Infrastructure Bill May Cause 486 Billion USD Liquidity Crunch

Arthur Hayes, the co-founder of BitMEX, has recently shared his insights on the potential impact of the infrastructure bill on the financial markets. According to Hayes, the passage of the infrastructure bill could lead to a temporary liquidity crunch in the USD market. This is primarily due to the significant allocation of funds towards infrastructure projects, which could reduce the availability of USD in the market.

Hayes' analysis is grounded in the fact that the infrastructure bill will necessitate substantial funding, sourced from various means including borrowing and taxation. This diversion of funds towards infrastructure projects could lead to a reduction in the supply of USD in the market, creating a temporary liquidity crunch as the demand for USD remains high while the supply is constrained.

Hayes predicts that the market may consolidate until August as investors and traders adjust to the new liquidity conditions. The gradual implementation of the infrastructure bill means that the market will need time to fully adapt to these changes. During this period, Hayes anticipates increased volatility as market participants react to the shifting liquidity landscape.

Hayes' views are informed by his extensive experience in the financial markets and his understanding of the potential impact of the infrastructure bill. However, it is important to note that these views are his own and do not necessarily reflect the opinions of any other organization.

According to Hayes, the Treasury has been funding the government by drawing down funds from its checking account, the Treasury General Account (TGA). As of June 25th, the TGA balance was $364 billion. If the debt ceiling is raised, the TGA balance will be supplemented to $850 billion through issuing bonds, resulting in a $486 billion USD liquidity contraction. The only major USD liquidity item that could offset this negative impact is funds flowing out of the RRP account, currently at $461 billion.

Hayes suggests that the bull market may experience a brief interruption. From now until August, when Jerome Powell speaks at the Jackson Hole Fed meeting, the market is expected to trade sideways to slightly lower. If the TGA supplementation proves detrimental to USD liquidity, the downside risk is between $90,000 and $95,000. Conversely, if the supplementation is inconsequential, Bitcoin will hover around $100,000 and not break above the all-time high of $112,000.

Hayes also predicts that by early September, the debt ceiling will be raised, the TGA will be effectively replenished, and Republicans will focus on distributing welfare to avoid political backlash in their home districts. By then, the market is expected to surge, fueled by the increase in currency issuance.