Macroeconomic impact: trade structure, capital flows, and supply and demand of U.S. debtAt 4 a.m., when Trump proudly came up with a list of new tariffs, the world was caught off guard. I believe everyone has witnessed what happened last night. Trump is once again wielding the tariff stick in an attempt to reverse long-standing trade imbalances. This tariff strategy may reshape the U.S. trade structure and capital flows in the short term, but it also hides a new shock to the U.S. Treasury market. The core of the strategy is that the tariff policy may lead to a decline in foreign demand for U.S. debt, and the Federal Reserve may need more monetary easing policies to keep the Treasury market functioning . So, is there any hope for saving all the things that have been shattered by the tariff policy? How to save it? How should we look at it?
Specifically, there are several aspects:
- Trade structure : High tariffs are intended to reduce imports, encourage domestic production, and thus narrow the trade deficit. However, the "treating the symptoms rather than the cause" approach often comes with side effects: rising import costs may push up inflationary pressure, while retaliatory tariffs imposed by other countries will also weaken US exports. The trade imbalance may be temporarily alleviated, but the pain of supply chain restructuring and price increases is inevitable. As the saying goes, if you suppress the gourd of trade deficit, the gourd of inflation may pop up again.
- International capital flows : When US imports decrease, it means that fewer dollars flow overseas - "no exports, no dollars" has triggered concerns about a dollar shortage around the world . As the dollar reserves held by overseas trading partners decrease, emerging markets may face tight liquidity, and the pattern of global capital flows will change as a result. When there is a shortage of US dollars, funds tend to flow back to the United States or hide in safe-haven assets, impacting overseas asset prices and exchange rate stability.
- Supply and demand of U.S. Treasury bonds : Over the years, the huge U.S. trade deficit has led to a large amount of U.S. dollars being held overseas, and these dollars often flow back to the United States through the purchase of U.S. Treasury bonds. Now that tariffs have reduced dollar outflows, foreign investors are running out of ammunition to buy U.S. bonds . However, the US fiscal deficit remains high and the supply of national debt continues to increase. If external demand weakens, who will take over the emerging US debt? The result is likely to be an increase in U.S. Treasury yields, higher financing costs, and even the risk of insufficient liquidity. Trump's attempt to balance the trade account may lead to new hidden dangers in the U.S. debt market by robbing Peter to pay Paul.
In general, the tariff policy is like drinking poison to quench thirst in the macro sense: it repairs trade imbalances in the short term, but weakens the momentum of the US dollar's global circulation. This shift in the balance sheet is tantamount to transferring pressure from the trade item to the capital item, with the U.S. Treasury market bearing the brunt. A blockage in macro capital flows will soon erupt at another point - the Federal Reserve has to prepare the fire hose to put out the fire.
When the supply of overseas dollars tightens due to the cooling of trade, the Federal Reserve will inevitably have to step in to ease dollar liquidity . Just as the logic above indicates, foreigners cannot buy U.S. debt if they do not earn dollars. Arthur Hayes mentioned that "the only ones who can fill the gap are the U.S. central bank and banking system" ( Arthur Hayes: Tariff policies may lead to a decline in foreign demand for U.S. debt, and the Federal Reserve may need more monetary easing policies to keep the Treasury market functioning - PANews ). what does that mean? In the words of the cryptocurrency world, this means that the Federal Reserve’s printing press will start to sound “ Brrrr ” again. https://x.com/CryptoHayes/status/1907698822752694342
In fact, Federal Reserve Chairman Powell has hinted in recent meetings that quantitative easing (QE) may be restarted soon , with a focus on purchasing U.S. Treasuries. This statement proves that the authorities also realize that maintaining the operation of the treasury bond market requires additional US dollar liquidity injection. Simply put, the dollar shortage can only be solved by "massive money printing". The Federal Reserve is ready to expand its balance sheet, lower interest rates, and even mobilize the banking system to jointly purchase bonds.
