Bitcoin to $1M+: The Technical Path to Insane Money Printing with Arthur Hayes at KBW

Yo, yo, yo, what up [ __ ] Happy Tuesday. Uh so, all right. Slides are up, we're all good. Um I love Seoul. I've been coming here I think since 2014.

My first uh blockchain thing in Korea, we were out at Incheon in the [ __ ] [ __ ] It was cold as [ __ ] in December. Um but now we're in the middle of [ __ ] uh Seoul. This is great. So, today I'm going to talk about the Federal Reserve. Um it's going to get a bit uh technical in terms of like who votes on what and this kind of things, but I think it's super important to understand where we are in this sort of path towards eventual insane money printing coming out of the United States.

And it really uh started with the election of Donald Trump and his appointment of Secretary um Scott Bessent, who I refer to as Buffalo Bill Bessent if you read my recent essay. But they're they're not really there yet. Uh they're making all the right noises. Bessent's in, you know, the the mainstream financial press talking about how shitty the Fed is. Trump is, you know, calling Jerome a [ __ ] [ __ ] every single day on Truth Social and whatnot.

But in the end of the day, you know, the Fed just cut, you know, quarter of a percent. Not amazing, but they could have done more. How do we get to craziness? How do we get to, you know, Bitcoin at a million or million plus and whatever a dog [ __ ] shitcoin engine in your portfolio is up 100x even though it's a piece of [ __ ] and has no revenue and no clients. Like I know that's what you guys want when you say alt season.

How do we get there? And it starts with understanding how the Fed votes, which board does what, and how we get to the eventual outcome that essentially yields to yield curve control. So, that's what this essay that will be released after I get off stage and a presentation that goes along with it that's going to talk about. So, to understand where we're going to go, let's go back in history because that is what informs the future. So, back in the 1940s, what was going on?

There was a world war. The United States got involved in 19 42 and obviously when you get involved in a war, what do you do? You print a [ __ ] ton of money. And how do you do it? Well, you tell the central bank to lower the price of money and increase its quantity so that the central government can crowd out everyone else, borrow money, and build things to kill people.

And so, how did the US government finance its entry into World War II? Well, the Federal Reserve essentially agreed with the Treasury that they were going to manipulate the bond market to make it very affordable for the US government to issue debt. So, here's a photo of you know, a Tuskegee Airmen outfit and they're going off to go and fight in the war. What were the Treasury and Fed Accords? So, for almost a decade, the Treasury bill rate, a Treasury bill is a Treasury that has a maturity of less than 1 year, was capped at 3/8 of a percent, so 0.

675% on the short end. On the long end, the 10 to 25-year bucket in the bond bucket was capped at 2 and 1/2%. And this was the United States version of yield curve control. And so, here is a graphical representation of the yield curve. And so, in the orange line is where we are today on thereabouts.

I've I made this chart over the weekend and as you can see, the you know, one three-month T-bill rate is around 4% and the 10-year bond is around you know, 4.1 and a half 1.15 and 30-year bonds at like 4.75. So, this is the the year the yield curve we have today versus the yield curve that we had in the late 1940s during World War II.

So, I'm going to speak a bit more about this, but in Bessant's mind, this is what he wants to create. He wants to take the orange line to the purple line. And how does he get there is the question that we have to answer as investors, and we have to make some leaps of faith and some guesses. So, I'm going to be delving into the realm of bureaucratic politics, which obviously is extremely messy because we're dealing with humans, and humans are weird and they do things that we don't predict them to do. So, while I'm going to lay out a path, it's a probable path.

I don't know if this is actually going to happen, but in terms of the way that I'm thinking about the portfolio at Maelstrom, the probability is high enough so that I feel confident to be almost at maximum risk levels, even though I mean Bitcoin slipped from about 120 to 112,000. We're going through this little period of of weakness. So, what are there the why the real curve control mechanics? As you know, new board Fed board member Stephen Moran proclaimed, the Fed's third mandate, which is actually in the 1913 Federal Reserve Act, that the Federal Reserve is responsible for maintaining moderate interest rates on government bonds. What the [ __ ] does moderate mean?

