The EU is doomed to fail because it is solely a monetary union, and it does not have federal powers to collect taxes and force economic harmony between its country members. Because every country in the EU pursues different policies, each one faces different economic outcomes. Some are more prosperous than others, and there’s no way for the centre to move resources between its member states. But at the same time, all states share the same currency and monetary policy — which is not always suitable for their specific economic circumstances.

As a result, some countries are perceived as safer or more worthwhile sovereign credit risks than others. The member states can issue their own Euro-denominated country bonds but cannot print Euros. Therefore, these bonds are not risk-free in Euro terms. They would only be risk-free if the European Central Bank (ECB) fully commits to printing Euros to pay back member states’ government debts in any and all circumstances. The ECB could have been set up with such a proviso; however, the ECB’s sole legal mandate is stabilising the general price level of the EU, and that’s it. All other policies are subordinated to that mandate.

The problem is that, when faced with inflation, the ECB’s mandate technically requires it to tighten monetary policy to keep prices down. This means that if a country cannot afford its national debt load during an inflationary period, the ECB cannot legally ride to the rescue and print Euros when doing so would push up the general price level.

But what the law prescribes as the ECB’s mandate and what the ECB views as its mandate are two different things. The ECB is really only concerned about maintaining the EU as a monetary and political entity — even if that means eschewing its legal mandate and stoking the fires of inflation. Leaving a member state to struggle helplessly under its Euro-denominated debt load can drive that member state to leave the Euro and redenominate all of its debts in a new national currency, which its central bank can print freely (much to the chagrin of its investors, who then get paid back in the weaker new national currency, rather than the Euro). This is called a technical default. An EU member entering technical default and leaving the EU to resolve its debt problems is the ECB’s worst nightmare — and it will do pretty much anything in its power to prevent that outcome.

The goal of the human species is to survive and procreate. It follows, then, that an organisation of humans has the same goals. The ECB will always do whatever it takes to ensure the EU is still a thing. If pesky things like EU inflation hitting 30-to-40-year highs get in the way, they can be explained away as “transitory”, thereby allowing the ECB to avoid its legal obligation to tighten monetary policy. The ECB can instead continue printing money, keeping countries from leaving the Euro due to their unaffordable government bond yields.

The current yields don’t compensate for inflation and redenomination risk. The amount of debt issuance is set to increase dramatically, both to fund large and increasing government deficits and to repay old debt. Even worse, the EU as a trade bloc now owes the world money, rather than the other way around. And to top it all off, the ECB, who is essentially the buyer of last resort and owns 40% of the market, might have to step away for a bit due to inflation at 30-to-40 year highs. And they want me to buy these bonds– LOLZ.

Explicit Yield Curve Control (YCC) — whereby the ECB targets a general absolute level of government bond yields and then purchases member state bonds to achieve that target — is the only way it can coax investors into taking the inflation and redenomination risk associated with buying the weaker member states’ bonds. Anything short of YCC, and investors will shun those bonds. The EU member states will quickly find there is no one left to purchase the bonds they have issued to pay for their high and rising budget deficits. But printing more Euros (which is necessary for the EU to buy their member countries’ bonds and successfully implement YCC) will cause the exchange rate to fall, and energy costs — and most importantly, the cost of natural gas — will rise.

Without ECB support, EU governments will be unable to finance themselves affordably. Then the bankrupt governments must either enact crushing austerity measures, such as raising taxes and cutting healthcare spending, or leave the Euro and redenominate all their debt into new national currencies which they can print. And if they decide to do the latter, the ECB and most of the large Too-Big-To-Fail European banks will become insolvent, as they owe Euros to their depositors, but their debt assets will be redenominated into weaker currencies.

The unfortunate reality is that European countries must import a substantial portion of their energy needs, and the countries selling it to them won’t be interested in a newly created Euro-trash currency. Trading partners will demand “hard” currency, and when a nation runs out of EUR, USD, or gold, no one will trade with them. The Sri Lankan tragedy is case and point. Without affordable energy, any modern society will quickly collapse. That, ladies and germs, is how the next European kinetic conflagration begins. For if newly destitute European nations cannot trade using their domestic currency, they will try to force others to trade with them using their military.

The Fed can do one of two things to weaken the dollar so that its allies can continue to afford to import the goods they need while also engaging in YCC: 1) Buy JGBs and EU member state bonds by printing dollars. 2) Stop reducing the size of its balance sheet and cut its policy rate.

Of the two options, I believe the first is politically an easier sell than the second. This comes down to accounting.

