Source: Golden Finance
Author: Aaron Brogan, CoinTelegraph; Translation: Tao Zhu
In recent months, a certain pattern has emerged: US President Donald Trump takes actions that are objectively harmful to the US economy, and the market collapses. Seeing this situation, Trump turns to Federal Reserve Chairman Jerome Powell, asking him to lower the federal funds rate — the interest rate at which the Fed lends to banks. With a determined gaze, Powell would say, "No."
Trump wants to lower interest rates because doing so can effectively inject Cash into the US economy, stimulate economic activity, and boost the market. He believes this will make him look successful. Powell wants to set interest rates based on strict economic standards, carefully balancing the Fed's dual mandate to maximize employment and maintain stable prices.
He also wants to maintain the independence of the Fed from political pressure, and it is crucial to keep the Fed free from political influence. If the market believes the independence of the US central bank has failed, selling US Treasury bonds (US sovereign debt) may become more difficult. Fundamentally, this is a problem because the US will have to pay more to borrow money, making it poorer — but this issue is particularly severe now because the US already bears a massive $30 trillion debt that must be regularly refinanced.
If forced to refinance at higher interest rates due to the market no longer trusting the US government, the interest costs will consume a larger proportion of GDP funds, as children would say, the US will be utterly destroyed.
Last week, Trump hinted multiple times that he wanted to fire Powell, and the market was not pleased with this. On Monday, Trump called Powell a "big loser" on the "Truth Social" program, causing a stir. Reportedly, in response, Treasury Secretary Scott Bessent expressed concerns about the risks of firing Powell to Trump, who currently seems to have tacitly approved this approach and stated on Tuesday that he would not fire the Federal Reserve Chairman.
Nevertheless, this process feels more like a spiral, with many market observers waiting for the next event to occur. This raises a question: what would happen if Trump really acted on his instincts and fired Powell? Specifically, what impact would this have on the Cryptos Industry?
Breaking the Federal Reserve
It is worth mentioning that the president should not be able to dismiss the chair of the Federal Reserve at will. Article 10 of the Federal Reserve Act of 1913 states, "Each member's term is fourteen years after the predecessor's term ends, unless removed for cause by the president."
This wording may seem ambiguous, but in the 1935 case of 'Humphrey's Executor v. United States,' the Supreme Court ruled that the Constitution does not grant the president 'unlimited removal power,' thus placing statutory language restrictions on the president’s removal authority.
The decision endorsed the concept of 'independent agencies' that fall under the executive branch but hold independent powers. While many agencies share this characteristic, including the Securities and Exchange Commission, Commodity Futures Trading Commission, and Federal Trade Commission, the Federal Reserve is the most significant.
Economists are not too concerned about the political control of central banks. Politicians' motivations are relatively short-term, thinking in terms of years or election cycles. This inherently leads them to prefer short-term policies, with hot money injection being the purest form. However, fiscal and monetary policy is a subtle art that often evokes painful policy choices.
A typical example is Richard Nixon pressuring then Federal Reserve Chairman Arthur Burns for expansionary monetary policy on the eve of the 1972 election, believing it would help improve his chances of reelection. Nixon won that election by a landslide, but shortly afterwards, the disastrous 'stagflation' emerged, paralyzing the USA economy for a decade, with the effects still felt in the depleted Industry of that time.
In stark contrast to this is Paul Volcker's policy, which, after enduring a catastrophic period of stagflation, implemented a series of drastic interest rate hikes from 1979 to 1987, leading to the 'Volcker Shock,' a series of painful recessions. However, the effects of this policy ultimately suppressed inflation and heralded the economic prosperity of the 1990s, leading to Bill Clinton's outstanding fiscal policies.
No politician can make such a choice, and there will not be such a choice in the future, that is the problem. Economists—and, crucially, the market—firmly believe that the Federal Reserve must remain independent, otherwise the entire economic structure of American society may collapse. This is no exaggeration—the central banks in countries like Weimar Republic Germany, Peronist Argentina, and Venezuela, controlled by politics, have all experienced extremely severe hyperinflation, leading to geopolitical regression for generations, people starving and eating rats, and even paving the way for Adolf Hitler's rise. This is very serious.
