Arthur Hayes: A Detailed Explanation of the Future Trends of U.S. Debt, Money Printing, and Bitcoin

Author: Arthur Hayes

Original Title: Hallelujah

Compiled and organized by: BitpushNews

(Any opinions expressed in this article are solely those of the author and should not be considered as the basis for investment decisions, nor should they be viewed as investment advice or recommendations.)

For ease of reading, the translation has been adapted from the original text.

Introduction: The Necessity of Political Incentives and Debt

Praise Nakamoto, the existence of time and the rule of compound interest, independent of individual identity.

Even for governments, there are only two ways to pay expenses: using savings (tax revenue) or issuing debt. For the government, savings are equivalent to tax revenue. It is well known that taxes are not popular among the public, but spending money is very appealing. Therefore, when distributing benefits to the common people and the nobility, politicians tend to prefer issuing debt. Politicians always lean towards borrowing from the future to ensure their current re-election, because by the time the bills come due, they are likely no longer in office.

If all governments are “hard-coded” to prefer issuing debt rather than raising taxes to distribute benefits due to the incentive mechanisms of officials, then the next key question is: how do the buyers of U.S. Treasury bonds finance these purchases? Do they use their own savings/equity, or do they finance through borrowing?

Answering these questions, especially in the context of “Pax Americana”, is crucial for our predictions about future dollar currency creation. If the marginal buyers of U.S. government bonds are completing purchases through financing, then we can observe who is providing them with loans. Once we know the identities of these debt financiers, we can determine whether they are creating money out of thin air (ex nihilo) to lend, or using their own equity to make loans. If after answering all the questions we find that the financiers of government bonds are creating money during the lending process, we can draw the following conclusion:

Government-issued debt will increase the money supply.

If this assertion holds true, then we can estimate the upper limit of credit that the financing party can issue (assuming an upper limit exists).

These issues are important because my argument is that if government borrowing continues to grow as predicted by large banks (TBTF Banks), the U.S. Treasury, and the Congressional Budget Office, then the Federal Reserve's balance sheet will also grow. If the Federal Reserve's balance sheet grows, that means favorable dollar liquidity, which will ultimately drive up the prices of Bitcoin and other cryptocurrencies.

Next, we will answer the questions one by one and evaluate this logic puzzle.

Q&A Session

Will U.S. President Trump finance the deficit through tax cuts?

No. He has recently extended the 2017 tax reduction policy with the Republican members of the “Red Camp.”

Is the U.S. Treasury borrowing money to cover the federal deficit and will it continue to do so in the future?

Yes.

The following are estimates from major bankers and U.S. government agencies. As can be seen, they predict a deficit of approximately $2 trillion, financed through $2 trillion in borrowing.

Given that the answers to the first two questions are both “yes,” then:

Annual federal deficit = Annual national debt issuance

Next, we will analyze step by step the main purchasers of government bonds and how they finance their purchases.

The “waste” that devours debt

1. Foreign Central Bank

If “peace under the United States” is willing to steal funds from Russia (a nuclear power and the world's largest commodity exporter), then no foreign holder of U.S. debt can ensure safety. Foreign central bank reserve managers are aware of the risk of expropriation, and they prefer to buy gold rather than U.S. debt. Therefore, since Russia invaded Ukraine in February 2022, gold prices have started to soar.

2. Private Sector in the United States

According to data from the U.S. Bureau of Labor Statistics, the personal savings rate for 2024 is 4.6%. In the same year, the federal deficit in the U.S. is 6% of GDP. Given that the size of the deficit exceeds the savings rate, the private sector cannot be the marginal buyer of government bonds.

3. Commercial Banks

Are the four major currency center commercial banks buying a large amount of US Treasury bonds? The answer is no.

In the fiscal year 2025, these four major currency center banks purchased approximately 300 billion dollars worth of U.S. Treasury bonds. In the same fiscal year, the Treasury issued 1.992 trillion dollars of U.S. Treasury bonds. Although this group of buyers is undoubtedly an important buyer of U.S. Treasury bonds, they are not the final marginal buyers.

4. Relative Value (RV) Hedge Fund

RV funds are the marginal buyers of government bonds, a fact acknowledged in a recent document from the Federal Reserve.