It means whatever the [ __ ] they want it to mean. Um and so, when I say that the Fed's third mandate is to print a [ __ ] ton of money to help up Bessant fund the national debt. Now, why is it so critical that right now the US has to fund this massive expansion in fiscal outlays and credit generation? Um it's the same as it always has been. The US is fighting war.

Um more importantly, US has pretty much lost two recent wars. They've lost the war against Russia and Ukraine, and they were forced to stop their bombardment of Iran after 12 days because they ran out of missiles to hand to Israel to defend itself. And so, the American industrial base has been shown to be completely non-existent. It was shipped off to China over the last 40 years, and now the US cannot make enough shells to defeat Russia, cannot make enough missiles to hand to its allies to bomb whoever they want to bomb. And that is what Trump is really going to rectify, or at least try to, as quickly as possible.

That requires credit. And this credit is going to be supplied by the banking system and the US Treasury. So, to get into the bit of the details, how do you manipulate the Treasury bill market on the short end of the yield curve? Well, you can lower the interest on excess reserves. Excess reserves are reserves that banks place with the Federal Reserve.

Currently, those those reserves earn the lower end of the Fed funds rate. And they can lower the discount rate. And when a bank gets into trouble, like in 20 2023, the regional banking crisis, banks go to the Federal Reserve, they borrow from the discount window at a rate. If I'm able to lower those two rates to wherever I like them to be, then I can effectively cap the yield on Treasury bills. The keyboard, which I'll talk about in a moment, is called the Federal Reserve Board of Governors.

They control the short end of the curve in respects to interest on reserves, and they influence the rate at which banks borrow from district banks in the discount window. On the long end, the Treasury bond market, how do they manipulate that market? Well, the first thing that we have to concern ourselves with is the system open market account, the SOMA account. Now, this is the account that is corresponds to the Fed's balance sheet. When the Fed engages in quantitative easing by creating reserves and and buying bonds from banks, those bonds end up on the SOMA account.

They report this account's balances on a weekly basis, and so this is what we can monitor to see if there is actually doing real curve control. Are they buying an infinite amount of bonds at a particular price to manipulate a yield to particular level? So, how does yield curve control work? If you've studied how it's been going in Japan, what do they do? The BOJ says, "Hey, I have a target rate at whatever tenor.

I will buy bonds until the rate reaches that level. So, why would you You're going to sell me that bond at a profit until the rate drops, the bond price rises, and the balance sheet expands, and the amount of credit in the system expands, and obviously crypto goes up. This expands the balance sheet. The key Federal Reserve board that is responsible for this is the Federal Open Market Committee. Um and we'll get into what that means in a second.

All right. The second thing is credit growth generation. I wrote an essay called black or white uh I think maybe nine or 12 months ago, and I basically went into the mechanics of the difference between when credit is created at the central bank level and when credit is created at the commercial bank level. Now, we've been in an era of central bank credit generation around the world since essentially the global financial crisis in 2008. And what have we noticed about the type of activity that is financed when the central bank is responsible for issuing credit?

The central bank favors large companies. It favors financial engineering. And so, you're a you know, a PE guy in London, New York, Hong Kong, Beijing, you load up some company with a bunch of debt, you take an operating dividend, and then you float it again at a higher EV-to-EBITDA PE PE ratio, and you make money. You are not building new capacity. You are leveraging up existing capacity.

This is why there is no more American industry, because what do you do since the 1980s? You do leverage buyouts. You take out companies, put on a bunch of debt because you have access to large corporate debt markets, and large corporates are able to issue money outside of the banking system. And because the Fed is creating so much money, all the rich people just want to buy these pieces of institutional grade capital. And this is why MicroStrategy works.

