The Fed's interest rate cut and the strengthening of the yen may lead to another bull run for Bitcoin

I recently finished the summer holiday in the Northern Hemisphere and headed to the Southern Hemisphere for two weeks of skiing. Most of my time was spent on backcountry skiing trips. For those who haven't experienced it, the process involves attaching climbing skins to the bottom of the skis, allowing you to ski uphill. Once at the top, you remove the skins and adjust your boots and skis to downhill mode, enjoying the abundant powder snow. The mountain range I visited could mostly only be accessed this way.

A typical four to five hour skiing day consists of 80% uphill skiing and 20% downhill skiing. This activity consumes a lot of energy. The body burns calories to maintain temperature and internal balance. The legs are the largest muscle group in the body, continuously working whether climbing or descending. My basal metabolic rate is about 3000 kcal, and with the energy required for leg movements, the total daily energy expenditure exceeds 4000 kcal.

Since completing this activity requires a huge amount of energy, the combination of foods consumed throughout the day is crucial. I have a hearty breakfast in the morning, which includes carbohydrates, meats, and vegetables, what I call "real food." Breakfast keeps me feeling full, but as I enter the cold forest and start the initial uphill climb, these initial energy reserves are quickly depleted. To manage my blood sugar levels, I prepare some snacks that I usually don’t eat. I eat a Snickers and syrup every 30 minutes on average, even if I'm not hungry. I don’t want low blood sugar levels to affect my performance.

Eating processed foods high in sugar is not a long-term solution to meet energy needs. I also need to consume "real food". After completing a lap, I usually stop for a few minutes, open my backpack, and eat the food I've prepared. I prefer containers filled with chicken or beef, stir-fried leafy greens, and a large amount of white rice.

I pair periodic sugar peaks with longer-burning, clean, real food to maintain performance throughout the day.

Describing the pre-meal preparations for a skiing trip serves to introduce a discussion about the relative importance of currency prices and quantities. To me, currency prices are like eating a Snickers and syrup, providing a quick glucose boost. Currency quantities, on the other hand, are like "real food" that burns slowly and lasts longer. At last Friday's Jackson Hole central bank meeting, Powell announced a policy shift, with the Fed finally committing to lowering policy interest rates. Additionally, officials from the Bank of England and the European Central Bank also stated they would continue to lower policy interest rates.

Powell announced this shift around 9 a.m. local time. The S&P 500 index, gold, and Bitcoin, which represent risk assets, all rose as currency prices fell. The dollar also weakened over the weekend.

The initial positive response from the market is reasonable because investors believe that if currencies become cheaper, assets priced in fixed-supply fiat currencies should rise. I agree with this view; however... we have forgotten that the anticipated rate cuts from the Fed, the Bank of England, and the European Central Bank will reduce the interest rate differentials between these currencies and the yen. The risk of yen carry trades will re-emerge and could spoil the party unless the money supply is increased in the form of central bank balance sheet expansion.

The US dollar strengthened by 1.44% against the Japanese yen, but the USD/JPY exchange rate immediately fell after Powell announced a policy shift. This was anticipated, as the expected difference in interest rates between the dollar and yen would narrow due to declining US dollar interest rates and stable or rising yen interest rates.

If the interest rate cuts by the three major economies lead to the appreciation of the yen against its domestic currency, we should expect a negative reaction from the market. We are facing a battle between the positive ( interest rate cuts ) and the negative ( appreciation of the yen ) forces. Considering that the total amount of global financial assets financed in yen exceeds tens of trillions of dollars, I believe the negative market reaction caused by the rapidly appreciating yen and the resulting yen arbitrage trades will outweigh any benefits gained from the slight interest rate cuts in the dollar, pound, or euro. Furthermore, I believe that the policymakers at the Fed, Bank of England, and European Central Bank recognize that they must be willing to loosen policies and expand their balance sheets to offset the adverse effects of the yen's appreciation.

The Fed is trying to get the "sugar high" from rate cuts before hunger sets in. From an economic perspective, the Fed should be raising rates, not cutting them.

Since 2020, the manipulated U.S. Consumer Price Index has increased by 22%. The Fed's balance sheet has grown by more than $3 trillion.

The U.S. government's deficit has reached record levels, partly because the cost of issuing debt has not been constrained enough to force politicians to raise taxes or cut subsidies to balance the budget.

If the Fed genuinely wants to maintain confidence in the dollar, it should raise interest rates to curb economic activity. This would lower prices for everyone, but some people will lose their jobs. At the same time, it would also control government borrowing, as the cost of issuing debt would rise.

The U.S. economy has only experienced two quarters of actual GDP contraction after COVID. This is not a weak economy that needs interest rate cuts.

Even the recent estimate for the actual GDP in the third quarter of 2024 has reached +2.0%. Once again, this is not an economy affected by overly restrictive interest rates.