Our findings suggest that Cayman Islands hedge funds are increasingly becoming marginal foreign buyers of U.S. Treasuries and bonds. As shown in Figure 5, from January 2022 to December 2024—during which the Federal Reserve reduced its balance sheet by allowing maturing Treasuries to roll off its portfolio—Cayman Islands hedge funds net purchased $1.2 trillion in Treasuries. Assuming these purchases were entirely composed of Treasuries and bonds, they absorbed 37% of the net issuance of Treasuries and bonds, nearly equivalent to the total of all other foreign investors' purchases.

Trading model of RV fund:

• Buy Spot Treasury Bonds
• Sell the corresponding government bond futures contracts

Thanks to Joseph Wang for the chart. SOFR trading volume is a proxy indicator for measuring the scale of RV fund participation in the Treasury market. As you can see, the increase in debt burden corresponds to the increase in SOFR trading volume. This indicates that RV funds are marginal buyers of Treasuries.

The RV fund conducts this type of transaction to profit from the small price difference between the two instruments. Due to this price difference being very small (measured in basis points; 1 basis point = 0.01%), the only way to make money is to finance the act of purchasing government bonds.

This leads us into the most important part of this article, which is to understand the Federal Reserve's next move: how RV funds finance the purchase of government bonds?

Part Four: Repurchase Market, Implicit Quantitative Easing, and Dollar Creation

The RV fund finances its purchase of government bonds through repurchase agreements (repos). In a seamless transaction, the RV fund uses the government bond securities it purchases as collateral, borrows overnight cash, and then uses this borrowed cash to complete the settlement of the government bonds. If cash is abundant, the repo rate will trade at or just below the upper limit of the Federal Reserve's federal funds rate. Why?

How the Federal Reserve Manipulates Short-Term Interest Rates

The Federal Reserve has two policy interest rates: the upper limit of the federal funds rate (Upper Fed Funds) and the lower limit (Lower Fed Funds); currently, they are 4.00% and 3.75%, respectively. In order to keep the actual short-term rate (SOFR, or Secured Overnight Financing Rate) enforced within this range, the Federal Reserve has used the following tools (sorted by interest rate from low to high):

• Overnight Reverse Repurchase Agreement (RRP): Money Market Funds (MMF) and commercial banks deposit cash here overnight to earn interest paid by the Federal Reserve. Reward rate: Lower bound of the federal funds rate.
• Interest on Reserve Balances (IORB): Excess reserves held by commercial banks at the Federal Reserve earn interest. Reward rate: between the upper and lower limits.
• Standing Repo Facility (SRF): When cash is tight, it allows commercial banks and other financial institutions to pledge eligible securities (mainly U.S. Treasuries) in exchange for cash provided by the Federal Reserve. Essentially, the Federal Reserve prints money in exchange for the pledged securities. Reward rate: upper limit of the federal funds rate.

The relationship among the three:

Federal Funds Rate Lower Bound = RRP < IORB < SRF = Federal Funds Rate Upper Bound

SOFR (Secured Overnight Financing Rate) is the target interest rate set by the Federal Reserve, representing a composite rate for various repurchase agreements. If the SOFR transaction rate exceeds the upper limit of the federal funds rate, it indicates a cash crunch in the system, which will trigger significant issues. Once cash tightens, SOFR will soar, and the highly leveraged fiat financial system will come to a halt. This is because, if the marginal liquidity buyers and sellers cannot roll over their liabilities near a predictable federal funds rate, they will incur substantial losses and cease to provide liquidity to the system. No one will buy U.S. Treasury bonds because they cannot obtain cheap leverage, leading to the U.S. government being unable to finance itself at an affordable cost.

Exit of Marginal Cash Providers

What causes the SOFR trading price to be higher than the upper limit? We need to examine the marginal cash providers in the repo market: money market funds (MMFs) and commercial banks.

