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The elites under America do not care whether the economic system is capitalism, socialism, or fascism; they only care if the policies implemented can help them maintain power. America ceased to be purely capitalist in the early 19th century. Capitalism means that the wealthy lose money when they make wrong decisions. This was overturned as early as 1913 when the Federal Reserve System was established. When privatized gains affect the country with socialized losses, creating a severe class divide between the vast inland residents and the coastal elite, President Franklin Delano Roosevelt had to correct course by distributing some crumbs to the poor through the New Deal policies. Whether then or now, expanding government welfare for the forgotten is not a policy favored by those so-called capitalist wealthy.

In 1944, the top marginal tax rate on income over $200,000 was raised to 94%, and extreme socialism quickly turned into unrestrained corporate socialism, which began in the Reagan era of the 1980s. Since then, central banks have dominated the scene by distributing printed money to the financial services sector, pushing the trickle-down effect of liberal economic policies until the COVID-19 pandemic in 2020. When President Trump responded to the crisis, he played his inner Roosevelt complex by distributing the most funds to the public since the New Deal. The U.S. printed 40% of all dollars between 2020 and 2021. Trump kicked off the 'stimulus check' party, which was continued by President Biden after his term with popular welfare policies. When assessing the government's balance sheet, something strange happened between 2008-2020 and 2020-2022.

From 2009 to the second quarter of 2020 was the peak of trickle-down economics, relying on central bank money printing to fund this practice, euphemistically called quantitative easing (QE). As you can see, the growth rate of the economy (nominal GDP) is lower than the national level of debt accumulation. In other words, the wealthy inject government funds into assets, and these types of transactions do not generate any real economic activity. Therefore, underpinned by debt, distributing trillions of funds to wealthy financial asset holders has increased the debt-to-nominal GDP ratio.

From the second quarter of 2020 to the first quarter of 2023, Presidents Trump and Biden broke this trend. The debt issued by the Treasury under both presidents was purchased by the Federal Reserve through money printing (QE), but the funds were not distributed to the wealthy but sent to everyone. The poor received cash in their bank accounts. Clearly, JPMorgan CEO Jamie Dimon took a cut from the government transfer fees... he's like the Li Ka-Shing of America; you can't escape paying this 'elder.' The poor are poor because they spend all their income on goods and services, and during this time, they really did so. Economic growth surged as the velocity of money circulation exceeded 1. That is to say, $1 of debt created more than $1 of economic activity. Thus, magically, the ratio of U.S. debt to nominal GDP declined.

Inflation soared because the supply of goods and services did not keep pace with the increase in purchasing power funded by debt. Wealthy holders of government bonds were unhappy with these populist policies, as these bondholders faced the worst total returns since 1812. The wealthy sent out their 'white knights,' Federal Reserve Chairman Jay Powell, who began raising interest rates in early 2022 to curb inflation, while the public would have preferred policies that distributed stimulus checks again, but this practice became taboo. U.S. Treasury Secretary Yellen stepped in to mitigate the effects of the Fed's tightening monetary policy. She provided nearly $2.5 trillion in financial stimulus by shifting the debt from long-term (notes) to short-term (bonds), draining the Fed's reverse repurchase tool (RRP), primarily benefiting the wealthy who hold financial assets, resulting in asset markets rising from September 2022 to the present. Similar to after 2008, these government subsidies for the wealthy did not generate real economic activity, and the ratio of U.S. debt to nominal GDP rose again.

Has Trump's incoming cabinet learned the right lessons from recent American economic history? I think yes.

Most people believe that Scott Bassett, the new U.S. Treasury Secretary appointed by Trump, has given multiple speeches on how to 'fix' America. His speeches and column articles detail how to implement Trump's 'America First Plan,' which shares many similarities with China's development plan (which began in the Deng Xiaoping era of the 1980s and continues today). The plan is to 'heat up' nominal GDP by providing government tax credits and subsidies to drive the return of key industries (shipbuilding, semiconductor factories, automobile manufacturing, etc.). Qualified companies will receive cheap bank financing. Banks will once again compete to lend to real companies because the U.S. government ensures their profitability. As companies expand in the U.S., they must hire American workers. Higher-paying jobs for ordinary Americans mean more consumer spending. If Trump limits the number of 'dirty black' immigrants crossing from 'shithole countries,' this effect will be magnified. These measures drive economic activity, and the government shares a portion of the enterprise profits and income tax revenue. The government deficit must remain high to fund these plans, and the Treasury finances the government by selling bonds to banks. Since the Federal Reserve or lawmakers have paused the supplementary leverage ratio, banks can now re-leverage. The ultimate beneficiaries are ordinary workers, companies producing 'approved' products and services, and the U.S. government, which sees its debt-to-nominal GDP ratio decline. This is an enhanced version of QE for the poor.

