MarketsOpinionBitcoin
|7 min ReadIs Global Liquidity Running Out?
Lucca Menezes
Senior Analyst
Published
Jan 16, 2026
The post-pandemic era has been defined by fiscal dominance—a period where government deficits and short-term treasury issuance have driven the economy. Even with the Federal Reserve maintaining high interest rates, liquidity has remained high. But now, we are entering a phase driven by the private sector. Compared to the previous administration, the Treasury is now pulling liquidity back into the system through tariffs and spending restrictions.
This is why interest rates need to come down.
In this analysis, we look at the current cycle from the perspective of global liquidity, emphasizing why this current round of "devaluation trades" is nearing its end.
Is Fiscal Dominance Coming to an End?
We always want to "buy the dip" when everyone else is "chasing the rally." That’s why we’ve been paying attention to the recent discussions around "devaluation trades."
According to Google Trends, interest in this trade peaked a few years ago, when Bitcoin was at 2,000. At that time, only cryptocurrency enthusiasts and macro analysts were talking about it.
In our view, this "trade" has largely played out. Our focus now is on understanding the conditions that created it and whether those conditions will persist.
What drove this trade? In our view, two main factors:
Treasury Spending: During the Biden administration, we saw massive fiscal deficits.
In FY 2025, the deficit slightly decreased—primarily due to higher taxes (tariffs) rather than a reduction in spending. However, the Big Beautiful Bill is expected to achieve spending cuts through reductions in Medicaid and SNAP (Supplemental Nutrition Assistance Program).
During Biden’s term, government spending and transfers continuously injected liquidity into the economy. But with the Big Beautiful Bill, spending growth will slow down. This means the funds the government is pushing into the economy will decrease.
Moreover, the government is now pulling funds out of the economy through tariffs.
This combination of spending restrictions (compared to the previous administration) and increased tariffs means the Treasury is now absorbing liquidity, not supplying it.
This is why we need interest rate cuts.
“We’re going to privatize the economy, revive the private sector, and shrink the government sector.” - Scott Bessent
Treasury QE (Quantitative Easing): To fund the excessive spending during Biden’s administration, we saw a new form of "quantitative easing" (QE). This is observable in the data (black line). Treasury QE funded government spending through short-term bills rather than long-term bonds, supporting the market.
We believe it was Treasury spending and Treasury QE that drove the "devaluation trade" and the "everything bubble" we’ve seen over the past few years.
But now, we are transitioning to a "Trump economy," where the private sector is taking over the baton from the Treasury.
This is also why they need to cut interest rates: to stimulate the private sector through bank lending.
As we enter this transition, the global liquidity cycle seems to be peaking.
Global Liquidity Cycle: Peaking and Reversing
Current Cycle vs. Historical Averages
Below, we can compare the current cycle (red line) with the historical average cycle since 1970 (gray line).
Asset Allocation
Based on Mr. Howell’s work on the Global Liquidity Index, we can see the typical liquidity cycle and how it aligns with asset allocation.
Commodities tend to be the last asset class to decline, which is exactly what we’re seeing today (gold, silver, copper, palladium).
From this perspective, the current cycle looks very typical.
This suggests that, if liquidity is indeed peaking, investors will rotate into cash and bonds as the environment changes. It’s important to note 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 for major economies hit its lowest level since 1980 by the end of last year. It is now rising and is expected to continue increasing until 2026.
The rising debt-to-liquidity ratio makes it more difficult to service trillions of dollars of debt that needs refinancing.
Bitcoin and Global Liquidity
Of course, Bitcoin has "predicted" global liquidity peaks in the past two cycles. In other words, Bitcoin has historically peaked a few months before global liquidity peaked, seemingly anticipating the subsequent decline.
We don’t know if this is happening right now, but we do know that cryptocurrency cycles have closely followed liquidity cycles.
Alignment with Cryptocurrency Cycles
Conclusion: The Future of Global Liquidity
The global liquidity cycle seems to be reaching its peak, and as we transition into a more private-sector-driven economy, liquidity is expected to tighten. This will shift market dynamics, and investors are likely to rotate into safer assets such as cash and bonds. As liquidity begins to retreat, we may witness a shift in financial markets, with debt servicing becoming more difficult and higher debt-to-liquidity ratios. The rise of Bitcoin’s correlation with liquidity cycles also suggests a deeper connection between crypto markets and traditional financial liquidity shifts. This shift could mark the beginning of a new era for investors to rethink their strategies in the coming months.
Disclaimer: This document is intended for informational and entertainment purposes only. The views expressed in this document are not, and should not be taken as, investment advice or recommendations. Recipients should do their own due diligence, taking into account their specific financial circumstances, investment objectives and risk tolerance, which are not considered here, before investing. This document is not an offer, or the solicitation of an offer, to buy or sell any of the assets mentioned.