Yield Curve Control and Fiat Endgames – Bitcoin Magazine

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Emergence of yield curve control

A key theme of our long-term Bitcoin theme is centralization across the world’s central banks in a world where centralized monetary policy will likely go unfixed and only exacerbate larger systemic problems. the continued failure of monetary policy. The failures, accumulated volatility, and economic disruption that accompany central bank attempts to solve these problems will only further deepen distrust in financial and economic institutions. This opens the door to alternative systems. We believe that system, or even a significant part of it, could be Bitcoin.

With the goal of providing a stable, sustainable and useful global monetary system, central banks face one of the greatest challenges of all time. It is the resolution of the global sovereign debt crisis. In response, we will see more monetary and fiscal policy experiments evolve and roll out around the world to sustain the current system. One of these policy experiments is known as Yield Curve Control (YCC) and is becoming increasingly important to our future. In this post, we will discuss what YCC is, some historical examples of it, and the future implications of increasing YCC rollouts.

Historical example of YCC

Simply put, YCC is a way for central banks to control or influence interest rates and the overall cost of capital. In practice, central banks set ideal interest rates for certain debt instruments in the market. They will continue to buy and sell that debt product (i.e. 10-year bonds) no matter what they do to maintain the particular interest rate peg they want. Usually they buy in newly printed currency, increasing inflationary pressure on the currency.

YCC can be tried for several different reasons. To maintain lower and more stable interest rates to foster new economic growth, to reduce borrowing costs and interest rate debt payments, to maintain lower and more stable interest rates, or to deliberately inflate in a deflationary environment to cause (some). Its success depends on the central bank’s credibility in the market. Markets must “trust” the central bank to continue to implement this policy at all costs.

The largest example of YCC occurred in the United States in 1942 after World War II. The U.S. suffered huge debt expenditures to finance the war, and the Fed capped yields to keep borrowing costs low and steady. Meanwhile, the Federal Reserve has capped both short-term and long-term interest rates on short-term Treasuries at 0.375% and long-term Treasuries at 2.5%. In doing so, the Fed relinquished control over its balance sheet and money supply, both of which were increased to maintain a lower interest rate peg. It was the method chosen to deal with the rise.

YCC present and future

The European Central Bank (ECB) has effectively tackled the YCC policy flying under another flag. The ECB has been buying bonds in an attempt to control the yield spread between the eurozone’s strongest and weakest economies.

With yields quickly getting too high for the economy to function and sovereign bonds facing their worst year-to-date performance in history, bond markets are now short of marginal buyers. As such, the BoE has no choice but to be a buyer of last resort. If the resumption of quantitative easing and initial bond purchases isn’t enough, we could easily see a move to his YCC program of tighter, longer-term yield caps.

The Bank of England has announced a move to block Gilt’s route as margin calls could occur across the UK pension system, which holds around £1.5 trillion in assets and is largely invested in bonds. reportedly intervened in Some pension funds hedged their volatility risk with bond derivatives managed by so-called liability-driven investment (LDI) funds. As the price of long-term UK government bonds fell significantly, derivatives positions secured with these bonds as collateral became increasingly exposed to margin call risk. The details are less important, but the important point to understand is that when monetary tightening becomes potentially systemic, central bank intervened.

YCC’s policies may “force” limit the damage of short-term crises, but they unleash a set of consequences and side effects that must be addressed.

The YCC is essentially the end of any “free market” activity left in the financial and economic system. It is a more aggressive centralized plan that maintains a certain cost of capital at which the economy as a whole works. This was done out of necessity to prevent the system from completely collapsing, which will prove inevitable if the fiat-based monetary system is nearing the end of its life. It has been.

YCC prolongs sovereign debt bubbles by allowing governments to lower the overall interest rate on interest payments and lower borrowing costs for future debt rollovers. Interest costs will continue to represent a larger proportion of tax revenues from governments, based on the huge amount of public debt, the pace of future budget deficits, and significant future voter spending promises (Medicare, Social Security, etc.) . Tax base declining under pressure.

final note

The first use of yield curve control was a global wartime measure. Its use was for extreme situations. So, for most people, trying to deploy a YCC or YCC-like program should serve as a warning signal that something is seriously wrong. Two of the world’s largest central banks (close to three) are now aggressively pursuing yield curve control policies. This is the new evolution of monetary policy and monetary experimentation. Central banks will do whatever it takes to stabilize economic conditions, resulting in further financial deterioration.

If ever there was a marketing campaign about why Bitcoin exists in the world, it would be this one. On how current macro headwinds will take time and the Bitcoin price decline is likely to be the short-term consequence of a scenario of severe stock market volatility, monetary policy waves and relentless liquidity. I’ve been talking What has been unleashed to rescue the system is massive. Lowering the price of Bitcoin to take a higher position and avoid a potential deep drop in a global recession is a good way (if the market offers it), but miss the next big rally That is a real missed opportunity in our view.

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