Arthur Hayes Blog: The most important thing in trading is understanding how the fiat supply changes.

Author | Arthur Hayes

Compiled by | BitpushNews

Risk Warning: This article contains a large number of investment predictions, which only represent the author's personal views. Wu Shuo does not endorse the related content. Readers are advised to strictly comply with the laws and regulations of their location and not to engage in illegal financial investment activities.

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Unveiling the Secret Waltz of Trump's Economy and the Crypto Bull Market — The Deadly Dance of Bitcoin and the "Credit Drum", Are Your Investment Moves in Sync?

The highest praise of humanity for the universe is the joy born from dance. Most religions incorporate some form of music and dance into their worship rituals. However, for me, the House Music I believe in, the place that "moves your body" is not the church on Sunday morning, but the dance floor at Club Space during the same time.

In college, I joined the ballroom dancing club, using my body to praise the rhythm. Each type of ballroom dance has strict rules (for example, in the Rumba, you cannot put your weight on a bent leg), and for beginners, the hardest part is to follow the beat and perform the basic steps well. The biggest difficulty lies in first determining the beat of a song, and only then can you know where each beat falls.

My favorite ballroom dance — the country dance, is in 4/4 time; while the waltz is in 3/4 time. Once you know the beat, your ears must catch which instrument is on the accent and count the rest of the beats in the measure. If every piece of music just had the bass drum beating "one, two, three, four," it would be very monotonous and boring. What makes music captivating is how composers and producers layer other instruments and sounds to add depth and richness to the song. But when dancing, listening to all these secondary sounds is unnecessary for placing your feet in the right position at the right time.

Just like music, price charts are the fluctuations of human emotions, and our portfolios dance accordingly. Like in ballroom dancing, our decisions to buy and sell different types of assets must follow the beat and rhythm of specific markets. If we fall out of sync, we will lose money. Losing money, like a dancer out of rhythm, is ugly. So the question arises: if we want to remain beautiful and wealthy, which instrument in the financial market must our ears listen to?

If there is an obvious core idea in my investment philosophy, it is this: the most important variable in profitable trading is understanding how the supply of fiat currency changes.

For cryptocurrencies, this is even more critical, as it is a fixed-supply asset, at least in the case of Bitcoin. Therefore, the rate of expansion of fiat currency supply determines the speed at which Bitcoin prices rise. Since early 2009, a massive amount of fiat currency has been created, competing for the relatively insignificant supply of Bitcoin, making Bitcoin the best-performing fiat-denominated asset in human history.

Currently, the harsh sounds emanating from financial and political events have formed a tritone. The market continues to rise, but there are some very serious, seemingly negative catalysts creating discordant sounds. Should you hedge locally because of tariffs and/or war? Or are these just unnecessary instruments? If so, can we hear the guiding force of the bass drum — that is, credit creation?

Tariffs and wars are important because a single instrument or sound can ruin a piece of music. But these two issues are interconnected and ultimately unrelated to the continuous rise of Bitcoin. U.S. President Trump cannot impose meaningful tariffs on China because China will cut off rare earth supplies to the 'beautiful country' and its vassal states. Without rare earths, the U.S. cannot manufacture weapons to sell to Ukraine, nor can it sell to Israel. Therefore, the U.S. and China are engaged in a mad tango, with both sides only probing to a certain extent to avoid excessively shaking the body economically or geopolitically. This is why the status quo, although sad and deadly for people in both places, will not have a substantial impact on the global financial market at this time.

Meanwhile, the credit bottom drum continues to divide time and rhythm. The United States needs industrial policy, which is a euphemism for state capitalism. The United States needs to shift from a semi-capitalist economic system, as its industrial giants cannot produce war materials in sufficient quantities to respond to the current geopolitical environment based on their own will.

The war between Israel and Iran lasted only twelve days because Israel exhausted the missiles supplied by the United States and could not operate its air defense system perfectly. Russian President Putin remains indifferent to the threats posed by the United States and NATO as they continue to deepen their support for Ukraine, as they cannot produce weapons in the same quantity, speed, and low cost as Russia.

The United States also needs an economic arrangement to boost employment and corporate profits. From a Keynesian perspective, war is very beneficial to the economy. The organic demand that is sluggish among the public is replaced by the government's insatiable demand for weapons.