Wow, this sounds great. Who would oppose such a magical era of American prosperity?

The losers are those holding long-term bonds or savings deposits. Because the yields on these instruments will be deliberately maintained below the nominal growth rate of the U.S. economy. If workers' wages cannot keep up with higher inflation levels, they will also be harmed. If you haven't noticed, unions are becoming popular again. "4 and 40" has become the new slogan. In other words, to retain employees, salaries must increase by 40% over the next four years, or 10% each year.

For those readers who consider themselves wealthy, do not worry. Here’s a brief guide on how to cope. This is not financial advice; I am simply sharing what I do with my portfolio. Each time a bill is passed and funds are distributed to approved industries, read and buy stocks in those verticals. Do not deposit funds into fiat currency bonds or bank deposits; instead, buy gold (a hedge against financial oppression for the baby boomer generation) or Bitcoin (a hedge against financial oppression for the millennial generation).

Clearly, my portfolio begins with Bitcoin, other cryptocurrencies, and stocks of crypto-related companies, followed by gold stored in the vault, and finally stocks. I leave a small portion of dirty fiat currency in a money market fund to pay my Amex bill.

In the remainder of this article, I will explain how quantitative easing for the wealthy and the poor affects economic growth and money supply. Then, I will predict how bank exemptions from the supplementary leverage ratio (SLR) will once again create unlimited quantitative easing targeted at the poor. In the final section, I will introduce a new index to track the amount of U.S. bank credit supply and show how Bitcoin outperforms other assets after adjustments in bank credit supply.

Money supply

I have great admiration for the quality of Zoltan Pozar's "Ex Uno Plures" series of articles. During the recent long weekend in the Maldives, I finished reading all of his works while surfing, doing Aiyang yoga, and getting fascia massages. His work will be frequently cited in the rest of this article.

Next, I will show a series of hypothetical accounting ledgers. The left side of the T represents assets, and the right side represents liabilities. Blue entries indicate appreciation, while red entries indicate depreciation.

The first example focuses on the impact of the Federal Reserve's QE bond purchases on money supply and economic growth. Of course, to add interest and appeal, the following examples will be a bit exaggerated.

Imagine you are Powell during the regional banking crisis in March 2023. To relieve the pressure, Powell goes to play squash with one of his wealthy financial friends at the Racquet Club on Park Avenue, 370. This friend is very excited, and let's call him Kevin; he is an aging financial mogul. He tells Powell: "Jay, I might have to sell my Hampton house. All my money is in Signature Bank, and clearly, my deposits exceed the insurance limit. You have to help me. You know how hard it is for Bunny to endure even a day in the city during the summer."

Jay responded: "Don't worry, I've got you. I'll announce $2 trillion of QE this Sunday night. You know the Fed is always your backstop. Without your contributions, who knows what America would become. Imagine if Trump returned to power due to a financial crisis while Biden was in office. I still remember him stealing my girlfriend at Dorsia in the early 80s, damn it."

The Federal Reserve launched the Bank Term Funding Program, which differs from traditional quantitative easing (QE) and aims to address the banking crisis. But allow me a little artistic license. Now, let's see how $2 trillion of QE affects the money supply. All figures are in billions of dollars.

1. The Federal Reserve bought $200 billion in government bonds from Blackrock and paid with reserves. JPMorgan acted as an intermediary in this transaction, receiving $200 billion in reserves and depositing $200 billion into Blackrock's account. The Fed's QE led banks to generate deposits, which ultimately became money.

