{"id":8449,"date":"2022-06-24T18:30:00","date_gmt":"2022-06-24T18:30:00","guid":{"rendered":"http:\/\/ci02a48b8d600024f9"},"modified":"2022-06-24T18:30:00","modified_gmt":"2022-06-24T18:30:00","slug":"is-bitcoin-afraid-of-big-bad-jerome-powell","status":"publish","type":"post","link":"https:\/\/bitcoinmagazine.com\/markets\/is-bitcoin-afraid-of-big-bad-jerome-powell","title":{"rendered":"Is Bitcoin Afraid Of Big Bad Jerome Powell?"},"content":{"rendered":"
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This is an opinion editorial by Tom Luongo, a former research chemist and financial\/political commentator specializing in the intersection of geopolitics, financial markets, gold and cryptocurrencies.<\/em><\/p>\n

The Federal Reserve is on the attack, but not against inflation. Oh, they say their shift in monetary policy is about inflation, but that\u2019s a cover story for what\u2019s really going on. There is a titanic fight for the future of not just money, but for humanity itself, and the Fed is in one corner of the ring.<\/p>\n

Newly reconfirmed Federal Open Market Committee (FOMC) chair Jerome Powell and the Fed have a much bigger target in mind than any of its \u201cusual suspects,\u201d i.e., the \u201coutside money<\/a>\u201d group of safe-haven assets: gold, silver, bitcoin.<\/p>\n

If you are familiar with my work, you\u2019ll know the answer to who that target is. If you aren\u2019t, keep reading, and keep an open mind.<\/p>\n

For now, bitcoin is caught in the middle. <\/p>\n

The world is all a-Twitter (literally) over the Fed\u2019s recent move to raise rates by 75 basis points (or 0.75%) across the board. I wasn\u2019t. In fact, I\u2019d suspected for a while that Powell wanted to go \u201c75\u201d but couldn\u2019t politically.<\/p>\n

Then he was \u201csummoned\u201d by President Joe Biden to discuss monetary policy. Now, we all know what this meeting was about. It was Biden, thinking he was still the Godfather, telling the Fed to back off before the midterm elections.<\/p>\n

Going into that meeting I placed a 25% probability of 75 bps. So did the rest of the market.<\/p>\n

Biden\u2019s remarks afterwards about respecting the Fed\u2019s independence while looking beaten raised that probability to 75%. The May consumer price index coming in hotter than expectations at 8.6% raised that to near certainty.<\/p>\n

Not only did the Fed go through with the 75-basis point raise, it is talking about doing it again at the next meeting in late July. Sorry Biden, the real Godfather resides at the Marriner S. Eccles building, not the White House. <\/p>\n

Powell has not only resumed his pre-COVID-19 hawkishness, but he\u2019s taken it up a notch.<\/p>\n

The stated reason was accelerating inflation. The May U.S. CPI number gave everyone quite a jolt. No one was likely happier with that number, however, than Powell. It gave him all the cover he needed to do what he wanted to do anyway.<\/p>\n

The markets immediately reacted badly to the report: It was a \u201csell everything Friday.\u201d Blue-light specials in capital markets that day were as common as bots lamely defending Biden on Twitter.<\/p>\n

This selling included, of course, bitcoin. Simply put, falling U.S. dollar liquidity worldwide means falling bitcoin liquidity and then, by extension, seizure of one cryptocurrency market after another. With the insane amount of leverage existent within the DeFi space, it\u2019s not hard to see what happened here and what\u2019s just over the horizon. <\/p>\n

If you still don\u2019t understand the inverse relationship between HODLing and bitcoin volatility, then I suggest you review a basic course in supply and demand.<\/p>\n

A lot of people finally woke up from their slumber and realized that for the first time since Alan Greenspan was in charge, the Fed may not be there to bail everyone out this time. Maybe, just maybe, Powell is serious about normalizing rates and letting the chips fall where they may.<\/p>\n

This process is slow. There are a lot of psychological barriers to overcome to change people\u2019s thinking. Too many people stick to their investment thesis well past its use-by date. This leaves them and markets very vulnerable to the kinds of shocks we\u2019ve seen in recent months as the Fed has now raised interest rates by 50 basis points more than most contrarian analysts thought was feasible. <\/p>\n

Go read the thoughts of the average goldbug and you\u2019ll see what I\u2019m talking about. <\/p>\n

Powell had a lot of inertia to overcome, and that inertia was well founded in the minds of investors and market analysts. <\/p>\n