He is able to issue debt in these markets, so he issues cheap debt and buys Bitcoin, and that is essentially why MicroStrategy is a massive company. Now, again, does this help Secretary Bessent and Trump build more bombs? No. They need more capacity within the American industrial sector. They need small and medium-size enterprises to receive credit, to hire people, to build factories, to produce goods.

They need bank loans. And small and medium-size banks, the regional banks, cannot operate when they're being crowded out by the Federal Reserve controlling all the credit. They need a steep yield curve. They need to be able to issue loans to these industries and then make money in that way. And so, Bessent wrote an article recently in the Wall Street Journal.

He called the Fed the gain of function as a reference to sort of the the COVID um debacle monetary policy. Basically saying that the Fed is responsible for destroying American industry and promoting income inequality in America. And he's 100% correct, but he's also a bit of a two-faced liar because he's going to print money as well. So, it's just it's an interesting dichotomy. But his point is he's going to empower the regional banks to lend money, and the regional banks need a steep yield curve.

And so, Bessent wants a bull steepening, which means a general decrease in the rate of interest and a steepness of the curve. A big difference between where banks borrow, pay deposits, you know, at the short end, and where they lend long in sort of a spread on top of the 10-year or 30-year US Treasury rate. So, if you take a look at the curve steepness in the 1940s, it was close to 2%, very profitable for for banks. Right now, it's only 20 basis points, and as of a few years ago, it was negative. And so, essentially, you've killed the credit generation, the industrial generation of your country by handicapping the small banks.

So, not only does Bester want to steepen the yield curve, he also wants to remove all these shitty regulations that hamper the ability for small banks to issue credit to small and medium-size enterprises. And so, by making the banks more profitable, they're going to engage in the things that they want them to do. So, here are the two boards that we have to understand because now Trump has this goal, he's got Bester in the Treasury telling you exactly what they want to do. Now, how do they move from the Treasury and the Fed as two separate entities to the Treasury and Fed working together to accomplish these goals? So, the first thing I talked about was the Fed Board of Governors.

There are seven Board Governors. They are all presidential appointees that require confirmation in the Senate. Very important. Trump has control of the Senate for now. It's we'll see if he retains it post-2026 on November in the midterm elections, but if anything is to go by, it's very, very tight.

Stephen Moran, the most recent Trump appointee to the Fed Board of Governors, was only approved last week by one vote. And so, it's very tight. If Trump does not get these people through within the next probably 12 months, he's [ __ ] out of luck because the opposing Democrats are not going to appoint approve any of you any of his appointees to the Fed Board of Governors. So, he needs four votes. It controls the interest on reserves.

It influences the rate at which banks borrow from the discount window at the 12 District Banks of the Fed. And most importantly, and I'll get to this, the District Bank Presidents who sit on the FOMC are approved by a simple majority on the Fed Board of Governors. So, the first step is Trump needs four out of seven votes on this board to control the short end of the yield curve and to promote more people onto the FOMC so that he can finally control the balance sheet. The FOMC has 12 members, seven of which are the Board of Governors, five of which are rotating presidents from the district banks, of which one of them is the New York Fed's president who has a permanent seat given its outsized impact in the financial ecosystem in America. So, what does the FOMC do?

We know that they set the Fed funds rate. We we monitor these, you know, almost monthly meetings and they manage the system open market account. They determine quantitative tightening, quantitative easing, the pace of bond purchases, which tenures they're going to buy. So, extremely important. So, how does Trump get control of the Fed Board of Governors?

He needs four of seven. He needs snake eyes in crap speak. So, uh this Here's a very interesting uh chart. We have essentially uh the situation where Trump had two out of seven, um Bowman and Waller. We know this because they wanted to be Fed Governor.

They dissented in the July um meeting cuz they wanted a cut in interest rates versus um Jerome Powell and the majority wanted to hold. They have come out in the Trump camp. They uh they're they're showing their fealty to Trump. Uh Kugler was uh a recent departure from the Fed. She joined She She left in the uh abruptly in August.