2. Blackrock now no longer holds government bonds, so it must lend this money to others, that is, acquire another interest-bearing asset. Blackrock's CEO Larry Fink does not mingle with the poor; he only collaborates with industry giants. At this time, he has a keen interest in the tech sector. A new social app, Anaconda, is building a community of users sharing 'plump' photos. Anaconda is in a growth phase, and Blackrock happily purchased their $200 billion in bonds.

3. Anaconda is a pillar of American capitalism. They have seized the market by getting 18–45-year-old males addicted to the app. The productivity of this demographic has significantly declined as they are no longer reading but are instead obsessed with browsing photos. Anaconda conducts stock buybacks by issuing debt, avoiding repatriating overseas retained earnings. Reducing the number of circulating shares not only boosts stock prices but also increases earnings per share (even though overall earnings do not grow, the earnings per share rise due to the smaller denominator). As a result, passive index investors like Blackrock are more likely to buy their stock. Ultimately, the wealthy cash out with $200 billion in bank deposits after selling the stock.

4. The wealthy shareholders of Anaconda do not urgently need to use this money. Gagosian held a grand party at the Miami Art Fair. The wealthy, under the influence of alcohol, decide to purchase the latest abstract paintings to showcase their status as serious art collectors and leave a deep impression on the young beauties stationed there. The net effect of this 'art' sponsorship is a reduction in the seller's account funds, while the buyer's account funds increase.

After this series of transactions, actual economic activity did not increase. The Federal Reserve injected $2 trillion of printed money into the economy, ultimately just increasing the bank balances of the wealthy. Even if this money were used to fund an American company, it did not generate any economic growth, as the funds merely inflated stock prices without creating any jobs. $1 of QE increased the money supply by $1, but did not bring about any economic activity. This is not an effective use of debt. Thus, from 2008 to 2020, the ratio of debt to nominal GDP during the QE era for the wealthy rose.

Now, let's look at President Trump's decision-making process during COVID. Recall March 2020: At the onset of the COVID outbreak, Trump's advisors suggested he 'flatten the curve' (remember that rhetoric?). They advised him to close the economy and only allow 'essential workers' (remember those poor people delivering below minimum wage?) to continue working.

Trump: "What a joke, am I going to close the economy because some ridiculous doctors think this flu is serious?"

Advisor: "Yes, Mr. President. I must remind you that mainly older, overweight baby boomers like you will die from complications caused by COVID-19 infections. I also want to remind you that if the entire group aged 65 and over falls ill and needs hospitalization, the costs will be very high. You need to lock down all non-essential workers."

Trump: "That would lead to an economic collapse, giving checks to everyone so they won't complain. The Federal Reserve can purchase the debt issued by the Treasury, which will fund these subsidies."

Now, let's use the same accounting framework to see how QE targeted at the poor works.

1. Just like in the first example, the Federal Reserve executes quantitative easing (QE) by purchasing $2,000 in government bonds from Blackrock and paying with reserves.

2. The difference is that this time the Treasury Department is also involved. To pay for Trump's stimulus checks, the government must borrow by issuing government bonds. Blackrock chose to purchase government bonds instead of corporate bonds. JPMorgan helped Blackrock convert bank deposits into reserves that could be used at the Federal Reserve to purchase government bonds. The Treasury receives deposits in the Federal Reserve's Treasury General Account (TGA), similar to a checking account.

3. The Treasury sends out stimulus checks to everyone — primarily to the general public. This leads to a reduction in the TGA balance, correspondingly increasing the reserves at the Federal Reserve, and these reserves turn into deposits for the general public at JPMorgan.

4. The general public will spend all of their stimulus checks on new Ford F-150 pickups. Whether or not it is an electric vehicle, this is 'America,' so they all rely on oil. The public's bank accounts are debited while Ford's bank accounts increase in funding.

5. When Ford sells these trucks, they do two things. First, they pay the workers' wages, which transfers bank deposits from Ford's account to its regular workers' accounts. Then, Ford applies for a loan from the bank to expand production; you can see that the issuance of loans generates deposits in Ford's account, increasing the money supply. Finally, the public wishes to take a vacation and obtains personal loans from banks, which are happy to provide loans when the economy is strong and income is ample. Bank loans for ordinary people create more deposits, just like Ford's borrowing.

