The Economic Storm Triggered by Tariff Policies: A Chain Reaction from Macro to Encryption

Recently, a new tariff policy has triggered shocks in the global economy. This measure aims to reverse the long-standing trade imbalance, but its impact goes far beyond that. It may reshape the trade structure and capital flows of the United States, while also causing new shocks to the U.S. Treasury market. The core impact of this policy lies in the potential decline in foreign demand for U.S. Treasuries, which may force the Federal Reserve to adopt more monetary easing policies to maintain the stable operation of the Treasury market.

Specifically, this policy will have an impact in the following areas:

1. Trade Structure: High tariffs aim to reduce imports and encourage domestic production, thereby narrowing the trade deficit. However, this approach may have side effects, such as increasing inflationary pressures and provoking retaliatory tariffs from other countries. While trade imbalances may be temporarily alleviated, the growing pains of supply chain restructuring and rising prices are hard to avoid.

2. International Capital Flows: A decrease in U.S. imports means that the flow of dollars overseas is reduced, which may trigger concerns about a "dollar shortage" globally. The decrease in dollar reserves held by overseas trade partners could lead to liquidity tightening in emerging markets, thus altering the global capital flow pattern.

3. US Treasury Supply and Demand: For a long time, the massive trade deficit in the United States has resulted in a large amount of dollars being held overseas, which are typically repatriated to the US through the purchase of US Treasuries. Now, tariffs are reducing the outflow of dollars, which may decrease the ability of foreign investors to buy US Treasuries. However, the US fiscal deficit remains high, and the supply of government bonds continues to increase. Weaker external demand may lead to rising US Treasury yields, increased financing costs, and even the risk of liquidity shortages.

Overall, this tariff policy may have a short-term effect of repairing trade imbalances at a macro level, but it may also weaken the dollar's circulation power globally. This adjustment of the balance sheet is effectively shifting pressure from the trade account to the capital account, with the U.S. Treasury market being the first to bear the brunt. A blockage in macro funds will soon erupt elsewhere, and the Federal Reserve may have to be prepared for countermeasures.

When the supply of overseas dollars tightens due to a cooling trade, the Federal Reserve may have to intervene to alleviate the tension in dollar liquidity. Foreign buyers lacking dollars cannot purchase U.S. Treasuries, which means the Federal Reserve may need to restart its monetary easing policy. In fact, the Fed chairman has recently hinted that quantitative easing (QE) may be restarted soon, with a focus on purchasing U.S. Treasuries. This indicates that officials also recognize that maintaining the operation of the Treasury market relies on additional dollar liquidity injections.

However, this liquidity rescue measure faces a dilemma: on one hand, timely injection of dollar liquidity can stabilize government bond yields and alleviate the risk of market failure; on the other hand, large-scale monetary injection may foster inflation and weaken the purchasing power of the dollar. The supply of dollars shifts from tight to excessive, and the value of the dollar is bound to fluctuate dramatically. It is foreseeable that in this process of "first draining, then releasing water," the global financial market will experience a drastic swing from a strong to a weak dollar. The Federal Reserve must seek a balance between stabilizing the bond market and controlling inflation, but at present, ensuring stability in the government bond market is a top priority, and "printing money to buy bonds" seems to have become a politically inevitable choice.

The signal of the Federal Reserve restarting the money printing machine is almost good news for Bitcoin and other encryption assets. The reason is simple: when the dollar floods the market and the expectation of credit currency depreciation rises, rational capital will seek inflation-resistant reservoirs, and Bitcoin, as "digital gold", attracts much attention. In this macro context, the allure of Bitcoin with its limited supply increases significantly, and its value support logic has never been so clear: as fiat currency continues to "lighten", hard currency assets will "weigh heavier".

Looking back at the situation in 2020, the massive QE by the Federal Reserve is evident in the simultaneous rise of Bitcoin and gold. If there is another round of monetary easing, the encryption market is likely to replay this scenario: digital assets may welcome a new wave of valuation increase. Some analyses suggest that if the Federal Reserve shifts from tightening to printing money for government bonds, Bitcoin may have already bottomed out last month, and will likely rise steadily, with the potential to hit a new high by the end of the year. Although this prediction may be overly optimistic, it reflects the market's strong confidence in the "inflation dividend."

In addition to expectations of price increases, this round of macro changes will also strengthen the narrative of Bitcoin as "digital gold." If the Federal Reserve's easing leads to market distrust in the fiat currency system, the public will be more inclined to view Bitcoin as a store of value against inflation and policy risks, much like how people embraced physical gold during tumultuous times in the past. It is worth mentioning that insiders in the encryption circle have long been accustomed to short-term policy noise. In other words, savvy holders understand that the original intention of Bitcoin's creation was to combat inflation and uncertainty; each instance of money printing and policy missteps further proves the value of holding Bitcoin as an alternative asset insurance.

The significant fluctuations of the US dollar not only impact Bitcoin but also have a profound effect on stablecoins and the DeFi sector. As a dollar substitute in the crypto market, the demand for US dollar stablecoins will directly reflect investors' expectations regarding changes in dollar liquidity. Additionally, the on-chain lending interest rate curve will also change with the macro environment.

In terms of stablecoin demand, regardless of whether the dollar strengthens or weakens, the rigid demand for stablecoins only increases: either due to a lack of dollars seeking alternatives, or due to concerns about fiat depreciation leading to funds being moved on-chain for temporary safety. Especially in emerging markets and regions with strict regulations, stablecoins serve as a substitute for the dollar, and every fluctuation in the dollar system actually reinforces the presence of stablecoins. It is foreseeable that if the dollar enters a new round of depreciation, investors may rely more on stablecoins to rotate their assets within the cryptocurrency space, thereby driving the market value of stablecoins to new heights.

In terms of DeFi yield curves, the tightness of US dollar liquidity will be transmitted to the DeFi lending market through interest rates. During periods of US dollar scarcity, on-chain US dollars become precious, and the borrowing rates for stablecoins soar, causing the DeFi yield curve to steepen. Conversely, when the Federal Reserve’s easing leads to an abundance of US dollars in the market and traditional interest rates decline, the rates for stablecoins in DeFi become relatively attractive, thereby attracting more funds to flow on-chain for yield. Some analyses indicate that under the expectation of the Federal Reserve entering a rate-cutting cycle, DeFi yields are beginning to regain attractiveness, the market size of stablecoins has rebounded to high levels, and the number of active wallets remains stable, showing signs of recovery.

As interest rates decline, more funds may flow into on-chain investments for higher returns, further accelerating this trend. Analysts expect that with the growing demand for encryption credit, the annualized yield of stablecoins in DeFi is likely to rebound to higher levels, surpassing the returns of traditional money market funds. This suggests that DeFi has the potential to offer relatively better yields in a low-interest-rate macro environment, thereby attracting the attention of traditional capital. However, it is important to note that if the Federal Reserve's quantitative easing ultimately triggers rising inflation expectations, the borrowing rates for stablecoins may also rise again to reflect risk premiums.

In summary, the recent tariff policies have triggered macro chain reactions that will profoundly affect all aspects of the encryption market. From macroeconomics to dollar liquidity, and then to Bitcoin trends and the DeFi ecosystem, we are witnessing a butterfly effect: changes in trade policies have sparked a currency storm, and as the dollar fluctuates sharply, Bitcoin is poised for action, while stablecoins and DeFi face both opportunities and challenges in the crevices. For sharp-sensed encryption investors, this macro storm is both a risk and an opportunity.