Compiled by | Wu Blockchain
Keep - - Simple - - Stupid - - = KISS (Keep It Simple Stupid)
Many readers, when faced with the policy bombardment of the Donald Trump administration, have forgotten the KISS principle. Trump's media strategy aims to ensure that every morning when you wake up, you will say to your friends, partner or inner self: "Wow, did you see what Trump/Musk/JFK Jr. did yesterday? I can't believe they did that." Whether you are elated or devastated, this soap opera titled "The Days of Our Emperor" is highly entertaining.
For investors, this constant state of emotional excitement is detrimental to capital accumulation. One day you buy, and after digesting the next headline, you quickly sell. The market repeatedly harvests you in this process, and your position size will shrink rapidly.
Remember the KISS principle.
Who is Trump? Trump is a real estate showman. To succeed in the real estate industry, you must master the technique of borrowing huge sums at the lowest interest rates. Then, to sell units or rent out space, you must hype up how amazing the new building or development project will be. I'm not interested in whether Trump can resonate globally, only in how he finances his policy goals.
I am confident that Trump wants to achieve the "America First" policy through debt financing. If not, letting the market naturally eliminate the credit bubbles in the system would trigger a Great Depression more severe than the 1930s. Does Trump want to be known as the 21st century Herbert Hoover or Franklin Delano Roosevelt (FDR)? The mainstream American historical view criticizes Hoover for insisting on monetary tightening during the Great Depression, exacerbating the crisis; while praising FDR's New Deal - for using monetary easing (abandoning the gold standard) and deficit spending to prop up the economy. I believe Trump wants to be seen as the greatest president in history, and therefore has no interest in destroying the foundations of the empire through austerity policies.
To reinforce this point, remember the words of Andrew Mellon, the U.S. Treasury Secretary during the Hoover era, when he spoke about addressing the over-leveraged U.S. and global economy after the stock market crash:
"Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. This will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and the brave man and woman will inherit the land."
The current U.S. Treasury Secretary, Janet Yellen, is unlikely to utter such harsh words.
If my view is correct - that Trump will use debt financing to achieve "America First" - what does this mean for the future of the global risk asset markets (especially cryptocurrencies)? To answer this question, I need to predict how Trump is likely to increase the money/credit supply (i.e. print money) and lower its price (i.e. interest rates). Therefore, I need to assess how the relationship between Janet Yellen's Treasury and Jerome Powell's Federal Reserve will evolve.
Remember the KISS principle
Who do Yellen and Powell serve?
Yellen was appointed by the Trump 2.0 administration, and based on her past and current interviews, her worldview is highly aligned with the "Emperor".
Powell was appointed by the Trump 1.0 administration, but he is a turncoat. He has defected to the Obama-Clinton camp. Powell completely destroyed whatever credibility he had left when he implemented a massive 0.5% rate cut in September 2024. At the time, the U.S. economy was growing above trend and still had inflationary embers, so there was no need for a rate cut. But the Obama-Clinton puppet Kamala Harris needed a boost in her approval ratings, so Powell dutifully implemented the rate cut. Although this did not achieve the desired effect, after Trump's victory, Powell declared he would serve out his term and again firmly resist inflation.
When you are burdened with massive debt, a few things will happen. First, interest expense will consume a large portion of free cash flow. Second, due to the high debt levels, no one is willing to lend for new asset purchases, so you must restructure the debt, i.e. extend maturities and lower coupon rates. This is a soft default, as both of these operations mathematically reduce the present value of the debt burden. Once the effective debt burden is alleviated, you can borrow again at affordable interest rates. From this perspective, the Treasury and the Federal Reserve each have a role to play in restoring the fiscal health of the United States. But with Yellen and Powell serving different masters, the success of this endeavor is being obstructed.
Debt Restructuring
Yellen has publicly stated that the current U.S. debt structure must be changed. She hopes to ultimately extend the average maturity of the debt burden, which on Wall Street is known as "debt extension". Various macroeconomic experts have different suggestions for such solutions, which I discussed in detail in my article "The Sprites". But for investors, the core conclusion is that the U.S. will default softly on its debt burden by reducing its net present value.
Given the global distribution of U.S. debt holders, completing this restructuring will take time. This is a geopolitical challenge. Therefore, this is not an immediate concern for us crypto inventors (in the next three to six months).