6. The final deposit balance is $3,000, which is $1,000 higher than the $2,000 initially injected by the Federal Reserve through QE.

This example shows how QE targeted at the poor stimulates economic growth. The Treasury's stimulus checks prompt the public to purchase trucks. With increased demand for goods, Ford can pay employee wages and apply for loans to increase production. With high-paying jobs, employees can access bank credit, allowing them to consume further. $1 of debt generates over $1 of economic activity. This is a good outcome for the government.

I want to explore further how banks can endlessly fund the Treasury.

Let's start from step 3 above.

4. The Treasury issues another round of stimulus checks. To fund these checks, the Treasury auctions bonds, and JPMorgan, as a primary dealer, uses the Federal Reserve's reserves to purchase the bonds. Selling bonds increases the Treasury's balance in the Federal Reserve's TGA.

5. Like the last example, the checks issued by the Treasury appear in the general public's deposits at JPMorgan.

When bonds issued by the Treasury are purchased by the banking system, they convert reserves held by the Federal Reserve — reserves with no productive use in the economy — into deposits for the public that can be used to purchase goods and generate economic activity.

Let's look at another T-account example. What happens when the government drives the production of specific goods and services through promises of tax cuts and subsidies?

In this example, Pax Americana's Clint Eastwood-style Western scene is running low on bullets in the Persian Gulf. The government has passed a bill promising to subsidize ammunition production. Smith and Wesson applies for and receives a contract to provide ammunition to the military. Unable to meet contract demands, they go to JPMorgan to apply for a loan to establish a new factory.

1. JPMorgan's credit officer confidently loans $1,000 to Smith and Wesson, having obtained a government contract. The act of lending creates $1,000 of money out of thin air.

2. Smith and Wesson builds factories, creating wages for ordinary workers, which ultimately become their deposits at JPMorgan. The money created by JPMorgan turns into deposits held by those ordinary people with the highest propensity to consume. I have discussed how ordinary people's consumption habits create economic activity. Let's slightly change the example.

3. The Treasury needs to issue $1,000 in new debt through an auction to fund the subsidy to Smith and Wesson. JPMorgan buys this debt at the auction but has no reserves to purchase the debt. Since using the Fed's discount window is no longer stigmatized, JPMorgan uses its held Smith and Wesson corporate debt assets as collateral to exchange for the Fed's reserve loan. These reserves are used to purchase newly issued government bonds. The Treasury then pays subsidies to Smith and Wesson, and the funds become its deposits at JPMorgan.

This example illustrates how the U.S. government prompts JPMorgan to lend money through industrial policy, while the assets created by loans are used as collateral to transact with the Federal Reserve to purchase additional government bonds.

Limitations

It seems that this 'magical money machine' involving the Treasury, the Federal Reserve, and banks can achieve one of the following goals:

• They can inflate financial assets for the rich without generating any real economic activity.

• They can fill the bank accounts of the poor, who typically use these funds to purchase goods and services, thus generating real economic activity.

• They can guarantee profits for certain participants in specific industries. This allows businesses to leverage bank credit for expansion, thus generating real economic activity.

So are there any limits?

Yes, banks cannot create unlimited amounts of money because they must provide expensive equity capital for every debt asset they hold. In professional terms, different types of assets will have risk-weighted asset costs. Even so-called 'risk-free' government bonds and central bank reserves will attract equity capital costs. This is why, at some point, banks cannot play a substantive role when bidding for U.S. government bonds or issuing corporate loans.

There is a reason banks must provide equity capital against loans and other types of debt securities. If the borrower goes bankrupt — whether government or company — the losses must be borne by some party. Since banks decide to create funds for loans or purchase government bonds for profit, it is only fair that their shareholders bear the losses. When losses exceed the bank's equity capital, the bank will collapse. When banks collapse, depositors lose their funds, which is bad. But worse, from a systemic perspective, banks cannot continue to increase the amount of credit in the economy. Since the fractional reserve system requires continuous credit issuance to survive, bank failures could lead to the collapse of the entire financial system. Remember — one participant's asset is another participant's liability.

