• TennHedge

Yield Curve Control and Bitcoin

Lately, it seems like all you read about in the financial press is about this ‘looming crisis‘ of rising yields, and their potential negative impact on the economy. "The 10 year yield is headed back to 3% and beyond," you will read. Why does such a thing even matter, and how could rising yields as well as the anticipated response by central banks affect Bitcoin?

I'm not going to spend a lot of time in this post explaining how yields work, but the take-home is that rising yields represent a rising borrowing cost for the government as well as the private sector. Since the modern world is financially leveraged to levels never before seen in human history, even an incremental increase in borrowing costs in the form of rising yields can have a huge negative impact. The ill-fated belief in Keynesian economic policy has made it so that if borrowing costs go up, an economic collapse would most likely loom on the horizon, for governments and private businesses alike.


Will governments sit back and allow such a collapse to happen?


Not without a fight, I suggest.

The U.S. government has an outstanding debt of more than $28 trillion, and that number is set to increase by $2 trillion this month alone. The government will not allow interest rates and yields to rise to a level where servicing this debt becomes cumbersome (if not impossible). The government will do anything and everything to prevent a potential debt default scenario, for if the U.S. government ever defaulted on its debt obligations, the fallout around the world would be earth-shattering.

In reality, the U.S. Federal Reserve has already explicitly stated in their official communications their resolve to cap yields on long duration bonds if yields rise too much. This tactic is known as 'yield curve control,' and has most recently been in the news when the Royal Bank of Australia conducted yield curve control measures.

Yield curve control has some precedence in the United States, when the U.S. government sought to keep borrowing costs low during World War II through the purchasing of bonds, but there is no precedence for such a measure in the modern era of central banking's extreme easy money policies.


What is the monetary and economic impact of yield curve control, especially in terms of Bitcoin?


Think of yield curve control as the Fed using a blank check to exert influence on the markets. The Fed will purchase as many treasuries as needed to keep the yield on a certain duration bond at a stated level. If quantitative easing continues alongside yield curve control, then the Fed's balance sheet will balloon to immense proportions, and the current environment of monetary inflation will only intensify. If you want a modern case study on what is likely to happen, just take a look at the Bank of Japan's monetary interventions over the past three decades or so. Essentially, the U.S. Federal Reserve could very well nationalize the public credit markets (and who really thinks they will stop there) in the United States, all without a vote from Congress.


Yield curve control will lead to more inflation, in a sort of vicious cycle.


Inflation is the result of an increasing money supply. The money supply has been increasing for many years because the government spends more than it receives in tax receipts. Inflation hurts bond prices because it makes bond coupon payments less valuable, therefore, yields tend to (in a free market) 'price-in' inflation expectations, meaning a rise in yields means an expected rise in inflation. What the U.S. government needs is more inflation to make it possible to continue to serve its enormous debt. The private sector also needs yields to stay low to be able to borrow and service their own debt. What the Fed then has to then do is have its cake and eat it too: more inflation, but without a resulting rise in borrowing costs. This is where yield curve control comes into play.

Make no mistake: yield curve control is coming, it's just a matter of when, not if. Yield curve control will be just another blow to the U.S. dollar's purchasing power, and a punishment to anyone who saves in dollars. Yield curve control will be a tailwind to the price of Bitcoin, as the policy devalues the dollar through an increase in monetary inflation.


In brief, I believe that yield curve control measures will signal a sort of 'endgame' for modern central banking, and will give Bitcoin the boost it needs to become a force to be reckoned with inside the global currency sphere. When yield curve control kicks off in the U.S., Bitcoiners should expect things to begin to get very interesting for Bitcoin soon thereafter.


-TH


You should always consider seeking financial advice from a licensed advisor before making decisions with your money, and you should not consider anything I write as financial advice but merely my opinion. Getting your financial house in order is a prerequisite for Bitcoin saving, in my opinion.


Disclosure: nothing in this article should be considered financial advice and I am not a financial advisor. Do your own research as everything in finance carries risk.