However, this liquidity firefighting is destined to be accompanied by a dilemma: on the one hand, timely injection of US dollar liquidity can stabilize treasury bond interest rates and alleviate the risk of market failure; on the other hand, massive flooding will sooner or later breed inflation and weaken the purchasing power of the US dollar. As the supply of US dollars shifts from being in short supply to being abundant, the value of the US dollar is bound to fluctuate dramatically. It is foreseeable that in the roller coaster of "draining first and then releasing water", the global financial market will experience a dramatic swing from a strong (shortage) to a weak (excessive issuance) dollar . The Federal Reserve has to walk a tightrope between stabilizing the bond market and controlling inflation, but at present, ensuring the stability of the Treasury market is the top priority, and "printing money to buy bonds" has become a politically inevitable choice. This also heralds a major turning point in the global US dollar liquidity environment: from tightening to easing. Historical experience has repeatedly proved that once the Federal Reserve opens the floodgates, the flood will eventually flow to every corner - including risky asset areas such as the crypto market.
The signal from the Federal Reserve to restart the printing press is almost good news for crypto assets such as Bitcoin . The reason is simple: when the US dollar is flooding and expectations of credit currency depreciation are rising, rational capital will look for a reservoir to resist inflation, and Bitcoin is the highly anticipated "digital gold". The limited supply of Bitcoin has greatly increased its appeal in this macro context, and the logic behind its value has never been so clear: as fiat currency continues to "become lighter", hard currency assets will "become heavier".
As Arthur Hayes pointed out, Bitcoin's performance "depends entirely on market expectations of future fiat money supply" (Bitcoin price can hit $250K in 2025 if Fed shifts to QE: Arthur Hayes ). When investors expect the supply of US dollars to expand significantly and the purchasing power of paper money to decline, safe-haven funds will flock to assets such as Bitcoin that cannot be over-issued . Looking back at the situation in 2020, the fact that Bitcoin and gold soared together after the Federal Reserve’s large-scale QE is a clear proof. If the floodgates are opened again this time, the crypto market is likely to repeat the same scene: digital assets will usher in a new wave of valuation increases. Hayes boldly predicted that if the Federal Reserve shifts from tightening to printing money to finance Treasury bonds , Bitcoin is expected to bottom out at around $76,500 last month, and will continue to rise, hitting a sky-high price of $250,000 before the end of the year. Although this prediction is radical, it reflects the strong confidence of cryptocurrency KOLs in the " inflation dividend " - the additional money printed will eventually push up the price of scarce assets such as Bitcoin.
In addition to expectations of price increases, this round of macro changes will also strengthen the narrative of " digital gold ". If the Federal Reserve's monetary easing causes the market to distrust the fiat currency system, the public will be more inclined to view Bitcoin as a means of storing value that is resistant to inflation and policy risks, just as people embraced physical gold in the turbulent times of the past. It is worth mentioning that people in the crypto community are already accustomed to short-term policy noise. As investor James Lavish pointedly said: "If you sold your Bitcoin because of the 'tariff' news, it means you don't understand what you are holding" ( Bitcoin (BTC) Kurs: Macht ein Verkauf noch Sinn? ). In other words, smart coin holders know that the original intention of Bitcoin's creation was to combat over-issuance and uncertainty; every round of money printing and policy mistakes further proves the value of holding Bitcoin as an alternative asset insurance . It can be foreseen that as expectations for the expansion of the US dollar balance sheet increase and safe-haven funds increase their allocation, Bitcoin's image as "digital gold" will become more deeply rooted in the minds of the public and institutions.
The sharp fluctuations in the US dollar not only affect Bitcoin, but also have a profound impact on the stablecoin and DeFi fields. As substitutes for the US dollar in the crypto market, the demand for US dollar stablecoins such as USDT and USDC will directly reflect changes in investors' expectations for US dollar liquidity. In addition, the on-chain lending interest rate curve will also change with the macro environment.