When banks run out of equity credit, the only way to save the system is for the central bank to create new fiat currency and exchange it for the banks' loss assets. Imagine if Signature Bank only lent to Su Zhu and Kyle Davies of the now-defunct Three Arrows Capital (3AC). Su and Kyle presented a false balance sheet, misrepresenting the company's health. They then withdrew cash from the fund and gave it to their wives, hoping these assets could avoid bankruptcy liquidation, but when the fund went bankrupt, the bank had no assets to seize, making the loans worthless. Of course, this is fictional; Su and Kyle are good people and wouldn't do such a thing ;). Signature provided a large amount of campaign donations to Senator Elizabeth Warren, who is a member of the Senate Banking Committee. Using its political influence, Signature persuaded Senator Warren to prove they deserved to be saved. Senator Warren called Powell, asking the Federal Reserve to exchange 3AC's debt at face value through the discount window. The Federal Reserve complied, and Signature was able to exchange 3AC bonds for fresh dollar bills, allowing the bank to meet depositors' withdrawal demands. This did not actually happen; it’s just a “humorous” example. But the lesson of the story is that if banks do not provide enough equity capital, the entire society will ultimately bear the cost, leading to currency depreciation.

Perhaps there is a grain of truth in my hypothetical example; this is a recent news piece from (The Straits Times):

The wife of Zhu Su, co-founder of the collapsed cryptocurrency hedge fund 3AC, managed to sell a mansion in Singapore for $51 million, despite the couple's other assets being frozen by the court.

Back to reality.

Assuming the government wants to create unlimited amounts of bank credit, then they must modify regulations to exclude government bonds and certain types of 'approved' corporate debt (like investment-grade bonds or specific industry debts, such as those issued by semiconductor companies) from the Supplementary Leverage Ratio (SLR).

If government bonds, central bank reserves, and/or approved corporate debt securities are excluded from the SLR, banks can purchase these debts in unlimited amounts without needing expensive equity capital. The Federal Reserve has the power to approve exemptions. They did this from April 2020 to March 2021. At that time, the U.S. credit market was in distress, and the Fed needed banks to re-lend to the government by participating in government bond auctions because the government was about to issue trillions of dollars in stimulus funds without tax revenue to pay for it. This exemption worked excellently, allowing banks to purchase a large amount of government bonds. The downside is that after Powell raised interest rates from 0% to 5%, the same government bond prices plummeted, leading to the regional banking crisis in March 2023. There is no free lunch.

The level of bank reserves also constrains the willingness of the banking sector to purchase government bonds at auction. When banks feel that the reserves at the Federal Reserve have reached the minimum comfortable reserve level (LCLoR), they will stop participating in auctions. The specific level of LCLoR usually only becomes apparent afterward.

This is a chart from the U.S. Treasury Borrowing Advisory Committee (TBAC) report on financial resilience of the government bond market published on October 29, 2024. The chart shows that the percentage of government bonds held by the banking system is gradually decreasing, approaching LCLoR. This is a problem because, in the case of the Federal Reserve's (QT) and surplus central bank selling (or not reinvesting) net export earnings (de-dollarization), the marginal buyer in the government bond market has become unstable bond trading hedge funds.

Here is another chart from the same report. As you can see, hedge funds are filling the gap left by banks. But hedge funds are not 'real buyers.' They are engaged in arbitrage trades, buying cheap spot government bonds and selling government bond futures contracts. The trading of the spot portion is financed in the repurchase market. The pricing in the repurchase market is based on the availability of commercial banks' balance sheets. As balance sheet capacity shrinks, repurchase rates rise. If repurchase financing costs rise, hedge funds can only continue purchasing if spot government bond prices are cheap relative to futures prices. This means that government bond prices in the auction must fall, and yields must rise. This is not what the Treasury wants to see because it wishes to issue new debt at increasingly cheaper prices.

Due to regulatory constraints, banks cannot purchase enough government bonds and cannot provide hedge funds with low-cost financing for purchasing government bonds. Therefore, the Federal Reserve must again exempt banks from the SLR. This will improve liquidity in the government bond market and provide unlimited QE for the productive sectors of the U.S. economy.

If you are still unsure whether the Treasury and the Federal Reserve recognize the importance of loosening bank regulations, TBAC explicitly pointed out the necessary measures on page 29 of the same report.

