This episode explores the intersection of macroeconomics and crypto, highlighting how fiscal policy and stablecoin innovation are reshaping the financial landscape and creating new dynamics for investors.
FOMC Meeting and Macroeconomic Uncertainty
- Joseph Wang, of Monetary Macro, summarizes the recent FOMC meeting, emphasizing the Federal Reserve's uncertainty about future economic conditions. The dot plot projections indicate downside risks for unemployment and upside risks for inflation, reflecting a complex global environment.
- The Fed is committed to a reactive stance, waiting for data before making policy changes.
- The market currently prices in two rate cuts for the year, aligning with the Fed's guidance.
- Quantitative tightening (QT) has effectively ended, with the Fed reducing its balance sheet shrinkage from $25 billion to $5 billion per month for treasuries.
- "The FED is really not going to be as important as it used to be"
EM-ification of the United States
- Austin Campbell, NYU professor, introduces the concept of the "EM-ification" of the United States, where the US fiscal situation and market behavior increasingly resemble those of emerging markets.
- The US has started to trade more like an emerging market, with the long end of the curve rising when short-term rates were cut.
- Corporations are now funding cheaper at the 30-year point than the federal government, indicating a perceived higher risk for the government.
- Fiscal policy is driving monetary policy, a departure from the US norm, due to concerns about the growing national debt.
- "We now have corporates in the United States funding cheaper at the 30-year Point than the federal government"
Rate Cuts and Market Impact
- Joseph Wang discusses the potential impact of accelerated rate cuts, drawing parallels to the 2018 market downturn.
- A significant market correction could lead to a flight-to-safety bid, increasing demand for US Treasuries.
- The market would likely price in more rate cuts, putting downward pressure on the yield curve.
- Longer-term, higher yields are possible due to the "EM-ification" trends.
- "You kind of have this happening right now right so this past month you have uh a huge amount of repatriation of foreign flows moving out of the us into places like Europe"
Recessions and Economic Policy
- Austin Campbell challenges the notion that recessions are inherently negative, emphasizing the importance of creative destruction.
- Recessions can lead to the reallocation of resources from inefficient to more productive uses.
- Using monetary or fiscal policy to eliminate market volatility only masks it, leading to larger crises later.
- The focus should be on sound long-term fiscal and monetary policies, not on avoiding short-term downturns.
- "I don't think recessions are necessarily a bad thing right creative destruction exists for a reason"
The Mar-a-Lago Accord and Treasury Demand
- The discussion turns to potential solutions for generating demand for US debt, starting with the "Mar-a-Lago Accord."
- Proposed by Steven Morán, this concept involves asking countries that benefit from US security to buy US debt.
- Joseph Wang suggests this might work for some allies like Japan but is unlikely to generate significant demand overall.
- "I think the amount of juice we could squeeze out of this probably isn't that much"
Stablecoins as a Marginal Buyer of Debt
- Austin Campbell highlights the role of stablecoins as a growing source of demand for US Treasuries.
- Properly constructed stablecoins hold assets like T-bills and Treasuries, represented on a blockchain.
- Global demand for US dollars, accessed through stablecoins, is increasing, even as foreign governments reduce Treasury holdings.
- Stablecoin legislation could allow larger financial institutions to issue stablecoins, further increasing demand.
- "There is a very significant chance that the single most important thing Congress will do over the past 10 years and next 10 years is pass the stable coin bill"
Bipartisan Support for Stablecoin Legislation
- The conversation shifts to the political landscape surrounding stablecoin regulation.
- Bipartisan support for stablecoin legislation has existed in the House for some time, with age being a stronger predictor of stance than political party.
- The change in Senate control, removing blockers like Elizabeth Warren, has increased the likelihood of the bill passing.
- "There's nobody in this country who hates changes to the financial system more than Elizabeth Warren"
US Dollar Hegemony and the Shift to a Secured Standard
- Joseph Wang addresses concerns about the potential decline of US dollar hegemony and the shift from LIBOR (London Interbank Offered Rate) to SOFR (Secured Overnight Financing Rate). LIBOR is an interest-rate average calculated from estimates submitted by the leading banks in London. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.
- The administration aims to maintain the dollar's reserve currency status, shifting from sanctions to tariffs.
- The move to a secured standard (SOFR) strengthens the financial system and the dollar's role.
- "If we have a secured system and it sounds like the stable coins are going to be backed by very sound collateral so maybe they could be Perce CE to be secured as well right"
Stablecoins vs. Money Market Funds
- Austin Campbell explains the relationship between stablecoins and money market funds.
- The Genius Act defines stablecoins in a way that closely resembles money market funds.
- Stablecoins are essentially a wrapper that puts money market fund assets on a blockchain.
- This could lead to the unbundling of banking services and force banks to compete for deposits.
- "Stable coins in the genius act are almost literally money market funds"
Repo Markets and Digital Assets
- Joseph Wang discusses the role of the Federal Reserve in money markets and the potential impact of digital assets.
- The Fed's increased footprint in money markets enhances stability, making stablecoin assets safer.
- Stablecoins could potentially become a more efficient and liquid form of money market fund.
- "When the FED is active in the money markets that creates greater stability and that actually makes anyone who is in the money markets a bit safer"
Systemic Stability and the Debt Ceiling
- The conversation touches on systemic stability and the potential risks associated with the debt ceiling.
- Stablecoins regulated under frameworks like the Genius Bill have demonstrated resilience, with no losses during the BUSD wind-down.
- The Fed has contingency plans to prioritize Treasury payments even if the debt ceiling is reached.
- "You can build these things correctly to the point that the only way you're going to have a stable coin collapse in disorderly fashion unlike say Banks which actually fail way more often is if the US Treasury itself is the problem"
Sovereign Wealth Fund and Strategic Bitcoin Reserve
- The discussion concludes with an analysis of the proposed US sovereign wealth fund and a strategic Bitcoin reserve.
- Austin Campbell strongly opposes a Bitcoin reserve while the US is running a deficit, calling it a "pants-on-head stupid idea."
- Joseph Wang suggests the sovereign wealth fund could capture upside from companies receiving government subsidies.
- "I am on record of having said in the current environment I think the Bitcoin strategic Reserve is an absolutely pants onhe head stupid idea"
Crypto Mimicking Traditional Finance
- The final point emphasizes how crypto asset classes are starting to behave like their traditional finance counterparts.
- Bitcoin is increasingly acting like digital gold.
- The meme coin market shares similarities with the art market, primarily serving as a means of money laundering.
- "One of the greatest parallels is actually between the Art Market and the meme coin Market because the primary purpose of both is actually still just moneya laundering"
Crypto Speedrunning Finance History
- Austin Campbell concludes by highlighting how crypto is rapidly replicating the history of financial products, both good and bad.
- Crypto should learn from the mistakes of traditional finance rather than reinventing the wheel.
- The collision of crypto and traditional finance could lead to technological innovation in banking and better risk management in crypto.
- "Crypto like in another parallel is just speed running the history of traditional Financial products"
The convergence of macroeconomics and crypto presents both opportunities and risks. Investors and researchers should closely monitor stablecoin legislation, fiscal policy developments, and the evolving dynamics of US dollar hegemony to navigate this changing landscape effectively.
