Summary–The Bitcoiner's Guide To Yield Curve Control
An abridged version of Wednesday’s article for paid subscribers: The Bitcoiner's Guide To Yield Curve Control, breaking down the fundamentals of YCC, past instantiations and implications for bitcoin.
BoE Embarks Upon Yield Curve Control
On Wednesday, the Bank of England recently announced the start of a new yield curve control (YCC) program. If you're like most people, you may wonder what YCC even is, or why everyone seems to be talking about it these days.
Bitcoin Magazine PRO analysts Dylan LeClair and Sam Rule explain how it functions as a way for governments to 'kick the can' down the road and let someone else deal with their problems:
“Yield curve control is a method for central banks to control or influence interest rates and the overall cost of capital if demand for government debt becomes a systemic issue. Typically, they purchase government debt with newly printed currency, thus adding to monetary inflation pressures while letting governments avoid bearing the true costs of their debts.”
To get an idea of what YCC has looked like in other countries, let’s take a look at Japan, a modern example of YCC that has been taking place since 2016:
“This year, we’ve seen Japan face a serious decision on maintaining their YCC policy: allow yields to rise or the Japanese yen to fall. Rising yields seem an unsustainable option with Japan having the largest public debt-to-GDP ratio in the world, around 260%. However, currency devaluation is the other side of the sword with a sustained YCC policy. As a result, the yen now looks more like an emerging market currency down 20% year-to-date… The Bank of Japan (BoJ) has gone full-on FX intervention mode to limit the bleeding, even if it's only going to prove to be temporary relief.”
Source: Bianco Research
Now, the Bank of England has followed suit in dramatic fashion with the announcement of a £65bn operation to stabilize its bond market, only a few short months after it began its quantitative tightening (QT) program in earnest. This is had drastic consequences for the British pound as seen in the chart below:
“On Wednesday, the Bank of England (BoE) took action to restart pseudo-quantitative easing (QE) efforts amidst concerns that major pension funds were facing insolvency as yields continued to rip higher.
Yields have become too high too quickly for economies to function and there’s a lack of marginal buyers in the bond market right now as sovereign bonds face their worst year-to-date performance in history. This leaves the BoE no choice but to be the buyer of last resort.”
“If there was ever a marketing campaign for why bitcoin has a place in the world, it’s exactly this. As much as we’ve talked about the current macro headwinds needing time to play out and lower bitcoin prices being likely, the wave of monetary policy and relentless liquidity that will have to be unleashed to rescue the system will be massive.”