New Lending
Powell and the Federal Reserve have broad control over the quantity and price of credit. The law allows the Federal Reserve to increase the money/credit supply (i.e. print money) by purchasing bond securities. The Federal Reserve also sets short-term interest rates. Given that the U.S. is unlikely to default on the nominal dollar, the Federal Reserve determines the risk-free U.S. dollar rate, i.e. the Effective Federal Funds Rate (EFFR). The Federal Reserve has four main levers to manipulate short-term interest rates: the Reverse Repo Facility (RRP), the Interest on Reserve Balances (IORB), the Federal Funds Rate floor, and the Federal Funds Rate ceiling. Without delving into the technical details of the money market, we only need to understand that Powell can unilaterally increase the U.S. dollar supply and lower its price.
If Yellen and Powell served the same master, analyzing the future path of U.S. dollar liquidity and the reactions of Japan and the EU to U.S. monetary policy would be very straightforward. Given that they are clearly in different camps, I am curious how Trump will manipulate Powell to print money and cut rates, while still having Powell uphold the Federal Reserve's mandate to fight inflation.
Suppressing the Economy
The Federal Reserve Recession Doctrine: If the U.S. economy is in recession, or the Federal Reserve fears the economy will slip into recession, it will cut rates and/or print money.
Let's use recent economic history to validate this doctrine.
This is a list of the proximate causes of U.S. economic recessions since WWII. I will focus particularly on the period from the 1980s to the present.
This is a chart of the Federal Funds Rate floor. Each red arrow represents a rate cut cycle that coincided with an economic recession. As the chart clearly shows, the Federal Reserve will at least cut rates during recessions.
From a fundamental perspective, the US-led global economic system relies on debt financing. Large companies raise funds for future capacity expansion and current operations by issuing bonds. If cash flow growth slows significantly or contracts directly, the ability to repay debt will be called into question. This poses a serious problem, as corporate liabilities are largely the assets of banks. The corporate bonds held by banks support their deposit liabilities. In short, if the debt cannot be repaid, the "value" of all existing fiat currencies will be called into question.
Furthermore, in the US, most households are leveraged. Their marginal consumption expenditures depend on mortgages, auto loans, and personal loans. If their earning capacity slows or declines, they will be unable to fulfill their debt obligations. Similarly, the banking system holds these debts and uses them to support deposit liabilities.
The Federal Reserve must ensure that there is no widespread default or an expected rise in the probability of corporate/household debt defaults during economic recessions or on the eve of cash flow growth slowdown/contraction. Otherwise, it will lead to corporate and consumer debt defaults, triggering a systemic financial crisis. To protect the solvency of the debt-driven economic system, the Federal Reserve will proactively or passively cut interest rates and print money whenever there is an economic recession or the risk of one rises.
Keeping it simple
Trump, through manufacturing a recession or convincing the market that a recession is imminent, manipulates Powell to loosen financial conditions. To prevent a financial crisis, Powell will take some or all of the following measures: cut interest rates, stop quantitative tightening (QT), restart quantitative easing (QE), and suspend the supplementary leverage ratio (SLR) requirement for banks to purchase US Treasuries.
DOGE Plan
How can Trump unilaterally trigger an economic recession?
The core driver of the US economy's exceptional growth is the government itself. Regardless of whether the spending involves fraud, government expenditures create economic activity. Furthermore, government spending has a monetary multiplier effect. This is why the Washington, DC metropolitan area has become one of the wealthiest regions in the US - countless professional vampires there are sucking on the government's blood. While directly calculating the specific multiplier is difficult, the concept of the government's spending having a ripple effect is easy to understand.
According to Perplexity data:
● The median household income in Washington, DC is $122,246, far above the national level
● This data places Washington, DC in the top 4% of US cities by household income
As a former president, Trump is well aware of the extent of corruption, fraud, and waste within the government. The bipartisan establishment has no intention of cleaning it up, as everyone is sharing the spoils. Given that Trump's faction is an outsider to both the Democratic and Republican parties, they are eager to expose these rampant government spending projects. The Government Efficiency Department (DOGE) advisory committee, led by Musk and endorsed by Trump, has emerged, with the core mission of rapidly and significantly reducing government spending.
