Arthur Hayes Token 2049 Speech: Global Changes, from 'America First' to Systemic Crisis in the Eurozone Since Trump ascended to the throne of "American hegemony" in 2016, his core policy has always revolved around "America First". What does this mean? It means reversing the surplus and deficit patterns among countries. For a long time, the Trump administration has been tired of the model where the United States is financed by other countries in the world, and these countries in turn hold assets in the United States. He believes that American companies should be able to export products and profit from competition with countries such as Germany and Japan. Therefore, the implementation of the "America First" policy is actually closing the huge export market of the United States. This shift has forced traditional export-oriented countries such as Germany and Japan to adopt corresponding "Germany First" and "Japan First" policies in response. They need to repatriate their savings and capital from overseas to cope with the closure of the US market. The direct consequence of this move is that these countries will no longer be able to provide financing to deficit countries like France and even the United States as they have in the past. The French Crisis: The Truth About Capital Flight In the European financial system, there is a key indicator - Target Balance. The European Central Bank releases the net balance of the Target system every month, which reflects the flow of capital within the eurozone. Taking France as an example, at the beginning of 2021, France still had a surplus, indicating capital inflows. But if we compare the changes in 2021 with the present, we will find that capital is flowing out of the French banking system on a large scale. Data shows that France's capital outflow situation is the most severe in the entire eurozone. French depositors and capital holders have clearly lost confidence in their country's financial system and are unwilling to place their funds in French banks, instead transferring the euro to Germany, Luxembourg, and other places. As this situation worsens, France may have to resort to measures such as capital controls to address imbalances in the future. So, what exactly is the Target balance? It is essentially a centralized clearing system operated by the European Central Bank, aimed at enabling the smooth operation of the eurozone with approximately 17-18 different central banks. Through this system, countries such as Germany and France can generate surpluses and deficits with each other without the need for each country's central bank to establish bilateral accounts with all other central banks. To understand the essence of the Target system, one can think of it this way: if a eurozone country exits the eurozone and re values its currency as its own currency, such as the franc or German mark, would investors be willing to hold that currency? If a country has a deficit and gradually loses its financing capacity, it may adopt capital controls. Rational capital would choose to transfer funds to powerful countries like Germany while the euro is still freely flowing, as Germany is the wealthiest and most stable country in the eurozone. The deterioration of Target's balance is like a canary in a coal mine, indicating the unease of domestic capital in France towards the system. The French people have expressed their distrust in the most direct way through fund transfers. *Note: Target balances in the financial sector specifically refer to the debt or credit balances formed by central banks of Eurozone countries through the pan European real-time full automatic clearing system (TARGET2) in cross-border payments within the Eurozone system. The dilemma of the European Central Bank and Lagarde's role As the President of the European Central Bank, Christine Lagarde is jokingly referred to as the "Crocodile Countess". She is a lawyer from France, but ultimately held the highest position at the European Central Bank. Her responsibility is not to respect the will of the people of the eurozone countries, but to maintain the control of the European Central Bank over each member state. Looking back at the 2011-2012 Greek debt crisis and elections in other eurozone countries, we can see the consistent style of action of the European Central Bank: it issued an ultimatum to governments - 'If you don't do what we say, we won't print money to buy your bonds anymore.' This will directly lead to government bankruptcy, currency depreciation, and inability to purchase oil, food, and medicine. The underlying message is: "Shut up, vote for that obedient political party, and we will continue to provide financing Lagarde achieved this control by controlling the printing press. Since the outbreak of COVID-19, the European Central Bank has maintained a relatively tight monetary policy. They set rules such as' the fiscal deficit must not exceed 3% of GDP '. If a country's spending exceeds the standard, the European Central Bank will threaten to stop supporting its bond market until the country passes an "acceptable" budget. This has brought huge challenges to domestic politicians in various countries, especially Macron in France. Macron's desperate situation and the inevitable choice of the government French President Macron is in a dilemma. On the one hand, the French people expect more social welfare and demand that the government increase spending. On the other hand, the European Central Bank strongly opposes and demands fiscal tightening, otherwise it will cut off financial support. This contradiction has evolved into a constitutional crisis. In the past year, two French prime ministers have stepped down due to the failure to pass the budget. Whenever the government suggests implementing austerity policies or cutting government spending, it immediately triggers large-scale street protests and strikes. The