Ultimately, the banking system is also willing to provide credit to enterprises because they secure profit guarantees by producing the products needed by the government. The wartime president is very popular, at least at first, because everyone seems to be getting richer. If we take a more comprehensive measure of economic growth, it becomes very clear that war is extremely destructive in net benefits. But that kind of thinking doesn't win elections, and the primary goal of every politician is re-election, if not for themselves, then for their party members. Trump is a wartime president, just like most of his American predecessors, and therefore, he is putting the American economy in a wartime state. This makes it easier to find a rhythm; we must look for ways in which credit is injected into the economy.

In the article "Black or White," I explained how government-backed profits lead to bank credit for "key" industries. I refer to this policy as "Quantitative Easing for Poor People" (QE 4 Poor People), which creates a credit fountain. I had predicted this would be the way the Trump team would boost the U.S. economy, and the deal with MP Materials is our first large-scale real-world case.

The first part of this article will elaborate on how this transaction expands the supply of dollar credit and will become a template followed by the Trump administration in its attempt to produce key commodities needed for 21st-century warfare (semiconductors, rare earths, industrial metals, etc.).

War also requires the government to continue borrowing large sums of money. Even if the assets of the wealthy expand due to increased credit supply, leading to higher capital gains tax revenue, the government will still face a growing fiscal deficit. Who will buy this debt? Stablecoin issuers.

As the total market value of cryptocurrencies rises, a portion of it will be stored in the form of stablecoins. The majority of the assets under custody (AUC) of these stablecoins are invested in U.S. Treasury bills.

Therefore, if the Trump administration can provide a favorable regulatory environment for traditional financial (TradFi) participation and investment in cryptocurrencies, the total market value of cryptocurrencies will skyrocket. The custodial assets of stablecoins will automatically increase, thereby creating more purchasing power for treasury bills. U.S. Treasury Secretary Bessent will continue to issue treasury bills that far exceed treasury notes or bonds for stablecoin issuers to purchase.

Let's dance a credit waltz, and I will guide readers on how to perfectly execute the S snake step.

Quantitative Easing for Poor People (QE 4 Poor People)

The central bank's money printing does not create a strong wartime economy. Finance has replaced rocket engineering. To correct the failures of wartime production, the banking system is encouraged to provide credit to industries deemed critical by the government, rather than to corporate raiders.

Private enterprises in the United States aim for profit maximization. Since the 1970s, they have been engaging in "knowledge" work within the United States while shifting production overseas for higher profits. China is very willing to enhance its manufacturing skills by becoming the world's low-cost, and over time high-quality manufacturing factory. However, producing a $1 Nike does not threaten the elites of the "beautiful country." The real issue is that at a time when its hegemony is seriously threatened, the beautiful country is unable to produce war materials. Hence, all the fuss about rare earths has arisen.

MP Company stated that JPMorgan and Goldman Sachs are providing a $1 billion loan to build its 10x capacity factory.

Why are banks suddenly willing to lend to the real economy? Because the U.S. government guarantees that this "money-burning project" is profitable for borrowers. The following T-account explains how this transaction creates credit out of thin air, leading to economic growth.

MP Materials (MP) needs to build a rare earth processing plant and obtain a $1000 loan from JPMorgan Chase (JPM). The loan action creates $1000 of new fiat currency (wampum), which is deposited into JPMorgan Chase.

MP Company subsequently built a rare earth processing plant. For this, it needs to hire workers, called "Plebes." In this simplified example, I assume all costs consist of labor fees. MP Company must pay the workers, resulting in a debit of $1000 from the MP account and a credit of $1000 to the Plebes' JPM account.

The Department of Defense (DoD) needs to pay for these rare earths. The funds are provided by the Treasury, which must issue debt to finance the Department of Defense. JPMorgan converts its corporate loan assets to MP through the discount window into reserves held at the Federal Reserve. These reserves are used to purchase debt, leading to a credit to the Treasury General Account (TGA). The Department of Defense then purchases rare earths, which becomes revenue for the MP company and ultimately returns to JPMorgan in the form of deposits.

The end balance of fiat currency (EB) is $1000 higher than the initial loan amount from JPMorgan. This expansion is due to the money multiplier effect.