There's rumors that her husband was engaged in some unethical insider trading during Fed blackout periods and that she resigned rather than getting forced to resign by um an angry Trump. So, that is when Stephen Morant came in. So, now Trump has three out of seven that he needs. The fourth is Lisa Cook. If you've been monitoring the the press, this is a appointee a recent appointee by Biden.

There are allegations that she's engaged in mortgage fraud. She lied about her primary residence to get a cheaper rate on her mortgage. And her case has been referred to the Department of Justice for possible criminal indictment. Now, as of right now, she's being very obstinate. She's refusing to leave, refusing to resign.

I think that by the end of the year end of the year, she will have gotten whatever she needed to get some sort of political guarantee that she's okay, and she'll exit stage left. And then Trump now has four votes and control of the Fed Board of Governors. So, the first thing that they want to do is they want to accelerate the decline in short-term rates. And there's an interesting arbitrage that they can perpetuate to force the FOMC, who Trump does not control yet, to lower rates faster than they otherwise would have. So, if the Fed Board of Governors lowers the interest rate on excess reserve and the discount window massively below Fed funds, it opens up an arbitrage opportunity for large commercial banks.

So, what do they do? The commercial bank post collateral at the discount window. They borrow funds cheaper than Fed funds, and they lend at the secured overnight forward rate, which is the SOFR rate, a replacement for LIBOR. And this arbitrage is essentially being traded on the Fed, who must now print money and hand it to the banks, which is absolutely ridiculous, which is why essentially this forces the FOMC to lower rates. There was a recent interview by Stephen Moore and I think yesterday that I saw on Bloomberg this morning, where he said that the Fed is about 2% too tight in terms of monetary policy.

So, this is kind of they're giving you the direction of where they want to go. They want Fed funds somewhere in the 2% handle. They wanted it there yesterday. If Fed if Trump gets Lisa Cook out and his appointee in, he can execute this uh or before the end of the year and possibly get Fed funds down below 2% very quickly. So, how does controlling the Fed Board of Governors lead to ultimate control of the FOMC?

Um as I said, all members of the Board of Governors are voting members permanent voting members of the FOMC. And the Board of Governors approves the 12 bank presidents who are rotating voting members on the FOMC. I believe other than New York uh next year uh uh Philadelphia, Cleveland, and Minneapolis are the other four uh bank presidents that will be voting members in 2026. And all 12 bank presidents are up for re-election in February of next year. Now, how does that happen?

Every district bank of the Fed, there is 12 of them, they were set up that way back in America's agrarian past when each sector of the American land mass had different needs in terms of interest rates for their harvest times. So, if there there are three class of board members, B and C board members, there are six of them, four of six vote on who is the president in that particular bank. So, let's take a look at what type of folks are board members of the district banks. Um and so, here's a list and you all of this will be online later and you can peruse this at your at your leisure. But, what you notice here are that the board presidents of the Fed banks are either bankers themselves or industrialists.

What do you bankers and industry always want? They want cheap money, they want a lot of it. And so, why would it these folks be opposed to Trump's policy of remov- removing the interest rate lower and increasing the quantity of money? It increases their net worth. And as humans who are self-interested, I think that they're very likely to vote for presidents who are going to follow what Trump wants, which is easier monetary policy.

And if they don't, the Fed Board of Governors that Trump now controls will basically insinuate that if you don't appoint a dove as your president, we will not approve them. So now Trump has seven. He's got control of the FOMC, I think sometime in the first half of 2026. So what can they do now with this majority on the FOMC? They can go back to quantitative easing.

They can stop quantitative tightening. The balance sheet run off stops. Now we are into quantitative easing because Basset has all this debt he needs to issue. And right now he's not issuing at the long end. He's afraid.

