Author: GregCipolaro, Global Research Director, NYDIG Compiled by WEEXBlogSummary: Bitcoin, as a non sovereign means of storing value, may be seen as an effective investment choice and hedging tool for those seeking to protect themselves from the conspiracies of politicians and monetary policymakers.Reading summary:The debate on the US debt ceiling is coming ahead of schedule due to the decline in tax revenue, which may highlight the importance of Bitcoin
Author: GregCipolaro, Global Research Director, NYDIG Compiled by WEEXBlog
Summary: Bitcoin, as a non sovereign means of storing value, may be seen as an effective investment choice and hedging tool for those seeking to protect themselves from the conspiracies of politicians and monetary policymakers.
Reading summary:
- The debate on the US debt ceiling is coming ahead of schedule due to the decline in tax revenue, which may highlight the importance of Bitcoin.
- Looking back at the debt ceiling crisis of 2011, although the market was relatively calm before the crisis, with the downgrade of the US Treasury rating, market volatility increased significantly and the stock market plummeted sharply.
- The signs of a banking crisis have eased from the most extreme, but recent trends and our understanding of the persistence of historical banking crises indicate that it is still too early to announce the resolution of the crisis.
Debate over debt ceiling may highlight the importance of Bitcoin
Last Tuesday was the deadline for individuals in the United States to submit their 2022 tax returns, and preliminary data showed a significant decrease in tax revenue. According to economists at Goldman Sachs, it has decreased by 39% compared to the same period last year, which may have accelerated the urgency of raising the debt ceiling.
Although the basic situation still requires raising the debt ceiling in July, given the current income situation, June may be on the table.
Anyway, the debt ceiling of $3.134 trillion will need to be quickly breached, which has caused tension, political competition, and ultimately raised concerns about the financial health of the United States.
Although the debt ceiling has been raised several times in the past without much drama, this time may be different from the past due to political differences and legislative responses.
Therefore, it is necessary for us to learn from history and see what inspiration the 2011 debt ceiling crisis event had. That debt crisis led to Standard&Poor's downgrade of the US debt rating, leading to a surge in market volatility and a decline in the stock market.
The debt ceiling, which is the maximum amount of debt authorized by Congress to be issued by the US Treasury, can be traced back to the Second Free Bond Act passed in 1917. If the debt falls below a certain amount (i.e. the debt ceiling), the law allows the Treasury to issue bonds without explicit congressional approval.
Before 1917, Congress usually authorized the Treasury to issue specific debt instruments, usually for a clear purpose. After the second free bond law was introduced, the Treasury Department had greater flexibility in providing funding for US government debt, but it also required regular approval of higher debt limits.
Although the debt ceiling has been raised multiple times, most of the time the market reaction has been calm. However, in some cases, such as 2011, it has brought significant market fluctuations.
In addition, in the past few years, due to unconventional measures taken by the Ministry of Finance, such as suspending investment and funding for certain government projects, the debt ceiling has been suspended multiple times (5 times since 2013) or operated without clear restrictions (3 times since 2017).
Our calculations indicate that since 1940, the US debt ceiling has grown at an annual growth rate of 8.1%. With the economic growth, the debt ceiling and US debt grew exponentially, but the growth rate was slower than that of debt. Therefore, the ratio of US government debt to its economic output, that is, the ratio of debt to GDP, has shown a significant long-term growth trend, as well as the response to specific economic crises, such as the global financial crisis and COVID-19.
Looking back at the 2011 debt ceiling crisis, there are some important observation points.
Firstly, before the debt ceiling was raised, the market was relatively calm, with low volatility measured by the CBOE Volatility Index (VIX), ranging from around 15 to 20, and soaring to nearly 30 at one point; The S&P 500 index has been rebounding within the 100 point range, from 1250 to 1350. Although credit rating agencies issued several warning signals and put US debt on the negative correction watch list, the market as a whole was relatively calm.
Another observation is that the debt ceiling has already been reached before the resolution is signed and takes effect. At that time, the debt ceiling was reached on May 16th, but then Treasury Secretary Tim Geithner could use "extraordinary measures" to fulfill financial obligations before August 2nd, essentially abandoning other obligations to maintain government operations. The current Finance Minister Yellen has also outlined these measures, which may delay the urgency of raising the debt ceiling if needed, but cannot eliminate it.
The final observation is that market volatility, VIX index rise, and stock market decline only occur after the debt ceiling signing takes effect. After raising the debt ceiling, the S&P 500 index plummeted 12% to 1100 points, and the VIX soared to nearly 50. Our interpretation is that this is related to S&P's downgrade of the US debt rating, rather than any other factor. The reason for the downgrade is the weakening of US decision-making and political institutions, as well as the fact that US governance has become less stable, effective, and predictable, which still applies today.
At that time, Bitcoin was still in its early stages, so we didn't want to interpret it too much due to the impact of the 2011 debt crisis, but today the situation is different. Bitcoin, as a non sovereign means of storing value, may be seen as an effective investment choice and hedging tool for those seeking to protect themselves from the conspiracies of politicians and monetary policymakers. The economic commitment provided by Bitcoin has certainty, which cannot be provided by fiat currency and public expenditure.
The banking crisis has been postponed, but it has not been completely resolved
An important indicator of the banking crisis, namely bank borrowing from the Federal Reserve, has fallen from its high in recent weeks, indicating that the most pressing pressure may have passed and the crisis has temporarily been lifted. Borrowings from the Federal Reserve's discount window and the newly launched Bank Term Financing Program (BTFP) have decreased from their high in March, despite a slight rebound in the past week.
Given the recent rebound and our previous understanding of the sustainability of the banking crisis, it is not yet possible to assert that everything is safe and secure.
The fundamental reason for this banking crisis is that due to rising interest rates and unstable deposit bases, the asset side of the bank's balance sheet has suffered losses. And these fundamental reasons have not yet been fully addressed.
The withdrawal from the most serious crisis is likely to affect Bitcoin. When concerns about solvency spread in the banking system, Bitcoin became an obvious beneficiary.
Although banking crises rarely occur in the United States, unfortunately, these events often remind us of how fragile the banking system is and the original intention behind Bitcoin's birth. It is not a coincidence that Nakamoto Cong included "Chancelloron the brick of second bailout for banks" in the Bitcoin creation block.
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Original link:
https://nydig.com/research/debt-ceiling-might-shine-a-light-on-bitcoin
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