Arthur Hayes Challenges Conventional Wisdom on Bitcoin and Interest Rates

In a recent blog post, macro-analyst Arthur Hayes challenges the commonly accepted notion about the relationship between Bitcoin and interest rates. According to Hayes, traditional economic theories are becoming obsolete, especially given the U.S. government’s huge debt burden.

Hayes criticizes central banks and governments for relying on outdated economic theories to address current challenges. He notes that the Federal Reserve has increased its key interest rate from 0.25% to 5.25% to combat inflation, which has so far been effective. However, Hayes warns that inflation might remain stubbornly high, especially if nominal GDP growth continues to outpace government bond yields. Based on Atlanta Fed data, he points out that nominal GDP growth for Q3 is at an astounding 9.4%, while the 2-year U.S. Treasury yield is only 5%.

Hayes argues that the traditional belief is that higher rates would slow down economic growth, which has proven true for financial markets like stocks and Bitcoin. But this drop also leads to lower tax revenues, forcing the government to issue more bonds to cover its deficits. This, in turn, increases interest payments, particularly to wealthier bondholders, in a high-rate environment.

According to Hayes, this sequence of events could boost GDP even more. He believes that as long as the economy expands faster than the interest payments on government debt, bondholders might opt for riskier but potentially more rewarding assets like Bitcoin.

In a previous essay, Hayes claimed that Bitcoin stands to gain as the Federal Reserve tightens its monetary policy, which could inadvertently boost the money supply. While analysts generally see low interest rates as beneficial for Bitcoin and other high-risk assets, Hayes maintains that Bitcoin’s relationship with central bank policy is more nuanced. He describes this connection as a “positive convex relationship” and suggests that the economic dynamics at play are reaching an extreme, making traditional models less applicable.

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