The debt ceiling is unlikely to be maintained as the government is facing increasing interest rate payment pressure, which is a potential catalyst compared to Bitcoin and cryptocurrency.The Federal Reserve of the United States released an important announcement on September 14th, revealing a cumulative loss of $100 billion for 2023
The debt ceiling is unlikely to be maintained as the government is facing increasing interest rate payment pressure, which is a potential catalyst compared to Bitcoin and cryptocurrency.
The Federal Reserve of the United States released an important announcement on September 14th, revealing a cumulative loss of $100 billion for 2023. And more importantly, according to Reuters, this situation at the Federal Reserve is expected to continue to worsen. But for BitcoinBTCFor risky assets, this may actually be a blessing in disguise.
The Federal Reserve is in a loss
The main reason behind this setback is that the interest expenses on Federal Reserve debt have exceeded the income generated by its holdings of assets and services provided to the financial industry.
Due to this development, investors are now scrambling to understand how this will affect interest rates and demand for recognized scarce assets such as BTC.
Federal Reserve earnings that should be remitted to the US Treasury, in US dollars (millions).
Some analysts believe that the Federal Reserve's losses have been ongoing since a year ago and may double by 2024. The central bank classifies these negative results as "deferred assets" and believes that there is no need to make up for them immediately.
The Federal Reserve once generated revenue for the US Treasury Department
From a historical perspective, the Federal Reserve has always been a profitable institution. However, the lack of profits does not hinder the central bank's ability to implement monetary policy and achieve its goals.
It is not surprising that the Federal Reserve has incurred losses on its balance sheet, especially considering the recent significant interest rate hikes, which have escalated from near zero interest rates in March 2022 to the current 5.25% level. Reuters believes that even if interest rates remain unchanged, the Fed's losses may continue for some time. This can be attributed to the expansionary measures implemented by the central bank in 2020 and 2021, which actively purchased bonds to avoid economic recession,.
Essentially, the Federal Reserve's function is like that of a traditional bank, which must provide returns to its depositors, mainly including banks, currency managers, and financial institutions.
An article in Barron's effectively explains the impact of a $100 billion loss, stating:
The losses of the Federal Reserve banks will not increase the federal budget deficit. However, the huge profits they used to repay the Treasury have now disappeared, which indeed helps to curb the deficit, with a deficit of $1.6 trillion so far this fiscal year
US total debt and debt ceiling, US $(trillion). Source: BBC British Broadcasting Corporation
Obviously, this situation is unsustainable, especially considering that the US debt has now reached $33 trillion. Although people may accuse the Federal Reserve of initially raising interest rates, they must also clearly recognize that without these measures, the inflation rate will not return to 3.2%, and the cost of living will continue to put greater pressure on the economy.
Ultimately, the huge demand for short-term bonds and money market funds reflects the trillions of dollars injected into the economy during the peak of the pandemic. However, even if people receive a fixed return of 5% on their three month investment, there is no guarantee that inflation will remain below this threshold for a long time.
In addition, every time the Federal Reserve injects liquidity into the market, whether by selling assets on the balance sheet or raising the Treasury's debt limit, investors face the risk of capital dilution.
In the final analysis, in the next 12 months, the return rate of fixed income cannot exceed the inflation rate, because at some point, the government will run out of funds and be forced to issue additional treasury bond.
Real estate and stocks are no longer reliable hedging tools
When the inflation rate catches up with the yield of short-term treasury bond, which industry or asset class will gain the maximum yield is still a major unsolved mystery. The reason for this uncertainty is that the S&P 500 index is only 7% below its historical high, while the real estate market is showing signs of tension due to mortgage interest rates reaching their highest level in more than 20 years.
On the one hand, the valuation of the S&P 500 index does not seem too high, especially compared to its previous peak of 30 times or even higher, which is only 20 times the expected return. However, investors are concerned that the Federal Reserve may be forced to further raise interest rates to cope with current inflationary pressures.
In addition, as the cost of capital continues to rise, corporate profits will face pressure, and investors' cash reserves will have nowhere to place.
At present, Bitcoin and other cryptocurrencies do not seem to be a viable safe haven option, but this view may shift as investors realize that the US government's debt ceiling is essentially endless. Therefore, regardless of short-term price trends, gradually accumulating these assets may make sense.
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