When a central bank commits to YCC, its balance sheet grows slowly, then accelerates upwards in a nearly straight line — blowing through all previous asset-holding highs extremely quickly. Hyperinflation is non-linear, and the ESF balance will grow rapidly as everyone dumps their JGB’s and EU bonds into the Fed, and the Japanese and EU governments continue to issue bonds at an increasing rate to fund their budget deficits. Thankfully, this dynamic probably won’t be dramatically apparent until 2023, when the market really tests whether the Treasury will purchase ALL the bonds necessary to cap yields. What’s special about 2023 is that it’s a non-election year. And therefore, inflation is not going to be a problem the administration cares about — that is, until it becomes a PRESIDENTIAL election year in 2024. That is going to be a humdinger of a policy conundrum.

And as I keep mentioning, it is an American election year. The Fed’s domestic monetary policy is pretty set in stone from now until mid-November, when the government can end the theatrical performance it has been putting on to curry votes. Therefore, I believe that if the Treasury and the Fed are to do anything to assist the kingdom of the Yen and the Euro in their existential fight against the Great Bear, printing USD and purchasing JGBs and EU bonds is the only politically- and time-efficient option.

If the Fed starts increasing the size of the ESF, the quantity of USD sloshing around the world will increase and drive this metric higher. Crypto responds positively to an increase in the quantity of USD. The quantity of Bitcoin is fixed, therefore when the USD denominator grows Bitcoin’s relative value increases. Even before the Fed buys its first foreign bond, just the expectation of an increase in the quantity of dollars will spur prices of cryptos and various other risky assets higher.

Even though this current episode of USD liquidity tightening has been brutal to risky assets, everyone believes that as soon as the Fed is politically able, it will turn the taps back on. If you don’t believe that, then you believe central banks will allow debt-backed assets to deflate. Every single central bank was created to fight this exact outcome, and we can therefore be confident that this time is no different. The only real unknown — and it’s the same unknown every cycle — is timing.

The market will definitely bottom before a change of US Treasury or Fed policy is announced. But, however sound my arguments may be, I have no idea what the timing of such an announcement will be. That is why, for my portfolio at least, it pays to wait. I am in no rush to sell fiat and increase the weighting of crypto in my overall portfolio. I will wait for a declarative statement from one of these two government agencies that supports my hypothesis.

If you buy my hypothesis, then expect the quantity of dollars supplied outside of the US to increase as the Fed buys Japanese and EU bonds. When this policy is announced, investors should consider going long and strong crypto.

The EU is doomed to fail because it is solely a monetary union, and it does not have federal powers to collect taxes and force economic harmony between its country members. Because every country in the EU pursues different policies, each one faces different economic outcomes. Some are more prosperous than others, and there’s no way for the centre to move resources between its member states. But at the same time, all states share the same currency and monetary policy — which is not always suitable for their specific economic circumstances.

As a result, some countries are perceived as safer or more worthwhile sovereign credit risks than others. The member states can issue their own Euro-denominated country bonds but cannot print Euros. Therefore, these bonds are not risk-free in Euro terms. They would only be risk-free if the European Central Bank (ECB) fully commits to printing Euros to pay back member states’ government debts in any and all circumstances. The ECB could have been set up with such a proviso; however, the ECB’s sole legal mandate is stabilising the general price level of the EU, and that’s it. All other policies are subordinated to that mandate.

The problem is that, when faced with inflation, the ECB’s mandate technically requires it to tighten monetary policy to keep prices down. This means that if a country cannot afford its national debt load during an inflationary period, the ECB cannot legally ride to the rescue and print Euros when doing so would push up the general price level.

But what the law prescribes as the ECB’s mandate and what the ECB views as its mandate are two different things. The ECB is really only concerned about maintaining the EU as a monetary and political entity — even if that means eschewing its legal mandate and stoking the fires of inflation. Leaving a member state to struggle helplessly under its Euro-denominated debt load can drive that member state to leave the Euro and redenominate all of its debts in a new national currency, which its central bank can print freely (much to the chagrin of its investors, who then get paid back in the weaker new national currency, rather than the Euro). This is called a technical default. An EU member entering technical default and leaving the EU to resolve its debt problems is the ECB’s worst nightmare — and it will do pretty much anything in its power to prevent that outcome.

The goal of the human species is to survive and procreate. It follows, then, that an organisation of humans has the same goals. The ECB will always do whatever it takes to ensure the EU is still a thing. If pesky things like EU inflation hitting 30-to-40-year highs get in the way, they can be explained away as “transitory”, thereby allowing the ECB to avoid its legal obligation to tighten monetary policy. The ECB can instead continue printing money, keeping countries from leaving the Euro due to their unaffordable government bond yields.

