Is global liquidity running out?

Written by: Michael Nadeau

Compilation: Vernacular Blockchain

The post-pandemic era has been defined by fiscal dominance—a government deficit-driven economy fueled by short-term bond issuance, where liquidity remains high even as the Federal Reserve maintains high interest rates.

Today, we are entering a phase dominated by the private sector, and compared to the previous government, the Ministry of Finance is reclaiming liquidity through tariffs and spending restrictions.

This is why interest rates need to be lowered.

We analyze the current cycle from the perspective of global liquidity to emphasize why this round of “devaluation trading” has reached its final stage.

Is the era of fiscal dominance coming to an end?

We always hope to “buy the dip” when everyone is “chasing the rise.”

This is why the recent discussions about “devaluation trading” have caught our attention.

Data: Google Trends

We believe that the right time to be interested in “devaluation trading” was a few years ago. At that time, the price of Bitcoin was $25,000, and the price of gold was $2,000. Back then, no one was talking about it except for cryptocurrency and macro analysts.

In our view, this “transaction” is basically complete.

Therefore, our job is to understand the conditions that created it and whether those conditions will continue to exist.

What drove this transaction? In our view, there are mainly two factors.

1. Department of Treasury expenditures. During the Biden administration, we implemented large-scale fiscal deficits.

Data: US Treasury

The fiscal year 2025 has just ended, and the deficit has slightly decreased - mainly due to increased tax revenue (tariffs) rather than reduced spending. However, the Big Beautiful Bill is expected to achieve spending cuts by reducing benefits for Medicaid and the Supplemental Nutrition Assistance Program (SNAP).

Data: Comparison of KFF (Kaiser Family Foundation) reductions with current spending trajectories

During Biden's administration, government spending and transfer payments continuously injected liquidity into the economy. However, under the “Great American Plan,” spending growth has slowed.

This means that the funds the government injects into the economy have decreased.

In addition, the government is extracting funds from the economy through tariffs.

Data: FRED (Federal Reserve Economic Data)

The combination of spending restrictions (compared to the previous administration) and increased tariffs means that the Treasury is now absorbing liquidity rather than supplying it.

This is the reason we need to cut interest rates.

“We will re-privatize the economy, revitalize the private sector, and reduce the government sector.” - Scott Bessent (Scott Bessent)

2. “Treasury QE”. In order to fund the excessive spending of the Treasury under the Biden administration, we have also seen a new form of “Quantitative Easing” (QE). We can observe this below (black line). “Treasury QE” funds government spending through short-term securities rather than long-term bonds, thereby supporting the market.

Data: Global Liquidity Index

We believe that it was fiscal spending and the quantitative easing by the Ministry of Finance that drove the formation of the “devaluation trade” and the “everything bubble” that we have seen in the past few years.

But now we are transitioning to the “Trump economy,” with the private sector taking over the baton from the Treasury.

Similarly, this is also the reason they need to cut interest rates. To stimulate the private sector through bank loans.

As we enter this transitional period, the global liquidity cycle seems to be peaking…

The global liquidity cycle is nearing its peak and beginning to decline.

Current Cycle and Average Cycle

Below, we can observe the comparison between the current cycle (red line) and the historical average cycle (gray line) since 1970.

Data: Global Liquidity Index

Asset allocation

Based on Mr. Howell's work on the global liquidity index, we can observe the typical liquidity cycle and its fit with asset allocation.

Commodities are often the last assets to decline, which is exactly what we are seeing today (gold, silver, copper, palladium).

From this perspective, the current cycle looks very typical.

Data: Global Liquidity Index

So, if liquidity is indeed peaking, we expect investors to rotate into cash and bonds as the environment changes. It is important to clarify that this part of the process has not yet begun (the market is still “risk-on”).

Debt and Liquidity

According to the global liquidity index, the debt-to-liquidity ratio of major economies reached its lowest level since 1980 at the end of last year. It is now rising and is expected to continue to climb until 2026.

Data: Global Liquidity Index

The rise in debt and liquidity ratios has made it more difficult to service the trillions of dollars of outstanding debt that needs refinancing.

Data: Global Liquidity Index

Bitcoin and global liquidity

Of course, Bitcoin has “signaled” the peak of global liquidity in the past two cycles. In other words, Bitcoin reached its peak a few months before the liquidity peak declined, seemingly anticipating the subsequent drop.

Data: Global Liquidity Index

We do not know if this is happening right now. But we do know that cryptocurrency cycles have always closely followed liquidity cycles.

Fit with the cryptocurrency cycle

Data: Global Liquidity Index