Bitcoin may soar above $25,000 due to debt ceiling debacle
While yesterday’s Biden-McCarthy meeting did not result in an agreement on the US debt ceiling, this could have direct implications for the entire financial market and Bitcoin. And the implications for the Federal Reserve’s efforts to fight inflation are nothing short of massive.
When the question of how the Fed would handle a failure to raise the debt ceiling came up during yesterday’s FOMC press conference, Chairman Jerome Powell was visibly irritated.
“There is only one way forward here, and that is for Congress to raise the debt ceiling so that the United States government can pay all of its obligations,” Powell so yesterday, further stating, “No one should assume that the Fed can protect the economy from the consequences of failing to act in time.”
The impact of the debt ceiling on the Bitcoin price
But what does it really mean for the financial markets and Bitcoin in particular if the debt ceiling is not raised? Jurrien Timmer, Director of Global Macro at Fidelity Investments has commented on this.
Timmer explained in a Twitter thread that the “fiscal cliff” is a “complicated dance” and could hinder the Fed’s quantitative easing (QT) efforts. Since the Fed began siphoning liquidity through higher interest rates and QT a year ago, overall liquidity has declined.
However, liquidity has stabilized since then, as the tightening has been offset by an influx of reverse repo (RRP) and Treasury General Account (TGA) liquidity. Remarkably, the stock market, and Bitcoin because of its correlation to traditional markets, stopped falling at this point.
The chart below shows the Fed balance sheet (grey) and the TGA (purple). Timmer explains, “Notice how TGA increased in 2020 as the Fed increased its balance sheet from $3.76 trillion to $8.97 trillion. Then the Treasury drew down its TGA balance to pay for the stimulus bill.”
Timmer describes the relationship between the debt of the US government, the Fed and the TGA as follows:
How is it to make money from debt? The Fed monetizes the Treasury’s debt, in the process generating income on the portfolio, which then goes into the TGA, which the Treasury then draws on to pay its bills. Creative accounting, to say the least!
A liquidity rally
Ironically, Timmer says, a political settlement over the debt ceiling would force the Treasury to empty its $569 billion TGA balance to avoid a technical default. This would be stimulative and would have a significant negative impact on the Fed’s efforts to fight inflation through QT.
As more liquidity will be flushed into the market, it could be “the fuel that allows the market to continue climbing the wall.” On the other hand, if the debt ceiling is lifted, the TGA does not need to be drawn down, which could have a negative impact on risky assets like Bitcoin.
It is currently not clear when the debt ceiling will be reached in the US. Estimates so far are for the second half of the year, although the ceiling could be reached much earlier, as other experts claim, citing the actions of the US government.
As the market thrives on expectations, and yesterday’s FOMC meeting revealed dovish tones from the Fed (for the first time this cycle), Bitcoin could continue its move towards $25,000 if the debt ceiling debate continues in the coming weeks.
At press time, the Bitcoin price stood at $23,761, and was rejected again at the crucial resistance zone above $24,000.
Featured image from Dave Sherrill / Unsplash, chart from TradingView.com