Inflation Coordination<\/h2>\n

For 13 years since the fall of Lehman Brothers, the markets got used to the coordinated monetary policy between the world\u2019s major central banks. The Gang of Five: The Fed, The Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank, engaged in what I\u2019ve called \u201cround robin quantitative easing (QE).\u201d In effect, these five central banks took turns inflating their money supplies while swap lines, carry trades and expanding global trade kept the system relatively liquid.<\/p>\n

The Bank of Japan is currently trashing the yen to play wingman to Powell\u2019s Maverick, if I may buy a cheesy \u201cTop Gun\u201d <\/em>reference here, putting serious pressure on the Hong Kong dollar\u2019s peg to the U.S. dollar. Long story short, Powell\u2019s aggressiveness has aftershocks and knock-on effects far bigger than what\u2019s happening in the cryptocurrency corner of the world. <\/p>\n

The Chinese played along with this charade to their benefit anytime the system began to teeter off-center, employing countercyclical monetary policy to keep the U.S. economy from collapsing. They happily converted their U.S. dollar trade surplus into infrastructure projects all over Asia and Africa. This is known as China\u2019s Belt and Road Initiative.<\/p>\n

Exchange rates were essentially pegged and there was high confidence that the central banks had saved the world. This is why gold languished through a brutal bear market through the end of 2015 and is still languishing below even the 2011 high 11 years later.<\/p>\n

Bitcoin was born because of this mess and simply attracted enough capital fleeing the insanity to establish itself as a real alternative asset class for people looking for optionality.<\/p>\n

It\u2019s got a long way to go to overcome the existent inertia of the current system, however. Because of this, its dollar price will be the plaything of these same central bankers, prop desk traders and power brokers trying to preserve their place in the monetary dominance hierarchy. <\/p>\n

The petrodollar standard as the global reserve currency which was established by Richard Nixon in 1971 and given its sea legs by Paul Volcker, ended in 2008. In 2011, the \u201ccoordinated central bank\u201d standard with the U.S. dollar at the center was established by announcing central bank swap lines and a $500 billion slush fund, which was what finally broke gold\u2019s bull market in September of that year.<\/p>\n

Powell, in my read of him and history, has been trying to extricate the Fed from this situation since he took over as FOMC chair. They raised rates aggressively in 2018 only to be forced back down a bit in 2019. He and John Williams at the Atlanta Fed pushed through the creation and implementation of SOFR (the Secured Overnight Funding Rate), which was a replacement for LIBOR (the London Interbank Overnight Rate). SOFR is the key, I believe, to the Fed\u2019s endgame, which I\u2019ve written about previously<\/a>.<\/p>\n

The reverse repo crisis<\/a> of September 2019 was a direct result of U.S. banks, particularly JP Morgan Chase, refusing to accept European debt as collateral, creating a dollar liquidity event which saw SOFR blow out to over 10% as banks scrambled for scarce dollars, which the Fed had to provide by opening its repo facility back up.<\/p>\n

I\u2019m not sure if this was the end of the \u201ccoordinated central bank\u201d standard, but September 2019 is definitely a candidate for monetary historians to discuss. Then Powell was forced \u2014 via our first flirtation with Modern Monetary Theory (MMT) with the CARES Act \u2014 to abandon his hawkishness during COVID in 2020.<\/p>\n

Once COVID was essentially over, Powell was free to begin removing the Fed from the Davos-inspired orthodoxy as expressed by the European Central Bank\u2019s Christine Lagarde\u2019s comments<\/a> that the central banks would all now have to coordinate policy to combat climate change.<\/p>\n

Powell publicly dissented in June of 2021<\/a>, just two weeks before he would begin stealthily tightening by raising the payout rate on reverse repo (RRP) contracts by 0.05% or 5 bps.<\/p>\n

Powell insisted \u201cwe are not, and we do not seek to be, climate policy makers as such. We have a very specific mandate, and precious independence \u2026 which has served the public well…that’s not up to us \u2026 but nonetheless I do think our work can indirectly educate the public and also I would think inform other parts of the government in the actions they are assigned to assess.\u201d<\/p>\n

A recent interview<\/a> with former Fed insider Danielle Dimartino Booth is worth your 20 minutes<\/a> to get a sense of what\u2019s really going on. She intimated (because she can\u2019t say the quiet parts out loud) that the Fed is raising rates for reasons other than \u201cfighting inflation.\u201d<\/p>\n

I identified Powell\u2019s use of the RRP facility to drain overseas markets nearly immediately and began forming the core thesis around which this article and a lot of my other commentary is based:<\/p>\n