When the largest spending items are mandatory, how does DOGE operate? If the spending involves fraud, it can be terminated. If computer systems can replace project managers, labor costs will plummet. The question becomes: how much fraud and inefficiency exists in annual government spending? If one believes DOGE and Trump, this figure reaches trillions of dollars.
One potentially shocking case is the Social Security Administration (SSA) check disbursement recipients. If one believes the DOGE allegations, the department disburses nearly a trillion dollars annually to deceased individuals and unverified recipients. While the veracity of the allegations cannot be confirmed, imagine: as a Social Security fraudster, if you knew that the Musk and "hardliner" team were deeply auditing the data, would you continue to defraud or flee? The key is that the mere threat of enforcement can suppress fraudulent activities, just as the Chinese proverb "kill the chicken to scare the monkey." Therefore, although the establishment media has smeared Musk and DOGE, I believe that even if it's not a trillion, there are still hundreds of billions of dollars in scale.
Turning to the human resource side of the government spending equation, Trump and DOGE are firing hundreds of thousands of civil servants. Whether the unions have sufficient legal means to resist this "useless bureaucrat" purge remains to be seen, but the impact is already evident.
"The current layoffs are just the tip of the iceberg. The scale and timing of future layoffs will determine whether the labor market can remain stable," DeAnthony explained, "We expect the federal workforce to decline by about 400,000 in 2025, due to ongoing hiring freezes, delayed retirements, and DOGE-led layoffs."
— Fox Business Channel
Although Trump 2.0's term is just a month old, the impact of DOGE is already clear. Unemployment claims in Washington, DC have surged, and housing prices have plummeted. The discretionary consumption data driven by massive government fraud spending has left financial analysts' forecasts in disarray. The market is starting to talk about the "R" word (recession).
The latest analysis by real estate transaction platform Parcl Labs shows that Washington, DC home prices have fallen 11% since the beginning of the year, tracking the impact of the Government Efficiency Department (DOGE) actions on the local housing market.
— Newsweek
Rosstan posted on Bluesky that the US is almost certainly headed for a severe economic contraction due to massive government layoffs and the sudden cancellation of federal contracts.
— The Economic Times
The "R" word, representing economic red ink, is something Powell is desperate to avoid. To prevent becoming a modern-day Volcker, he must respond.
Powell's Pivot — Encore
Powell has made numerous abrupt policy adjustments since 2018, having been thoroughly tormented by the back-and-forth interest rate decisions. Investors need to assess: will Powell proactively save the financial system, or will he only react passively once major financial institutions start defaulting? This choice is essentially a political consideration, which I cannot predict.
The known facts are: there are $2.08 trillion in US corporate debt and $10 trillion in US government debt that need to be refinanced this year. If the US is on the brink of or in a recession, the cash flow shock will make it nearly impossible to refinance this massive debt at current interest rate levels. Therefore, to maintain the sanctity of the US-led financial system, the Federal Reserve must and will act.
For crypto investors, the core question is: how much credit will the US unleash, and at what pace will it flood the global markets? Let's break down the four main rescue tools the Federal Reserve may deploy.
Interest Rate Cuts
It is estimated that each 0.25% reduction in the federal funds rate is equivalent to $100 billion in quantitative easing (i.e., money printing). Assuming the rate is cut from 4.25% to 0%, it would be equivalent to $1.7 trillion in quantitative easing (QE). Powell may not necessarily cut to zero, but one can be sure that Trump will allow Musk to continue the pressure until the target rate is reached. Once the rate has been reduced to an acceptable level, Trump will rein in Musk.
Halt QT
The January 2025 FOMC meeting minutes show that some members believe quantitative tightening (QT) should be terminated at some point in 2025. QT is the process of the Federal Reserve reducing the size of its balance sheet, at a pace of $60 billion per month. Assuming the Fed pivots its policy in April, the termination of QT would release $540 billion in liquidity compared to the original plan.
Restart QE/Supplement Leverage Ratio Exemption
To absorb the supply of US Treasuries, the Federal Reserve can restart QE and grant banks a supplementary leverage ratio (SLR) exemption. Through QE, it can print money to purchase bonds and increase the credit supply. The SLR exemption would allow US commercial banks to leverage up infinitely to buy Treasuries. The key is that both the Federal Reserve and US commercial banks are allowed to create money out of thin air. Restarting QE and the SLR exemption are both within the exclusive decision-making power of the Federal Reserve.