This is how government procurement guarantees can finance the construction of new factories and the hiring of workers through commercial bank credit. I haven't included it in this example, but JPMorgan now lends to these "grassroots" to allow them to purchase assets and goods (houses, cars, iPhones, etc.) because they have stable, good jobs. This is another example of new credit being created, which ultimately ends up in the hands of other American companies, and this income is deposited back into the banking system. As you can see, the money multiplier is greater than 1, and this wartime production leads to an increase in economic activity, which is counted as "growth."

The supply of money, economic activity, and government debt are all growing in tandem. Everyone is happy. The "grassroots" have jobs, and financiers / entrepreneurs have government-backed profits. If these economic policies can provide benefits out of thin air for everyone, why have they not become the global economic policy of every nation-state? Because it would lead to inflation.

The human resources and raw materials required for producing goods are limited. The government is crowding out financing and ultimately production of other goods by encouraging the commercial banking system to create money out of thin air. Ultimately, this will lead to shortages of raw materials and labor. However, fiat currency is not in short supply. Therefore, wage and commodity inflation will follow, which will ultimately cause suffering for any individuals or entities that are not directly connected to the government or the banking system. If you don't believe me, please read the daily history of the two world wars.

The trading of MP Materials is the first major case that reflects the "quantitative easing for the poor" policy on a large scale. The best part of this policy is that it does not require congressional approval. The Department of Defense, under the instructions of Trump and his successor in 2028, can issue guaranteed procurement orders as part of its normal business operations. Profit-driven banks will follow suit, fulfilling their "patriotic" duty to provide funding for government-affiliated companies. In fact, elected representatives from all political parties will rush to argue why the companies in their constituencies should receive procurement orders from the Department of Defense.

How can we protect our portfolio from the ensuing inflation if we know that this form of credit creation will not face political resistance?

Blow bubbles, try to blow them bigger.

Politicians are not unaware that stimulating "key" industries through accelerated credit growth will lead to inflation. The challenge lies in using the surplus credit to inflate a bubble in an asset that will not undermine social stability. If wheat prices were to soar like Bitcoin has over the past 15 years, most governments could be overthrown by popular revolutions. Instead, governments encourage the public (who instinctively feel that their actual purchasing power is decreasing) to profit by investing in state-recognized inflation-hedging assets, thereby participating in the credit game.

Let’s look at a real-world example from a non-crypto field. Since the late 1980s, China’s banking system has created the largest amount of credit in the shortest period of time in the history of civilized humanity, mainly allocating it to state-owned enterprises. They have successfully become the world’s low-cost, high-quality factory; currently, one third of the world’s manufactured goods are produced in China. If you still think that products made by Chinese companies are of poor quality, then go test drive a BYD and then test drive a Tesla.

China's money supply (M2) has increased by 5000% since 1996. Those hoping to escape this credit-driven inflation are facing very low bank deposit interest rates. As a result, they are flooding into apartments, and the government encourages this behavior as part of its urbanization strategy. The continually rising housing prices, at least before 2020, helped suppress the public's demand to hoard other physical goods. The housing prices in China's first-tier cities (Beijing, Shanghai, Shenzhen, Guangzhou) have become the most expensive in the world in terms of affordability.

Over 19 years, land prices have increased 80 times, with a compound annual growth rate (CAGR) of 26%.

This kind of housing price inflation has not undermined social stability, as ordinary middle-class citizens can borrow money to purchase at least one apartment. Therefore, everyone is involved. An extremely important secondary effect is that local governments primarily fund social services by selling land to developers, who then build apartments to sell to the "grassroots." As housing prices rise, land prices and sales also increase, and tax revenues rise accordingly.

This case tells us that the excessive credit growth under the Trump administration must inflate a bubble, one that allows ordinary people to make money while also funding the government.

The bubble that the Trump administration will blow will focus on the cryptocurrency sector.

Before I delve into how the crypto bubble has achieved various policy goals of the Trump administration, let me first explain why Bitcoin and cryptocurrencies will surge as the United States becomes a national capitalist economy.

I created a custom index called <.BANKUS U Index> on the Bloomberg terminal (white line). This is the sum of reserves held by the Federal Reserve and other deposits and liabilities in the banking system, serving as a proxy for loan growth. Bitcoin is represented by the gold line, and both lines are indexed to 100 as of January 2020. Credit growth doubled, and Bitcoin grew by 15 times as a result. The fiat price of Bitcoin is highly leveraged to credit growth.

At this point, whether retail or institutional investors cannot deny that if you believe more fiat currency will be created in the future, Bitcoin is the best investment choice.