Just like Bad Girl Yellen, she was afraid of the long end. Buffalo Bill Basset is afraid of the long end. It's all in the short end, which is why the genius act and all the stable coin regulation is so pertinent because they need a price inelastic buyer of these Treasury bonds or bills at any price. But if they have control of the FOMC who agrees that yield curve control is necessary to accomplish the political industrial goals of the American Trump administration, then now Basset can issue trillions of dollars of debt and the Fed is going to buy a majority of these bonds because the seven members of the FOMC have restarted quantitative easing. And so essentially, with this control and this sort of timeline of moving from the Fed Board of Governors out to the FOMC, Trump can essentially create the yield curve that I showed from the 1942 to 1951.

And so why do we care as crypto investors? So of course I had to put some [ __ ] bull market math up here. I know I've gotten some [ __ ] from a bull market math and hyper liquid in Japan, but come on guys, this is what we're here for. So, what can we get to in a price of Bitcoin with yield curve control coming out of America? Now, this number is, you know, patently silly.

It's 3.4 million dollars per Bitcoin. Do I believe standing up here today in front of you guys that we're going to get to 3.4 million dollar Bitcoin by 2028? I would say probably not.

But what I'm interested in is the the direction of travel and the potential magnitude of how high we could go. So, I hope that we get above a million. Do I think we'll get there? It'd be nice, but I I highly doubt it. But let's just go through the mental thinking on how I got to this number.

So, how much treasury debt will be issued between now and the end of 2028 when Trump and Co. leave office? And so I pull up my Bloomberg, I looked at how much treasury debt is going to mature that needs to be rolled over, and then I added that to a an estimated two trillion dollar federal deficit between now and 2028, and that's roughly what the Congressional Budget Office in the US estimates in their estimates of the fiscal deficit. That gets us to 15.3 trillion dollars of new treasury debt that must be issued within the next three years.

How much will the Fed purchase? During COVID, the Fed purchased about 40 to 45% of all new treasury debt issued. I think we'll shade higher in this period because foreigners are even less likely to buy treasury debt now than they were before, especially because Trump has made it known that he intends to depreciate the dollar and issue a [ __ ] ton of debt to reindustrialize America at the express against everybody else. And so why would you buy this debt? I don't know why I would.

I wouldn't do it. And so we get seven and a half trillion dollars effectively of Fed credit creation. That's how much their balance sheet grows between now and 2028. The second piece is this bank credit creation. How many loans are going to be created that are going to go to SMEs around America.

It's a very hard number to to forecast, so I said, "Okay, well, what happened during COVID? This is the last time when they were successfully did this policy." Between basically February of 2020 to the high point in late 2021, if you look at the weekly Fed statistic called other deposits and liabilities for the banking system, this is a good proxy measure for credit growth for loan growth within the banking system. It was about two and a half trillion dollars in that year time period. So, we have 3 years, multiply by three, finger in the air math, and in total we get to about 15.

2 trillion dollars of credit creation. Okay, great, but what does that mean in terms of Bitcoin price appreciation? Again, going back to the COVID times, I took a very rough, very rough slope on the the percentage increase of Bitcoin per dollar of credit created. Using this framework, the slope came to 0.19.

it to the price of 115,000 and this credit growth of 15.2 trillion, and that's how we get to roughly 3.4 million dollar Bitcoin by 2028, which I am pretty much 100% confident will not be the case, but I think this is the mental framework in terms of credit growth coming from the Fed to fund the Treasury, coming from the banking system to fund the reindustrialization of America. We know what happened during COVID when this was the policy pursued for 1 year. What if we do it for 3 years?

What if we do it when the Fed and the Treasury are working together to print money and send, in their terms, the American economy into a Valhalla, we get, you know, Bitcoin 1 million dollar plus. And so, this is why I'm very confident that the 4-year cycle is not really applicable to this particular a We are in a reindustrialization of a military belligerent, and this is what's going to happen if they are able to gain control of all the levers of monetary policy, and believe me, they are very, very motivated. Thank you, everybody.