A big blundersome Bitcoin bust ahead? Janet Yellen’s “financial armageddon” warning doesn’t show so

Treasury, A big blundersome Bitcoin bust ahead? Janet Yellen’s “financial armageddon” warning doesn’t show so
“Empty pocket” by cafecredit is licensed under CC BY 2.0

Key Bitcoin takeaways:

  • Bitcoin dropped from above $52K to below $43K on Tuesday, sparking further sell-off warnings.
  • But the prospects of a “financial catastrophe” brewing in the US economy could save the cryptocurrency from aggressive downturns.
  • US Treasury Secretary Janet Yellen has said her office would run out of cash by next month.
  • That has raised the possibility of the US government defaulting on its debt, unless Congress agrees to raise the debt ceiling.
  • Republicans and Democrats are at impasse about the debt raising proposal.
  • All eyes should be on Bitcoin.

YEREVAN (CoinChapter.com) — Bitcoin’s latest downside move from above $52,000 to around $42,000 has triggered warnings about further price declines, with Seeking Alpha’s Clem Chambers reiterating that the price would fall as low as $20,000.

Some analysts look at the Federal Reserve and its upcoming policies as their primary clue. For example, the US central bank’s chief, Jerome Powell, clarified in his Jackson Hole speech last month that they would start tapering their $120 billion a month asset purchase facility by the end of this year.

Taper fears

Powell noted that the US economic rebound remains on the right track, which would mean they don’t need to carry the unnecessary load of buying $80 billion worth of government bonds and $40 billion mortgage-backed securities at the same pace.

Bitcoin bulls do not like a less-gracious Fed. After all, the cryptocurrency’s supersonic rally from below $4,000 in March 2020 to as high as $65,000 in mid-April 2021 took its cues from the bank’s loose monetary policies. So if they slow down their bond-buying, it would raise yields, which, in turn, would make the US dollar attractive among foreign investors.

Related: Bitcoin almost reclaims $50K as Powell confirms tapering in Jackson Hole’s speech.

The massive Bitcoin price crash on Tuesday came on the same prospects. The chart below shows that gold and Bitcoin fell almost in sync against a rising US dollar index. True, the excessively leveraged Bitcoin market dropped harder than the precious metal, but a stronger greenback triggered their downside move in the first place.

Bitcoin and gold locked their loss-making moves against a rising US dollar on Sep 7
Bitcoin and gold locked their loss-making moves against a rising US dollar on Sep 7. Source: TradingView.com

The Fed officials will meet again in mid-September and would probably go ahead with their tapering plans. But away from the central bank meeting, something sinister emerges from the US Treasury that could potentially cause a “financial armageddon.”

Treasury will run out of cash next month

US Treasury Secretary Janet Yellen warned lawmakers this Wednesday about how her office risks running out of cash by October 22 unless Congress increases federal borrowing limits.

In simple terms, the federal government headed by US President Joe Biden will find it impossible to pay its debts. That would lead to a default, which, in turn, would have the potential to cause interest rate hikes, stock market crashes, retirement accounts drop-downs, and the US dollar’s value erosion.

“It would be financial armageddon. It’s complete craziness even to contemplate the idea of not paying our debt on time.”

— Mark Zandi, chief economist at Moody’s Analytics, told CNN.

Republicans and Democrats are playing chicken with one another on the matter, with Senate Minority Leader Mitch McConnell vowing that Republicans will not vote to raise the debt ceiling. The political deadlock, as Yellen pointed, would do “irreparable damage” to the US economy.

“A delay that calls into question the federal government’s ability to meet all its obligations would likely cause irreparable damage to the U.S. economy and global financial markets.”

— Yellen wrote in her letter to US lawmakers.

Soaring rates

The biggest outcome from a debt default could be a falling US bond market. That, in turn, would lead to soaring rates, making it for Americans to borrow cheap money. That’s because Treasuries serve as a benchmark to interest rates charged on mortgages, car loans, credit cards, and corporate debt.

US federal government debt is near $29 trillion already
US federal government debt is near $29 trillion already. Source: FRED

Meanwhile, if Congress does not raise the debt ceiling, it would force the government to default on many of its obligations, whether payments to federal employees, veterans, social security recipients, or defense contractors. Someone will lose out.

Related: Bitcoin and S&P 500 correlation strengthens against taper tantrum fears

The uncertainty alone could have people opt for safe-havens instead of the dollar. As a result, Bitcoin could benefit, given its ongoing role as a hedging asset in countries with serious economic issues.

It appears there won’t be a big, blundersome Bitcoin bust, after all.

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