Trump and Besant have also been "orange-pilled". From their perspective, the best thing about Bitcoin and the entire cryptocurrency space is that, compared to the wealthy white baby boomer generation, traditionally non-stock-holding demographics (young people, the poor, and non-white individuals) have a higher proportion of cryptocurrency ownership. Therefore, if cryptocurrencies thrive, it will create a broader and more diverse group of people who are satisfied with the ruling party's economic platform.

In addition, to encourage all types of savings to invest in cryptocurrencies, according to a recent executive order, 401(k) retirement plans are now explicitly allowed to invest in crypto assets. These plans hold approximately $8.7 trillion in assets. Boom Shak-A-Laka!

A fatal blow is President Trump's proposal to eliminate capital gains tax on cryptocurrency. Trump is offering war-driven crazy credit growth, regulatory permission for retirement funds to invest cash in cryptocurrency, and — — TMD, no taxes! Hooray!

All of this is good, but there is one problem. The government must issue more and more debt to fund the procurement guarantees provided by the Department of Defense and other agencies to private enterprises. Who will buy this debt? Cryptocurrency wins again.

Once capital enters the crypto capital market, it usually does not leave. If an investor wants to stay on the sidelines, they can hold stablecoins pegged to the US dollar, such as USDT.

USDT invests in the safest traditional financial (TradFi) income-generating instruments: Treasury bills, in order to earn returns from its custodial assets. The maturity of Treasury bills is less than one year, so the interest rate risk is close to zero and they have liquidity like cash. The U.S. government can print dollars in unlimited quantities for free, so there will never be a nominal default. Currently, Treasury bills yield between 4.25% and 4.50% depending on the maturity. Therefore, the higher the total market capitalization of cryptocurrencies, the more funds the stablecoin issuers accumulate. Ultimately, most of these custodial assets will be invested in Treasury bills.

On average, for every 1 dollar increase in the total market value of cryptocurrencies, 0.09 dollars flows into stablecoins. Let's assume that Trump does his due diligence, and by the time he leaves office in 2028, he will have pushed the total market value of cryptocurrencies up to 100 trillion dollars. This is an increase of about 25 times from the current level;

If you think this is impossible, it means you haven't been exposed to cryptocurrencies long enough. This will create approximately $9 trillion in Treasury bond purchasing power, realized through global capital inflows by stablecoin issuers.

From a historical perspective, when the Federal Reserve and the Treasury needed to fund the United States' World War II ventures, they also turned to issuing treasury bills far more than bonds.

Now, Trump and Besant have "drawn a circle" (solved the problem):

· They copied the Chinese model.

· The inflationary impulse of financial assets driven by credit growth has been directed towards cryptocurrencies, which have soared, making the general public feel wealthier due to their astounding returns. They will vote for the Republican Party in 2026 and 2028... unless they have a teenage daughter... or perhaps the public always votes with their wallets.

The continuously rising cryptocurrency market brings a large inflow of funds into dollar-pegged stablecoins. These issuers invest their custodial assets in newly issued Treasury bonds, which provide funding for the ever-expanding federal deficit.

The bass drum is beating. Credit is being pumped. Why haven't you fully invested in cryptocurrency yet? Don't be afraid of tariffs, don't be afraid of war, and don't be afraid of randomly occurring social issues.

Trading Strategy

It's simple: Maelstrom has been fully invested. As degens, the altcoin space offers amazing opportunities to outperform Bitcoin, this crypto reserve asset.

The upcoming Ethereum bull market will completely ignite the market.

Since Solana rose from $7 to $280 from the ashes of FTX, Ethereum has been the least favored among large cryptocurrencies. But that is no longer the case; the Western institutional investor community, led by its chief cheerleader Tom Lee, has developed a strong affection for Ethereum.

Buy first, ask questions later. Or don't buy, and then sit in the corner of the club like a sullen guy, drinking a light beer that tastes like urine, while a group of people at the next table, whom you think are less intelligent than you, are throwing money around buying champagne.

This is not financial advice, so make your own decisions. Maelstrom is doing everything related to Ethereum, everything related to DeFi, and all the "degenerate" plays powered by ERC-20 altcoins.

My year-end goal:

· Bitcoin = 250,000 USD

· Ethereum = 10,000 USD

Yacht freedom, TMD!