Tether and the Expansion of the M1 Money Supply: A Hidden Economic Threat
The cryptocurrency market has been under scrutiny for its potential to influence global financial systems. Among the most significant players is Tether (USDT), a stablecoin ostensibly pegged 1:1 to the U.S. dollar. However, its issuance process and the assets backing it raise critical concerns about its role in expanding the U.S. M1 money supply — potentially without governmental oversight.
Join our Telegram to get more information about Crypto Trading.
#### **The Mechanism of Expansion**
Tether mints USDT tokens, which are then used across cryptocurrency exchanges to facilitate trading. While these tokens are supposed to be fully backed by reserves, evidence suggests a significant portion of Tether’s holdings includes volatile assets like Bitcoin, rather than cash or cash equivalents.
The cycle works as follows:
1. **Tether issues USDT.**
2. **USDT is used to buy Bitcoin or other assets.**
3. **The rise in Bitcoin’s price increases the value of Tether’s reserves, justifying further issuance.**
This creates a feedback loop, where new USDT issuance drives up Bitcoin’s price, which then “backs” the new issuance. This practice mimics unauthorized money creation, inflating the effective supply of U.S. dollars circulating within the economy.
#### **Impact on the M1 Money Supply**
The M1 money supply includes physical currency and liquid assets like checking deposits. By issuing USDT without direct U.S. dollar backing, Tether effectively injects liquidity into the crypto market, which can be converted into real dollars. This activity expands the M1 supply beyond what is authorized by the Federal Reserve and Congress, undermining the central bank’s control over monetary policy.
#### **Economic Implications**
1. **Inflationary Pressures:**
By expanding the money supply, Tether contributes to inflation. As more USDT enters circulation, it increases demand for assets like Bitcoin, raising their prices and creating wealth effects. This added liquidity can spill over into traditional markets, increasing prices across various sectors.
2. **Market Instability:**
A sudden loss of confidence in Tether could trigger a run on USDT, leading to mass redemptions. If Tether’s reserves cannot cover these redemptions, it could cause a liquidity crisis, forcing fire sales of Bitcoin and other assets, leading to broader market turmoil.
3. **Undermining Monetary Policy:**
The Federal Reserve’s ability to manage the economy through interest rates and money supply controls is weakened when unregulated entities like Tether can effectively create money. This unaccounted expansion disrupts the balance between supply and demand, complicating inflation management.
#### **Legal and Regulatory Concerns**
Tether’s practices raise legal questions. Expanding the M1 supply without Congressional authorization contravenes U.S. monetary regulations. Critics argue that Tether operates as a “shadow central bank,” issuing currency without the backing or oversight required of traditional financial institutions.
### Expanded Analysis: Tether’s Impact on the Global Economy
#### **1. The Tether-Bitcoin Feedback Loop: A Self-Perpetuating Cycle**
The core issue with Tether (USDT) lies in its issuance model. Unlike traditional stablecoins that are fully backed by cash or equivalents, Tether relies heavily on non-liquid assets, including Bitcoin. This introduces a unique feedback loop:
– **USDT Issuance and Bitcoin Purchase:** Large minting of USDT increases demand for Bitcoin as it’s used to back new tokens.
– **Bitcoin Price Surge:** Increased demand artificially inflates Bitcoin’s price, creating more “value” to back the issued USDT.
– **Perpetual Issuance:** The rising Bitcoin price allows Tether to justify further USDT issuance, compounding the loop.
This cyclical process is problematic because it creates the illusion of liquidity and wealth without real, tangible backing. It mimics a Ponzi-like structure where new investments prop up earlier gains, relying on continuous inflow for stability.
—
#### **2. How Tether Expands the M1 Money Supply**
**Unauthorized Expansion:**
The M1 money supply includes cash and liquid assets readily available for transactions. When Tether mints USDT and claims it is backed by U.S. dollars, it adds to the global liquidity pool without any oversight from U.S. regulatory authorities.
**How This Impacts Inflation:**
1. **False Demand Creation:**
USDT increases market liquidity, driving demand for cryptocurrencies and indirectly influencing traditional asset prices.
2. **Circulation of “Shadow Dollars”:**
Although USDT transactions occur mainly in crypto markets, the tokens can eventually be converted into actual U.S. dollars, introducing new cash into the economy.
3. **Fed’s Control Erosion:**
With Tether adding liquidity outside of the Federal Reserve’s purview, traditional monetary controls lose their effectiveness, making it harder to combat inflation.
—
#### **3. Economic Risks of a Tether Collapse**
**Run on Tether:**
If confidence in Tether collapses, users will rush to redeem their USDT for actual dollars. Given its questionable reserves, Tether may not meet these obligations, causing a liquidity crisis.
**Contagion Effect:**
Such a collapse would not be limited to Tether. Bitcoin and other cryptocurrencies heavily tied to USDT liquidity would experience severe price crashes, likely triggering broader financial market instability. The ripple effects could mirror or even surpass the 2008 financial crisis.
—
#### **4. Historical Precedents and Potential Fallout**
**Historical Analogies:**
– **Bank Runs During the Great Depression:**
Tether’s model mirrors the dangers of unbacked banknotes. A sudden loss of trust could lead to a “crypto bank run,” drawing parallels to the Great Depression.
– **2008 Financial Crisis:**
The over-leveraging and lack of real assets in Tether’s reserves resemble the practices of institutions during the subprime mortgage crisis.
**Potential Fallout in 2024+:**
– **Global Economic Instability:**
A collapse of Tether could shake investor confidence across global markets, pulling traditional financial systems into disarray.
