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There’s growing risk of fiscal dominance in the U.S., with ever-growing debt and deficits likely on an unsustainable path, and that should be good news for bitcoin (BTC-USD), according to Standard Chartered’s Geoff Kendrick. Donald Trump winning the presidential election would be a boon for digital assets as well, he added.
Fiscal dominance is an economic condition that occurs when governments’ fiscal actions overshadow the independence of monetary policy. That, in turn, potentially undermines central banks’ ability to control inflation as they would be forced to accommodate government spending.
Such a scenario would likely have several implications for the Treasury yield curve:
- The yield spread between the 2 year (US2Y) bill and the 10 year (US10Y) note widens, in a move that steepens the yield gap;
- A greater increase in inflation breakevens (a market-based measure of expected inflation derived from the spread between the yield of a nominal bond and an inflation-linked bond of the same maturity) than inflation-adjusted yields; and
- A higher term premium, the extra return investors require for holding onto longer-dated bonds instead of shorter-term ones.
The price of bitcoin (BTC-USD) has a strong relationship with each of these three effects, Kenrick wrote in a recent note to clients.
“In a scenario of US fiscal dominance, we think BTC would provide a good hedge against de-dollarization and declining confidence in the UST market,” he added.
JPMorgan Chase (JPM) CEO Jamie Dimon, a long-time bitcoin (BTC-USD) critic, appears to agree with Kendrick’s fiscal-dominance assessment. He said in a fireside chat last month that the U.S. economy is “booming,” but that’s in large part driven by the government’s outsized spending. The tradeoff with a debt-fueled economy is inflation, he added.
In addition to the prospect of the U.S. dollar losing its dominance as the global reserve currency, bitcoin (BTC-USD) usually fares well relative to traditional financial assets when the banking system is under stress, or when central banks monetize government debt via quantitative easing, the StanChart note pointed out. Heightened geopolitical risk, however, does not bode well for the token.
Also, many people make the case that bitcoin (BTC-USD) is a good hedge against inflation. The token’s overall uptrend may support that popular notion, but there have been quite a few instances in a recent memory in which the price actually fell, or barely reacted, after a hot inflation reading.
A Trump election win should also be a positive for bitcoin (BTC-USD), Kendrick contended, through “looser regulation and the approval of U.S. spot ETFs.”
While the Biden administration has adopted a more stringent approach towards crypto, Trump has said that he would not crack down on the use of bitcoin (BTC-USD) or other digital tokens if elected president again.
All told, Kendrick reiterated his price targets on bitcoin (BTC-USD): $150K by the end of 2024 and $200K by the end of 2025. The average SA analyst thinks BTC is a Buy (1 Strong Buy, 9 Buy, 3 Hold, 1 Sell).
In Saturday afternoon trading, bitcoin (BTC-USD) changed hands at $61.3K, down 13% M/M, up 45% year-to-date and 122% from a year ago. BTC had reached an all-time high of over $73K in March, but has since pulled back as market participants pushed out their rate-cut expectations in the face of sticky inflation data.
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