Beyond QE: Arthur Hayes on a New US Economy, with a Chinese Twist

In his latest essay, titled “Black or White?” Arthur Hayes explores the transformation of the American economic system, which he terms “American Capitalism with Chinese Characteristics.” This concept is inspired by China’s unique blend of socialism and capitalism.

From Trickle-Down Economics to QE for the Poor

Hayes argues that the US economy has shifted from trickle-down economics, where wealth is concentrated among the rich, to a system where the government directly supports the poor through stimulus checks and subsidies. This approach, implemented by Presidents Trump and Biden, has led to increased economic growth and a decrease in the debt-to-nominal GDP ratio.

Hayes explains that the COVID-19 pandemic marked a turning point in this shift. The government’s response, including stimulus checks and subsidies, helped to stimulate economic growth and reduce inequality. This approach is in contrast to the traditional QE policies, which primarily benefited the wealthy.

The Magic Money Machine

Hayes explains how the Treasury, Fed, and banks work together to create an infinite amount of bank credit. This process involves the Fed purchasing Treasury bonds, which allows banks to create new deposits and loans. By exempting certain assets from the Supplemental Leverage Ratio (SLR), banks can purchase an infinite amount of debt without needing to hold expensive equity.

The process works as follows:

1. The Fed purchases Treasury bonds from banks, which increases the banks’ reserves.
2. The banks use these reserves to create new deposits and loans, which increases the money supply.
3. The Treasury uses the proceeds from the bond sales to fund its activities, including stimulus checks and subsidies.
4. The banks purchase more Treasury bonds, which increases their reserves and allows them to create even more deposits and loans.

Constraints and the Way Forward

Hayes notes that there are constraints to this system, including the need for banks to hold equity capital against debt assets and the limited ability of hedge funds to purchase Treasuries. However, he believes that the Treasury and Fed will find ways to overcome these obstacles, potentially by exempting banks from the SLR.

Hayes also notes that the level of bank reserves acts as a constraint on the willingness of the banking sector to purchase Treasuries at auction. Banks will stop participating in auctions when they feel their reserves at the Fed hit the Lowest Comfortable Level of Reserves (LCLoR).

The Impact on Bitcoin and Crypto

Hayes argues that the combination of legislated industrial policy and SLR exemption will lead to a surge in bank credit, which will benefit Bitcoin and crypto. He expects the price of Bitcoin to rise significantly, potentially to $1 million, as the freely traded supply dwindles and fiat money chases a safe haven.

Hayes notes that the COVID-19 pandemic marked a turning point for Bitcoin, as it became clear that the government would do whatever it takes to support the economy. This led to a surge in Bitcoin’s price, as investors sought a safe haven from the economic uncertainty.

Key Takeaways

• The US economy is shifting towards a system where the government directly supports the poor through stimulus checks and subsidies.
• The Treasury, Fed, and banks can create an infinite amount of bank credit through a complex process involving bond purchases and loan creation.
• Exempting certain assets from the SLR can allow banks to purchase an infinite amount of debt without needing to hold expensive equity.
• The combination of industrial policy and SLR exemption will lead to a surge in bank credit, benefiting Bitcoin and crypto.
• The price of Bitcoin is expected to rise significantly as fiat money chases a safe haven.