If the federal deficit remains in the range of $1-2 trillion per year, and the Federal Reserve and banks absorb half of the new government debt, it means that the money supply will increase by $500 billion to $1 trillion per year. A 50% participation rate is a conservative estimate - during the COVID-19 period, the Federal Reserve purchased 40% of the new government debt. However, by 2025, oil-producing countries (Saudi Arabia) will have stopped or significantly slowed down the use of their dollar surpluses to purchase debt, so the Federal Reserve and banks will need to intervene more forcefully.
The Federal Reserve's Market Rescue Math
Rate cuts: $1.7 trillion + Halt QT: $0.54 trillion + Restart QE/SLR exemption: $0.5-1 trillion = Total: $2.74-3.24 trillion
COVID-19 vs. DOGE Printing Comparison
In 2020-2022, the Federal Reserve and the Treasury Department created about $4 trillion in credit to address the pandemic.
The scale of money printing driven by DOGE may reach 70-80% of the COVID-19 period.
During the COVID-19 period, the US printed $4 trillion, and Bitcoin surged 24-fold from its 2020 low to its 2021 high. Considering that the current Bitcoin market capitalization is much higher than that time, assuming a 10-fold increase (conservative estimate) from $3.24 trillion in money printing. For those who ask how Bitcoin can reach $1 million during Trump's term, this is the path to achieve it.
Necessary Prerequisites
1. Trump will achieve "America First" through debt financing.
2. Trump will use DOGE to eliminate political opponents dependent on fraudulent income, reduce government spending, and reduce the probability of a recession caused by a slowdown in government spending.
3. The Federal Reserve will implement a series of policies to increase the money supply and lower the price of money before and after the economic recession.
US Strategic Reserves
I was awakened by Trump's tweet on Monday morning. He reiterated on Truth Social that the US will establish a strategic reserve containing Bitcoin and Altcoins. The market surged on the news, but this is just a rehash of old news, a violent Dead Cat Bounce excuse.
For the strategic reserve to be bullish for cryptocurrency prices, the US government needs to have the actual purchasing power. There is no idle pool of funds waiting, Trump needs Republican lawmakers to cooperate to raise the debt ceiling or revalue the gold reserves at market prices - these are the only two sources of funding for the cryptocurrency strategic reserve. I'm not saying Trump won't keep his promise, but the start time of the purchase may be later than the deadline for leveraged traders to be liquidated. I suggest reducing positions on the highs.
Trading Strategy
Bitcoin and the cryptocurrency market are the only truly global free market that currently exists. The Bitcoin price reflects the global perception of fiat liquidity in real-time. Bitcoin hit a new high of $110,000 on the eve of Trump's inauguration in mid-January, then fell to a local low of $78,000 (a drop of about 30%). Although the US stock market is still at an all-time high, Bitcoin is warning of an impending liquidity crisis. I believe the signal from Bitcoin, indicating that the US stock market will experience a significant correction due to concerns about an economic recession.
If Bitcoin leads the decline, it will also be the first to rebound. Given the large amount of leverage embedded in the system, even a slight financial disturbance can quickly escalate into a full-blown panic. If my prediction is largely correct, the Federal Reserve's action will not be long in coming. Bitcoin will be the first to bottom out and rebound, followed by the dirty fiat financial system led by the US stock market.
I firmly believe that we are still in a bull market cycle, and the worst bottom is the previous high of $70,000. I'm not sure if it will reach that level, but a positive signal for US dollar liquidity is a decrease in the balance of the US Treasury General Account (TGA) - this is equivalent to injecting liquidity. Based on my confidence in the essence of Trump's financiers and policy goals, Maelstrom Fund has already increased its positions in the $80,000-$90,000 range. If the current situation is indeed a Dead Cat Bounce, I expect to be able to re-enter at the $80,000 low level. If the S&P 500 or Nasdaq 100 index falls 20-30% from its high point, coupled with the imminent danger of large financial institutions, or a moment when global risk assets plummet across the board, this means that Bitcoin may fall below $80,000 or even explore $70,000. In any case, we will cautiously buy the dips without leverage and wait for the US to lead global reflation, driving Bitcoin to breach $1 million.
