and banking regulatory policies are more inclined to favor these banks over non-TBTF banks. Therefore, as long as they can achieve a certain level of profit, these banks will cooperate with government requests. If the Treasury Secretary asks them to purchase government bonds, he will offer risk-free returns in exchange.

The finance minister's enthusiasm for stablecoins may stem from the ability of TBTF banks to unlock up to $6.8 trillion in Treasury bond purchasing power through the issuance of stablecoins. These dormant deposits can be re-leveraged in the fiat financial system, thereby driving the market upward. The following sections will detail how Treasury bond purchases can be achieved through the issuance of stablecoins and how the profitability of TBTF banks can be enhanced.

In addition, it will briefly explain that if the Federal Reserve stops paying interest on reserves, it could release up to $3.3 trillion for purchasing government bonds. This would become another policy that, although technically not quantitative easing ) QE (, has a similar positive impact on fixed supply monetary assets ) such as Bitcoin (.

Now, let's learn about the new favorite of the finance minister -- stablecoins, this "currency heavy weapon".

) Stablecoin Liquidity Model

My predictions are based on the following key assumptions:

Government bonds obtain full or partial exemption from supplementary leverage ratio ( SLR )

• Meaning of Exemption: Banks are not required to hold equity capital for their government bond investment portfolios. If fully exempt, banks can purchase government bonds with unlimited leverage.
• Recent policy changes: The Federal Reserve has just voted to reduce banks' capital requirements for Treasury securities, which is expected to free up to $5.5 trillion in bank balance sheet capacity for purchasing Treasuries over the next three to six months. The market is forward-looking, and this purchasing power may flood into the Treasury market in advance, thereby lowering yields under otherwise unchanged conditions.

Banks are profit-oriented organizations that minimize losses

• Lessons from the Risks of Long-Term Government Bonds: From 2020 to 2022, the Federal Reserve and the Treasury urged banks to purchase large amounts of government bonds, and banks rushed to buy long-term coupon bonds with higher yields. However, by April 2023, due to the fastest rise in the Federal Reserve's policy interest rates since the 1980s, these bonds incurred massive losses, leading to the collapse of three banks within a week.
• TBTF banks' safety net: In the TBTF bank sector, a certain bank's "held to maturity" bond investment portfolio has incurred losses exceeding its total equity capital. If forced to mark to market, the bank would face bankruptcy. To resolve the crisis, the Federal Reserve and the Treasury effectively nationalized the entire U.S. banking system through the "Bank Term Funding Program" ###BTFP(. Non-TBTF banks may still incur losses, and if bankruptcy occurs due to losses on government bonds, their management will be replaced, and the bank may be sold at a low price to TBTF banks. Therefore, the bank's Chief Investment Officer )CIO( is cautious about purchasing large amounts of long-term government bonds, fearing that the Federal Reserve will once again "pull the rug out" by raising interest rates.
• The appeal of treasury bonds: banks purchase treasury bonds because they are essentially high-yield, zero-maturity cash-like instruments.
• High net interest yield ) NIM ( is key: Banks will only purchase treasury bonds with deposits when they can provide a high net interest yield and require little or no capital support.

A certain trading platform recently announced plans to launch a stablecoin called JPMD. JPMD will operate on a layer two network developed on Ethereum by a certain platform. As a result, the bank