1. Exit from Money Market Funds (MMF): The goal of MMFs is to earn short-term interest with minimal credit risk. Previously, MMFs would withdraw funds from RRP and invest in the repo market because RRP < SOFR. However, now, due to the attractive yields on short-term Treasury bills (T-bills), MMFs are pulling funds out of RRP to lend to the U.S. government. The RRP balance has reached zero, and MMFs have essentially exited the cash supply of the repo market.
2. Restrictions of Commercial Banks: Banks are willing to provide reserves to the repurchase market because IORB < SOFR. However, the ability of banks to provide cash depends on whether their reserves are sufficient. Since the Federal Reserve began quantitative tightening (QT) in early 2022, bank reserves have decreased by trillions of dollars. Once the balance sheet capacity shrinks, banks are forced to charge higher interest rates to provide cash.

Since 2022, both MMF and banks, as marginal cash providers, have had less cash to supply to the repurchase market. At a certain point, neither was willing or able to provide cash at a rate below or equal to the upper limit of the federal funds rate.

At the same time, the demand for cash is rising. This is because former President Biden and the current Trump continue to spend lavishly, calling for the issuance of more Treasury bonds. The marginal buyers of Treasury bonds, RV funds, must finance these purchases in the repurchase market. If they cannot obtain daily funding at rates below or slightly below the upper limit of the federal funds rate, they will stop buying U.S. Treasuries, and the U.S. government will not be able to finance itself at affordable rates.

The Activation of SRF and Stealth Quantitative Easing

Due to a similar situation that occurred in 2019, the Federal Reserve established the SRF (Standing Repo Facility). As long as acceptable collateral is provided, the Federal Reserve can offer unlimited cash at the SRF rate (i.e., the upper limit of the federal funds rate). Therefore, RV funds can be assured that no matter how tight cash may be, they can always obtain funds at the worst-case scenario—the upper limit of the federal funds rate.

If the SRF balance is above zero, we know that the Federal Reserve is cashing the checks written by politicians with the money it prints.

The amount of government bonds issued = The increase in the supply of dollars

The above image (top panel) shows the difference between ( SOFR – the upper limit of the federal funds rate ). When this difference approaches zero or is positive, cash becomes tight. During these periods, the SRF (bottom panel, measured in billions of dollars) is used non-negligibly. Using the SRF allows borrowers to avoid paying the higher, less manipulated SOFR rate.

Stealth QE: The Federal Reserve has two methods to ensure there is sufficient cash in the system: the first is to create bank reserves by purchasing bank securities, which is known as Quantitative Easing (QE). The second is to freely lend to the repo market through the SRF.

QE is now considered a “dirty word,” with the public generally associating it with money printing and inflation. To avoid being blamed for causing inflation, the Federal Reserve will strive to claim that its policies are not QE. This means that SRF will become the main channel for money printing to flow into the global financial system, rather than creating more bank reserves through QE.

This can only buy some time. But ultimately, the exponential expansion of government bond issuance will force the SRF to be reused repeatedly. Remember, Treasury Secretary Buffalo Bill Bessent not only needs to issue $20 trillion each year to fund the government but also needs to issue several trillion dollars to roll over maturing debt.

Implicit quantitative easing is about to begin. Although I don't know the specific time, if the current monetary market conditions persist, the pile-up of government bonds will necessitate an increase in the SRF balance as the lender of last resort. As the SRF balance grows, the amount of global fiat currency in dollars will expand accordingly. This phenomenon will reignite the bull market for Bitcoin.

Part Five: Current Market Stagnation and Opportunities

Before the implicit QE begins, we must control capital. The market is expected to remain volatile, especially before the end of the U.S. government shutdown.

Currently, the Treasury is borrowing money through debt auctions (negative dollar liquidity), but has not yet spent this money (positive dollar liquidity). The balance of the Treasury General Account (TGA) is about $150 billion above the target of $850 billion, and this additional liquidity will only be released into the market once the government reopens. This liquidity siphoning effect is one of the reasons for the current weakness in the crypto market.

As the four-year anniversary of Bitcoin's historical peak in 2021 approaches, many will mistakenly interpret this period of market weakness and fatigue as a top and sell off their holdings. Of course, this assumes they weren't “cleared out” (deaded) in the altcoin crash a few weeks ago.

But this is a mistake. The operating logic of the dollar money market does not lie. This market corner is shrouded in obscure terminology, but once you translate these terms into “printing money” or “destroying currency,” it becomes easy to grasp the trends.