In order to dismiss Powell, Trump must first overturn the precedent of the Humphrey’s Executor case, and given the current composition of the Supreme Court, many legal scholars believe this is very likely to happen. This is a Rubicon; once crossed, there is no turning back. Not just Trump, every subsequent president will have complete legal power to direct all executive officials—including the chair of the Federal Reserve—according to their own will. Most believe this will lead to destruction.
But regardless of whether disaster strikes, this will be a test for cryptocurrencies. The original Bitcoin white paper aimed to strip financial transactions from the "trusted third party of financial institutions." If the Federal Reserve collapses and US monetary policy deviates from reasonable judgment, the arguments for cryptocurrencies of early days will become very obvious.
Due to Trump's recent weeks causing capital outflow, investors are seeking safety in various Assets. Traditionally, whenever a crisis occurs, savvy investors transfer risk Assets to US Bonds. These are considered risk-free assets. Well, those days may be over. During the peak of the tariff crisis, the yield on ten-year Bonds approached 5%, which has not yet fully reverted to previous lows. If Trump undermines the Federal Reserve, such Outflows will be just a drop in the ocean, and this money may flow into cryptocurrencies.
Historically, Bitcoin's price has closely tracked the Nasdaq (though with a multiplier). However, since the tariff crisis, despite US stock prices remaining generally sluggish, Bitcoin has miraculously begun to rise. This has led some to speculate that we are witnessing the long-predicted 'decoupling,' where crypto assets will realize their original purpose and become independent of centralized assets.
It cannot be determined if this will happen, but if Trump fires Powell, it will be certain.
Just out of the frying pan and into the fire.
Of course, the historical collapse of the world is not entirely good for Cryptos, and this crisis will bring tremendous suffering in various aspects. First, stablecoins will almost immediately feel the terrible consequences.
In the past decade, two dollar-denominated stablecoins—USDC and Tether's USDt—have dominated the market. Their issuers, Circle and Tether, are significant systemic Institutions and major buyers of US Treasury Bonds, with most of their stablecoin liabilities backed by US Treasury Bonds as collateral.
The direct consequence of the Federal Reserve crisis might be a Treasury default. Economist Noah Smith speculates that Trump may attempt to write down the US sovereign debt:
"I suspect Trump will do something more akin to what he did as a businessman regarding debt issues—seek cheap bailouts, and if not, declare bankruptcy."
In fact, the president himself has hinted at this prospect, suggesting earlier this year that they might take pretense measures to lower the price of money:
"There may be a problem—you have certainly read articles about US Treasury Bonds, and that could be an interesting issue. […] Many things may not add up at all. In other words, some of what we found is very fraudulent, so our debt may be less than we think."
Sovereign default will immediately impact Circle and Tether, causing the value of their collateral to decline. This, in turn, may lead to insufficient collateral for stablecoins, triggering a bank run. The market may ultimately stabilize, but events can easily reverse, leading to the collapse of major stablecoins.
This will create many second-order effects, as the Asia Vets used as collateral begin to liquidate positions, spreading throughout the market.
Interestingly, these consequences may not carry the same political costs as a Federal Reserve crisis because Treasury Bonds are not the only assets of systemic importance to Cryptos. The US dollar has been the world’s reserve currency for many years. There are many good reasons for this: it is relatively strong and stable, making it suitable for trade. However, if the government backing it is no longer strong and stable, this pattern may shift.
As more trades are conducted through accounts denominated in euros or renminbi, regulators in the EU and China will have more control over the flow of fiat currency through Cryptos. A prominent cryptocurrency lawyer, who chose to remain anonymous due to concerns about political retaliation, speculated on this:
I believe that China will fill most of the gaps, with the EU filling the remaining gaps. China and the EU overregulate in different ways for different objectives, which is detrimental to the overall Industry of Cryptos. This seems quite bad.
This may prompt a shift towards unsecured crypto native assets, but there is virtually no precedent indicating that such assets are widely used for real-world Trade. The stablecoin crisis is likely to severely impact the Industry in the coming years as it gets back on track.
In the end, no one knows if Trump will fire Powell or if he can fire Powell. No one knows what consequences his decision will bring. But if a butterfly flapping its wings in Argentina can cause a tornado in Prague, then Donald Trump's mutterings in the White House could forever prove the correctness or undermine the stability of blockchain.
Editor/Rocky