voice of the people is very clear: "We don't want austerity. We want to print money for France, for ourselves. We don't care what the European Central Bank or Brussels say This has put Macron in an unsolvable predicament. What does a government do first when faced with the pressure to fill a fiscal hole? The answer is: stealing foreign assets. This is not an exaggeration. Although France claims to be a capitalist country that respects property rights, plundering foreign wealth is always the first choice when the country's solvency is threatened. Data shows that 53% of French stocks and bonds are held by foreigners. As a Communist Party leader in the French parliament said a few months ago, "Don't worry about us increasing taxes on the French people. All our debts are owed to foreign countries, we just need to take their money first This behavior will trigger a chain reaction. Firstly, plundering foreign assets will scare away domestic capital, forcing the government to implement stricter domestic capital controls. Ultimately, private capital remaining within France will be forced to purchase government bonds at interest rates that the government can afford, which is by no means the optimal choice for capital holders. Systemic Risk and the Future of Global Money Printing France's actions of seizing foreign assets or implementing capital controls will have catastrophic consequences. Firstly, this will directly lead to the bankruptcy of the entire EU banking system. Due to the large amount of French assets held by EU banks, France's default behavior will trigger a systemic collapse. It is estimated that the European Central Bank will need to provide a massive bailout of approximately 5 trillion euros to ensure the solvency of the EU banking system. Secondly, the crisis will quickly spread globally. What will the Bank of Japan do when it discovers that its hundreds of billions of dollars in investments are trapped in France? What will the Federal Reserve do when the United States faces the same situation? They will all be forced to print money to rescue the financial institutions in their countries that have provided loans to France. Therefore, this localized crisis in Europe will become the trigger for a new round of large-scale money printing worldwide. To understand how all of this will happen, we must continue to monitor the changes in the Target 2 system. Once France sets a precedent for capital controls, all investors will ask, 'Who is next?' Capital will flee wildly from all other fragile eurozone countries. No country's people would accept a budget deficit ceiling of only 3% when they crave more government spending rather than less. In the end, the problem fell on Germany. What choices will they make? Should we continue to stay in the eurozone and pay for all of this, or choose to exit? This is a political decision full of uncertainty, and what investors dislike the most is this binary opposition political game. For the European Central Bank, the so-called "choice" it faces is actually a false proposition: Now printing money: accept the fiscal expansion of countries, restart quantitative easing (QE), and buy bonds of countries. This means handing over power to politicians in various countries and the European Central Bank losing control. In the future, printing money: waiting for France to threaten Brexit and seize foreign assets, then being forced to print 5 trillion euros for rescue and restart QE for the remaining countries. The result is also losing control. The conclusion is obvious: the euro is fundamentally a failure, but it took us 30 years to realize this fact. The European Central Bank has no choice, they will eventually print money. Without printing money, the euro will undoubtedly die; Printing money, Lagarde and her successors may still be able to maintain their rule over Europe. Investment Inspiration: Escape from Europe and Embrace Real Assets From an investment perspective, historical data clearly illustrates the predicament of European assets. Since the COVID-19 epidemic, the performance of the Euro Stoxx index is not only inferior to the MSCI global stock index, but also a mess compared with real hard assets such as gold and Bitcoin. Seeing this information, combined with the fact that domestic capital in France has fled, it is difficult to find a reason to continue holding European assets. The conclusion is very clear: leave as soon as possible while you can still exit. The most important observation tool is still the balance of the Target system. It is a core indicator for determining when the European Central Bank is forced to print money. Just check the Target balances of each country on the European Central Bank website or Bloomberg system every month to gain insight into the most authentic capital flows. As France's funding gap continues to widen, the European Central Bank has no way out. In fact, the European Central Bank has exhausted all options. France is too large to be rescued and cannot be ignored. Once French capital escapes to a critical point, it will be impossible to maintain stability through local measures, and the only response will be large-scale printing of money. Whether France really withdraws from the euro or not, the outcome will be the same: trillions of euros will be created out of thin air. This is particularly important for cryptocurrency investors. Because the United States is changing the global order and reversing the pattern of surplus and deficit. Deficit countries will turn into surpluses, and surplus countries will turn into deficits. And countries like France do not hold reserve currencies, their bonds lack buyers, and can only rely on central banks to print money. For investors, this means that European assets will lack attractiveness in the long term, and the importance of Bitcoin and other decentralized assets will be further highlighted.