The current yields don’t compensate for inflation and redenomination risk. The amount of debt issuance is set to increase dramatically, both to fund large and increasing government deficits and to repay old debt. Even worse, the EU as a trade bloc now owes the world money, rather than the other way around. And to top it all off, the ECB, who is essentially the buyer of last resort and owns 40% of the market, might have to step away for a bit due to inflation at 30-to-40 year highs. And they want me to buy these bonds– LOLZ.

Explicit Yield Curve Control (YCC) — whereby the ECB targets a general absolute level of government bond yields and then purchases member state bonds to achieve that target — is the only way it can coax investors into taking the inflation and redenomination risk associated with buying the weaker member states’ bonds. Anything short of YCC, and investors will shun those bonds. The EU member states will quickly find there is no one left to purchase the bonds they have issued to pay for their high and rising budget deficits. But printing more Euros (which is necessary for the EU to buy their member countries’ bonds and successfully implement YCC) will cause the exchange rate to fall, and energy costs — and most importantly, the cost of natural gas — will rise.

Without ECB support, EU governments will be unable to finance themselves affordably. Then the bankrupt governments must either enact crushing austerity measures, such as raising taxes and cutting healthcare spending, or leave the Euro and redenominate all their debt into new national currencies which they can print. And if they decide to do the latter, the ECB and most of the large Too-Big-To-Fail European banks will become insolvent, as they owe Euros to their depositors, but their debt assets will be redenominated into weaker currencies.

The unfortunate reality is that European countries must import a substantial portion of their energy needs, and the countries selling it to them won’t be interested in a newly created Euro-trash currency. Trading partners will demand “hard” currency, and when a nation runs out of EUR, USD, or gold, no one will trade with them. The Sri Lankan tragedy is case and point. Without affordable energy, any modern society will quickly collapse. That, ladies and germs, is how the next European kinetic conflagration begins. For if newly destitute European nations cannot trade using their domestic currency, they will try to force others to trade with them using their military.

The Fed can do one of two things to weaken the dollar so that its allies can continue to afford to import the goods they need while also engaging in YCC: 1) Buy JGBs and EU member state bonds by printing dollars. 2) Stop reducing the size of its balance sheet and cut its policy rate.

Of the two options, I believe the first is politically an easier sell than the second. This comes down to accounting.

When a central bank commits to YCC, its balance sheet grows slowly, then accelerates upwards in a nearly straight line — blowing through all previous asset-holding highs extremely quickly. Hyperinflation is non-linear, and the ESF balance will grow rapidly as everyone dumps their JGB’s and EU bonds into the Fed, and the Japanese and EU governments continue to issue bonds at an increasing rate to fund their budget deficits. Thankfully, this dynamic probably won’t be dramatically apparent until 2023, when the market really tests whether the Treasury will purchase ALL the bonds necessary to cap yields. What’s special about 2023 is that it’s a non-election year. And therefore, inflation is not going to be a problem the administration cares about — that is, until it becomes a PRESIDENTIAL election year in 2024. That is going to be a humdinger of a policy conundrum.

And as I keep mentioning, it is an American election year. The Fed’s domestic monetary policy is pretty set in stone from now until mid-November, when the government can end the theatrical performance it has been putting on to curry votes. Therefore, I believe that if the Treasury and the Fed are to do anything to assist the kingdom of the Yen and the Euro in their existential fight against the Great Bear, printing USD and purchasing JGBs and EU bonds is the only politically- and time-efficient option.

If the Fed starts increasing the size of the ESF, the quantity of USD sloshing around the world will increase and drive this metric higher. Crypto responds positively to an increase in the quantity of USD. The quantity of Bitcoin is fixed, therefore when the USD denominator grows Bitcoin’s relative value increases. Even before the Fed buys its first foreign bond, just the expectation of an increase in the quantity of dollars will spur prices of cryptos and various other risky assets higher.

Even though this current episode of USD liquidity tightening has been brutal to risky assets, everyone believes that as soon as the Fed is politically able, it will turn the taps back on. If you don’t believe that, then you believe central banks will allow debt-backed assets to deflate. Every single central bank was created to fight this exact outcome, and we can therefore be confident that this time is no different. The only real unknown — and it’s the same unknown every cycle — is timing.

The market will definitely bottom before a change of US Treasury or Fed policy is announced. But, however sound my arguments may be, I have no idea what the timing of such an announcement will be. That is why, for my portfolio at least, it pays to wait. I am in no rush to sell fiat and increase the weighting of crypto in my overall portfolio. I will wait for a declarative statement from one of these two government agencies that supports my hypothesis.

If you buy my hypothesis, then expect the quantity of dollars supplied outside of the US to increase as the Fed buys Japanese and EU bonds. When this policy is announced, investors should consider going long and strong crypto.