Yield Curve Control and Fiat End Game BlockBlog


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Here is the yield curve check

A key theme of our long-term Bitcoin thesis is the continued failure of centralized monetary policy at global central banks in a world where centralized monetary policy is unlikely to solve, but will only exacerbate, systemic problems. more important. Failure, pent-up volatility, and economic destruction from central bank attempts to address these issues will only further deepen distrust of financial and economic institutions. This opens the door to an alternative system. We believe that this system, or even a significant part of it, may be Bitcoin.

In an effort to provide a stable, sustainable and useful global monetary system, central banks face one of the greatest challenges in their history: resolving the global sovereign debt crisis. In response, we will see more monetary and fiscal policy experiments evolve and unfold around the world in an attempt to keep the current system afloat. One such political experiment is known as yield curve control (YCC) and is becoming increasingly critical to our future. In this article, we’ll cover what YCC is, its few historical examples, and the future implications of increased YCC deployments.

YCC historical examples

Simply put, YCC is a method for central banks to control or influence interest rates and the overall cost of capital. In practice, a central bank sets its ideal interest rate for a specific debt instrument in the market. They continue to buy or sell this debt instrument (i.e. a 10-year bond) regardless to maintain the peg of the specific interest rate they want. Typically, they buy with newly printed currency, which adds to monetary inflationary pressures.

YCC can be tempted for different reasons: keeping interest rates low and stable to stimulate new economic growth, keeping interest rates low and stable to reduce the cost of borrowing and interest rate debt payments. interest or intentionally creating inflation in a deflationary environment (to name a few). Its success depends on the credibility of the central bank in the market. Markets must “have confidence” that central banks will continue to enforce this policy at all costs.

The largest example of YCC occurred in the United States in 1942 after World War II. The United States incurred huge debt outlays to finance the war, and the Fed capped yields to keep borrowing costs low and stable. Meanwhile, the Fed capped short-term and long-term interest rates on short-term bills at 0.375% and long-term bonds at up to 2.5%. In doing so, the Fed relinquished control of its balance sheet and money supply, both rising to keep interest rates lower. This was the method chosen to deal with the unsustainable and unsustainable increase in public debt relative to gross domestic product.

Yield curve control is the next saga in the global monetary policy experiment.  What does this mean for the economy and what are the future consequences?

Current and future YCC

The European Central Bank (ECB) has indeed embarked on a YCC policy under another banner. The ECB bought bonds in an attempt to control the spread in yields between the strongest and weakest economies in the eurozone.

Yields have gotten too high too quickly for economies to work and there is a lack of marginal buyers in the bond market at the moment as sovereign bonds face their worst year-to-date performance. This leaves the BoE no choice but to be the buyer of last resort. If restarting QE and initial bond buying isn’t enough, we could easily see a move towards a stricter and more sustainable yield cap YCC program.

Yield curve control is the next saga in the global monetary policy experiment.  What does this mean for the economy and what are the future consequences?

It has been reported that the BoE has stepped in to stem the gilt route due to the potential for margin calls in the UK pension system, which holds around £1.5 trillion in assets, the majority of which was invested in bonds. Some pension funds have hedged their volatility risk with bond derivatives, managed by so-called liability-driven investment (LDI) funds. As the price of long-term UK sovereign bonds fell drastically, derivative positions that were secured with said bonds as collateral became increasingly exposed to margin calls. Although the specifics are not particularly important, the key point to understand is that when monetary tightening has become potentially systemic, the central bank intervened.

Although YCC policies can “kick the pot” and limit the damage of the crisis in the short term, they trigger a host of second-order consequences and effects that will need to be addressed.

YCC is essentially the end of any “free market” activity left in the financial and economic systems. It is more active centralized planning to maintain a specific cost of capital on which the whole economy operates. This is done out of necessity to prevent the system from totally collapsing, which has proven unavoidable in fiat-based monetary systems towards the end of their lifespan.

YCC prolongs the sovereign debt bubble by allowing governments to reduce the overall interest rate on interest payments and reduce borrowing costs on future debt rollovers. Based on the sheer amount of the size of public debt, the pace of future budget deficits, and promises of large spending on long-term entitlements (health insurance, social security, etc.), the rate of Interest will continue to account for a greater share of tax revenue from a shrinking tax base under pressure.

Final remark

The first use of yield curve control was as a global wartime measure. Its use was for extreme circumstances. So even the attempt to deploy a YCC or similar program should act as a warning signal to most that something is seriously wrong. We now have two of the world’s largest central banks (on the verge of three) actively pursuing yield curve control policies. This is the new evolution of monetary policy and monetary experiments. Central banks will do whatever it takes to stabilize economic conditions and further currency depreciation will result.

If there was ever a marketing campaign to explain why Bitcoin has a place in the world, it is exactly that. Although we have talked about the current macroeconomic headwinds that need time to manifest and lower bitcoin prices are a likely near-term outcome in the scenario of severe stock market volatility, monetary policy wave and of incessant liquidity that will have to be unleashed to save the system will be massive. Getting bitcoin price lower to build a higher position and avoid another potential big drop in a global recession is good play (market permitting), but missing the next major move up is the real missed opportunity. our opinion.

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