Tracking number

If Trump-o-nomics operates as I have described, then we must focus on the growth of bank credit. According to the examples above, we know that QE for the wealthy works by increasing bank reserves, while QE for the poor works by increasing bank deposits. Fortunately, the Federal Reserve provides both of these data for the entire banking system weekly.

I created a custom Bloomberg index that combines reserves and other deposits and liabilities.

This is my custom index tracking the amount of U.S. bank credit. To me, this is the most important money supply indicator. As you can see, sometimes it leads Bitcoin (like in 2020), and sometimes it lags behind Bitcoin (like in 2024).

More importantly, observe how assets perform after adjustments in bank credit supply. Bitcoin (white), the S&P 500 index (gold), and gold (green) have all been adjusted according to my bank credit index. The index value is set at 100, and from the chart, it can be seen that Bitcoin has performed the best, rising over 400% since 2020. If you can only do one thing to cope with fiat currency depreciation, it’s Bitcoin. The math doesn’t lie.

Forward direction

Trump and his economic team have made it very clear that they will push for policies that weaken the dollar and provide necessary financing to reshape American industry. Given that the Republican Party will control all three branches of government for the next two years, they can pass Trump's economic plan without effective opposition from the Democrats. I believe Democrats will also join the money-printing party because no politician would refuse to 'benefit' voters.

The Republican Party will start by passing bills to incentivize manufacturers of key goods and materials to expand domestic production in the U.S. This will be similar to the CHIPS Act, infrastructure bill, and Green New Deal passed by the Biden administration. Bank credit will grow rapidly as businesses take these government subsidies and obtain loans. For those who consider themselves stock investors, they can buy stocks of companies related to the products the government wants to manufacture.

At some point, the Federal Reserve will have to make compromises, at least exempting government bonds and central bank reserves from the SLR. Once that happens, the road to infinite QE will be unobstructed.

The combination of legislative industrial policy and SLR exemptions will lead to a surge in bank credit. I have shown that the velocity of money circulation under such policies is far higher than traditional QE targeted at the wealthy. Therefore, we can expect the performance of Bitcoin and cryptocurrencies to be comparable to, or even better than, the period from March 2020 to November 2021. The real question is, how much credit will be created?

COVID stimulus injected about $4 trillion in credit. This time, the scale will be larger. The growth rate of defense and healthcare spending alone will outpace the nominal GDP growth rate. As the U.S. increases its defense spending to respond to a multipolar geopolitical environment, this spending will continue to grow rapidly. The proportion of the population aged 65 and older in the U.S. will peak at 2030, meaning that healthcare spending growth will accelerate from now until then. No politician would cut defense and healthcare spending, or they would be swiftly ousted by voters. All of this means the Treasury will be busy issuing debt every quarter to maintain basic operations. I have previously shown that the velocity of money circulation combining QE with government bond borrowing exceeds 1. This deficit spending will enhance America's nominal growth potential.

Achieving this goal in revitalizing American manufacturing will also come at a cost of trillions of dollars. Since China was allowed to join the World Trade Organization in 2001, America has actively handed over manufacturing to China. In less than thirty years, China has become the world's factory, producing the highest quality products at the lowest prices. Even if companies wish to diversify their supply chains to other lower-cost countries, they find that the depth and efficiency of integration with East Coast suppliers make it necessary to import intermediate parts from China, even if countries like Vietnam have lower wages. Therefore, moving supply chains back to America will be a daunting task, and if it must be done for political reasons, it will be extremely expensive. I refer to the trillions of dollars of cheap bank financing provided to achieve the transfer of production capacity from China to America.

Last time, it took $4 trillion to reduce the debt-to-nominal GDP ratio from 132% to 115%. Assuming the U.S. further reduces it to 70% by September 2008, this linearly implies that $10.5 trillion of credit must be created to achieve this deleveraging. This is why Bitcoin is heading towards $1 million, as prices are determined at the margin. As the freely traded supply of Bitcoin decreases, the most fiat currency ever will chase safe-haven assets, not just from Americans, but demand will also surge from China, Japan, and Western Europe. Go long and stay long. If you doubt the impact of my analysis on QE for the poor, just read the economic history of China over the past thirty years to understand why I call the new Pax Americana economic system 'American capitalism with Chinese characteristics.'