In this post we discuss the link between bitcoin, US interest rates, and China
If you want to understand where bitcoin is heading from a macro perspective, you need to understand the USD price action. Not just because BTC/USD is the predominant ticker, but because of bitcoin’s potential role as an inflationairy hedge against US central bankers.
At this point in time the USD is either going to go up, or go down. No shit. But there is a good chance it is going to go in either direction a lot. Why? Because we are seeing both a topping formation in short and long term debt cycles, and at the same time seeing extreme geo-political uncertainty with a potential weaponization of the USD.
Ray Dalio is a big wig investor managing ~125B. He called the top in 2007, and is also a famous Youtuber based on his video “How The Economic Machine Works”. He understands the economy as a system dominated by both a short term and long term debt cycle. Short term debt cycles go for about 10 years, while long termers run at about 70. The cycles can be understood by watching the youtube video, but the important point to note is that Ray Dalio seems to think we are seeing both a topping of the short term AND long term debt cycles - a double whammy that most have never experienced before. He is calling ~30% drop in USD prices.
On the other hand we have China. China represents an ‘alternative order’ a.k.a. existential threat to US dominance. Most people in the US government thought the fruits of capitalism would liberalize the communist party. Instead there is a president who can stay in power for life, and an AI powered skynet in the making. Not only that, but they are not buying treaseries. And they are not settling oil in USD.
The US government likes other countries buying US treaseries. If they do that, interest rates for refinancing US debt remains low. Then they can print more money. And buy more wealth. Instead China decided 5 years ago that buying US treasieries that are going to be inflated away while helping to fund a competing government is not exactly in their best interest, and so said no. And not only that, now they are settling oil in Chinese yen.
Oil is the widest traded commodity in the world. Most of it is settled in USD, meaning there is always demand for USD, meaning the US can perpetually fund it’s trade imbalance by issuing lots of US treaseries with very low interest rates. Gaddafi from Libya tried settling oil for gold. He went boom boom. Same with Saddam Hussein. Give a few other examples and you have yourself a full blown conspiracy theorist. Might as well go watch Zeitgeist while tripping on a bean bag. But we digress.
Conspiracy theory or not, it can certainly be argued that it’s not in the USA’s best interest to allow China to develop an alternative reserve currency. Having the USD as the reserve currency gives the whitehouse some nice looking super powers. They don’t need an army to crush a country. In 2011 they crushed Iran with Swiss sanctions, drying up liquidity and bringing them to their knees. The USD reserve currency is a weapon. And the US does not want China to disarm it.
But what can they do?
Well not a lot. China has snuck up on the Whitehouse. One remaining option is financially burning everyone to the ground, in a game of last man standing. Rather then dropping interest rates during the double top of both short and long term debt cycles, the US can lift interest rates. And keep on lifting them. As share markets crash capital will fly into treaseries from emerging markets. A liquidity crisis will emerge and hopefully China’s economy will collapse before the US. And yeah, good luck with that job of yours.
All of this is probably not going to happen overnight. The topping patterns can be slow, then sudden. But now you have a high level understanding of the reason behind all the volatility, why the USD might swing +-30%, and why bitcoin might be a reasonable hedge against all this craziness.