– **Inflation Surge:**
If Tether users redeem tokens en masse, the sudden influx of unaccounted dollars into circulation could lead to hyperinflation, destabilizing economies reliant on the U.S. dollar.
—
#### **5. Regulatory and Legal Implications**
**Lack of Oversight:**
Despite being the third-largest holder of Bitcoin and the dominant stablecoin issuer, Tether operates largely in regulatory gray areas. It bypasses central banking systems, allowing it to expand the money supply without Congressional approval.
**Calls for Regulation:**
– **Stablecoin Legislation:**
Financial authorities are urging tighter controls on stablecoins to ensure they are fully backed by cash or liquid assets.
– **Transparency Requirements:**
Tether’s opaque reserve reporting undermines trust. Clear, regular audits could enforce accountability, but to date, Tether has resisted comprehensive external audits.
### **Tether’s Role in Expanding the M1 Money Supply and Its Economic Impact**
Tether (USDT), a stablecoin pegged to the US dollar, has consistently minted large volumes of USDT that align with significant Bitcoin price increases. This issuance raises concerns about unregulated liquidity creation and its broader economic impact, specifically through unauthorized expansion of the M1 money supply.
### **Correlation Between USDT Issuance and Bitcoin Price Spikes**
Here’s a revised analysis of notable instances where Tether minted significant amounts of USDT, followed by rapid Bitcoin price increases:
1. **July 25, 2020 – August 10, 2020**
– **Tether Issuance**: ~$1 billion USDT
– **Bitcoin Price Movement**: Increased from ~$9,300 to ~$11,900 (28% rise)
– **Pattern**: USDT flooded exchanges, increasing BTC demand.
2. **October 21, 2020 – November 25, 2020**
– **Tether Issuance**: ~$1.2 billion USDT
– **Bitcoin Price Movement**: Climbed from ~$11,500 to ~$19,000 (65% rise)
– **Pattern**: Surge in USDT injected liquidity, driving Bitcoin’s upward momentum.
3. **December 18, 2020 – January 8, 2021**
– **Tether Issuance**: ~$2 billion USDT
– **Bitcoin Price Movement**: Jumped from ~$23,000 to ~$41,000 (78% rise)
– **Pattern**: The rapid USDT minting was pivotal in accelerating Bitcoin’s rally.
4. **April 1, 2021 – April 14, 2021**
– **Tether Issuance**: ~$1.5 billion USDT
– **Bitcoin Price Movement**: Rose from ~$59,000 to ~$64,800 (9.8% rise)
– **Pattern**: New USDT fueled the final surge to Bitcoin’s all-time high.
5. **July 20, 2021 – August 23, 2021**
– **Tether Issuance**: ~$1 billion USDT
– **Bitcoin Price Movement**: From ~$29,000 to ~$50,000 (72% rise)
– **Pattern**: Liquidity from USDT again spurred Bitcoin’s recovery.
### **How Tether’s Minting Expands the M1 Money Supply**
Tether claims to back each USDT with equivalent assets, including fiat, cash equivalents, and other reserves such as Bitcoin. However, this creates a problematic feedback loop:
1. **Tether Mints USDT**: USDT is issued supposedly backed by assets, including Bitcoin.
2. **USDT Enters Market**: Traders use USDT to buy Bitcoin, raising its price.
3. **Bitcoin Price Rises**: As Bitcoin’s value increases, Tether’s reserves (which include Bitcoin) appreciate, allowing them to mint more USDT.
4. **Loop Continues**: This cycle drives Bitcoin’s price artificially higher.
### **The Inflationary Effect**
The unauthorized creation of USDT, which is treated as a dollar-equivalent, expands the M1 money supply without oversight from the Federal Reserve or Congressional approval. Here’s how:
– **Increased Liquidity**: New USDT introduces dollar-equivalent liquidity into the financial system.
– **False Demand**: This liquidity fuels speculative trading and inflates asset prices, especially Bitcoin.
– **Inflationary Pressure**: As USDT circulates, it increases the supply of de facto dollars in the economy, reducing the dollar’s purchasing power and contributing to inflation.
### **Economic Risks**
If a sudden loss of confidence or a “run on Tether” were to occur, it could lead to:
– **Massive Liquidations**: A crash in Bitcoin and other cryptocurrencies, as investors rush to convert USDT to fiat.
– **Inflation Spike**: Redeemed USDT would inject more physical dollars into circulation, worsening inflation.
– **Systemic Risk**: The collapse of a key stablecoin like Tether could ripple across global markets, affecting millions.
There are several ongoing investigations and allegations that point toward potential fraud and regulatory violations involving Tether, the issuer of USDT, the largest stablecoin.
1. **Regulatory Fines and Misrepresentation**: Tether was fined $41 million by the Commodity Futures Trading Commission (CFTC) in 2021 for falsely claiming that USDT was fully backed by U.S. dollars. Instead, it was often only partially backed by cash and other reserves like commercial papernking and Transparency Issues**: There are longstanding concerns about Tether’s banking relationships and its reserve transparency. In the past, it had trouble maintaining reliable banking partners, which raises questions about the accessibility of its reserves during financial stress .
3. **Pctions and Money Laundering**: U.S. authorities are investigating whether Tether facilitated transactions involving sanctioned entities and criminal organizations. The Manhattan U.S. Attorney’s Office is examining whether Tether was used for illicit activities such as drug trafficking and terrorism financing.
4. **Rt Manipulation**: A 2022 study suggested that Tether could be used to manipulate the price of Bitcoin and other cryptocurrencies, given its ability to mint large amounts of USDT without clear reserve backing .
Tether and the Expansion of the M1 Money Supply: was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.