- Demand for stablecoins : When the U.S. dollar is in short supply, the offshore market often uses stablecoins to "save the country in a roundabout way." When it is difficult to obtain US dollars overseas, USDT often trades at a premium in the OTC market because everyone is scrambling to get the digital dollar. Once the Federal Reserve starts to flood the market with money, some of the new dollars will likely flow into the crypto market, driving a large-scale issuance of USDT/USDC to meet trading and risk aversion needs. In fact, the issuance of stablecoins in recent months has shown that this process has actually begun. In other words, whether the U.S. dollar strengthens or weakens, the rigid demand for stablecoins will only increase: either they seek alternatives to the U.S. dollar due to a lack of dollars, or they move their funds to the chain for temporary shelter due to fears of fiat currency depreciation. Especially in emerging markets and regions with strict regulations, stablecoins play the role of a substitute for the US dollar . Every fluctuation of the US dollar system strengthens the presence of stablecoins as the "💲crypto dollar". It is conceivable that if the U.S. dollar enters a new round of depreciation cycle, investors may rely more on stablecoins such as USDT to circulate in the currency circle in order to preserve their assets, thereby pushing the market value of stablecoins to new highs.
- DeFi yield curve : The tightness of US dollar liquidity will also be transmitted to the DeFi lending market through interest rates. During the dollar shortage, on-chain dollars became valuable, the interest rate for borrowing Stablecoins soared, and the DeFi yield curve rose steeply (lenders demanded higher returns). On the contrary, when the Federal Reserve floods the market with money, resulting in an abundance of U.S. dollars and a decline in traditional interest rates, the interest rates of stablecoins in DeFi become relatively attractive, thereby attracting more funds to flow into the chain to gain returns. An analysis report pointed out that with the expectation that the Federal Reserve will enter the interest rate cut channel, DeFi returns have begun to become attractive again, the size of the stablecoin market has rebounded to a high of approximately US$178 billion, and the number of active wallets has stabilized at more than 30 million, showing signs of recovery. As interest rates decline, more funds may shift to the chain to gain higher returns, further accelerating this trend. Bernstein analysts even predict that as demand for crypto credit grows, the annualized yield of stablecoins on DeFi is expected to rise above 5%, surpassing the return rate of US money market funds. This means that DeFi has the potential to provide relatively better returns in a low-interest rate macro environment, thereby attracting the attention of traditional capital. However, it should be noted that if the Fed’s monetary easing eventually leads to rising inflation expectations, stablecoin lending rates may also rise again to reflect the risk premium. Therefore, DeFi’s yield curve may be repriced in a “down-then-up” fluctuation: first flattening due to abundant liquidity, and then steepening under inflationary pressure. But overall, as long as the US dollar liquidity is flooded, the trend of a large amount of capital pouring into DeFi in search of returns will be irreversible , which will not only push up the prices of high-quality assets, but also lower the risk-free interest rate level, causing the entire yield curve to shift in a direction that is beneficial to borrowers.
In summary, the macro chain reaction caused by Trump’s tariff policy will profoundly affect all aspects of the crypto market. From the macro economy to the liquidity of the U.S. dollar, to the Bitcoin market and the DeFi ecosystem, we are witnessing a butterfly effect: the trade war has stirred up a currency storm, and as the U.S. dollar fluctuates dramatically, Bitcoin is ready to go, while stablecoins and DeFi are facing opportunities and challenges in the cracks. For crypto investors with a keen sense of smell, this macro storm is both a risk and an opportunity - as the popular saying in the currency circle goes: "The day when the central bank prints money is the day when Bitcoin ascends the throne." Objectively, the violent tariff model has actually promoted this process. Perhaps QE is getting closer because of this. Although I don’t like to tell narratives like “a big chess game”, it seems to be the most positive and clear angle at the moment.