Just like I eat candy and syrup when I'm not hungry to prevent my blood sugar levels from dropping, the Fed promises to never let the financial markets stagnate. The United States is a highly financialized economy that requires continuously rising prices of fiat assets to make the public feel wealthy. On an actual level, stock performance is flat or declining, but most people do not pay attention to their real returns. Nominally rising stocks also increase capital gains tax revenues in terms of fiat currency. In short, a market downturn is harmful to the financial health of Pax Americana. Therefore, Yellen began to interfere with the Fed's rate hiking cycle in September 2022. I believe that Powell is sacrificing himself under the instructions of Yellen and Democratic leaders, choosing to cut rates when he knows he shouldn't.

The U.S. economy is not eager for interest rate cuts, but Powell will provide sugar stimulation. Because the monetary authorities are extremely sensitive to any decline in the nominal stock price, Powell and Yellen will soon provide "real food" in some form, namely expanding the Fed's balance sheet to offset the impact of the yen's appreciation.

Powell made adjustments based on a poor employment report. Just days before Powell's speech at Jackson Hole, President Biden's Labor Department released a shocking revision of previous employment data, indicating that the employment estimates were overstated by about 800,000.

Biden and his disingenuous economist supporters have been claiming that the labor market has been strong during his presidency. This strong labor market puts Powell in a dilemma, as senior Democratic senators are calling for him to cut interest rates to stimulate the economy, so that Trump does not win the election. Powell is in a predicament. With inflation exceeding the Fed's 2% target, Powell cannot lower interest rates due to falling inflation. He also cannot lower rates on the grounds of a weak labor market. But let's sprinkle a little political misdirection in this situation and see if we can help Powell.

When politics overrides economics, I am more confident in my predictions. This is due to Newtonian political physics — the politicians in power want to maintain their power. They will spare no effort, regardless of economic conditions, to secure re-election. This means that, no matter what happens, the incumbent Democrats will use all monetary policy tools to keep the stock market rising before the November elections. The economy will not lack cheap and abundant fiat currency.

The exchange rates between currencies are primarily influenced by interest rate differentials and expectations of future changes in interest rates.

If traders close their USD-JPY arbitrage positions when the value of the yen surges, the short-term stimulus from the Fed's interest rate cuts may quickly fade. Taking further rate cuts to prevent declines in various financial markets will only accelerate the narrowing of the USD-JPY interest rate differential, which in turn will strengthen the yen and lead to more positions being unwound. The market needs "real food", provided in the form of printed money by the ever-growing Fed balance sheet, to stop the losses.

If the yen accelerates its appreciation, the first step will not be to resume quantitative easing. The first step will be for the Fed to reinvest the cash from maturing bonds into U.S. Treasuries and mortgage-backed securities. This will be seen as a halt to its quantitative tightening plan.

If the painful trend continues, the Fed may use central bank liquidity swaps and/or resume quantitative easing. In this context, Yellen will increase dollar liquidity by selling more government bonds and reducing the fiscal account balance. Neither of these market manipulators will use the destructive impact of the end of yen arbitrage trading on the market as a reason to resume aggressive money printing. Acknowledging any influence that other countries have on this free and democratic nation does not align with American values!

If the USD-JPY exchange rate quickly falls below 140, I believe they will not hesitate to provide the "real food" needed for the fiat currency financial market.

In the final phase of the third quarter, the conditions for fiat liquidity couldn't be better. As cryptocurrency holders, we have the following tailwinds behind us:

1. Central banks around the world, especially the Fed, are lowering the cost of capital. The Fed is still cutting interest rates while inflation is above its target and the U.S. economy continues to grow. The Bank of England and the European Central Bank may further cut interest rates at the upcoming meetings.

2. Yellen promised to issue $271 billion in Treasury bonds before the end of the year and to conduct $30 billion in buyback operations. This will inject $301 billion in liquidity into the financial markets.

3. The U.S. Treasury has about $740 billion left in its general account, which can and will be used to stimulate the market and help Harris win.

4. The Bank of Japan expressed extreme concern over the speed of the yen's appreciation after its meeting on July 31, 2024, when it raised interest rates by 0.15%. Therefore, it publicly stated that future rate hikes would consider market conditions. This is an implicit statement of "if we believe the market will decline, we will not raise interest rates."

I am a person from the coin circle; I do not pay attention to stocks. So, I do not know whether stocks will rise. Some people point out examples of the stock market falling when the Fed cuts interest rates in history. Some are worried that the Fed cutting interest rates is a leading indicator of recession in the U.S. and developed markets. This may be correct, but just imagine, if the Fed cuts interest rates when inflation is above target and economic growth is strong, what measures will they take? They will increase the printing of money significantly, which will lead to inflation, and this may be detrimental to certain types of businesses.