Analyzing the Global Liquidity Cycle: Implications for Markets

Sunday Nov 2 2025 23:40

Duration

2 min

  1. 1. Key Takeaways

  2. 2. Introduction

  3. 2.1 The End of the Debasement Trade?

  4. 2.2 Drivers of the Debasement Trade

  5. 2.3 Transition to a Privately-Led Economy

  6. 2.4 The Global Liquidity Cycle

  7. 2.5 Debt and Liquidity

  8. 2.6 Bitcoin and Global Liquidity

Key Takeaways

  • Shift from fiscal policy to private sector leadership of the economy.
  • Impact of decreasing government spending and increasing tariffs on liquidity.
  • Necessity of interest rate cuts to stimulate the private sector.
  • Impact of global liquidity cycles on asset allocation.
  • Correlation between Bitcoin and global liquidity cycles.

Introduction

The post-pandemic era has been largely defined by fiscal dominance – an economy driven by government deficits and short-term Treasury bill issuance. However, we are now transitioning into a phase of private sector leadership, where the Treasury is withdrawing liquidity through tariffs and spending constraints. This shift has profound implications for interest rates and financial markets.

The End of the Debasement Trade?

The interest in the "debasement trade" peaked years ago, when Bitcoin was priced at $25,000 and gold at $2,000. Now that this trade is mainstream, we must examine the conditions that created it to determine if they will persist.

Drivers of the Debasement Trade

In our view, two primary factors fueled this trade:
  1. Government Spending: The Biden administration oversaw significant fiscal deficits, injecting liquidity into the economy. However, the "Big Beautiful Bill" will result in spending cuts by reducing Medicaid and Supplemental Nutrition Assistance Program (SNAP) benefits.
  2. Treasury QE: To finance the excessive spending, the Treasury employed a new form of "quantitative easing" (QE), funding government spending through short-term Treasury bills rather than long-term bonds.

Transition to a Privately-Led Economy

As we transition towards a Trump-led economy, the private sector will take the reins from the Treasury. This is why interest rate cuts are necessary – to stimulate the private sector through bank lending. The global liquidity cycle appears to be topping out as we enter this transition.

The Global Liquidity Cycle

Comparing the current cycle to the historical average since 1970, we observe that the current cycle is following a typical pattern. Historically, commodities are the last assets to fall, which we are seeing today in the prices of gold, silver, copper, and palladium. If liquidity is indeed topping out, we can expect investors to rotate into cash and bonds.

Debt and Liquidity

The debt-to-liquidity ratio in major economies reached its lowest level since 1980 at the end of last year. It is now rising and is projected to continue rising through 2026. This makes servicing trillions of dollars in outstanding debt that needs to be refinanced more challenging.

Bitcoin and Global Liquidity

Historically, Bitcoin has foreshadowed the peaking of global liquidity in the past two cycles. In other words, Bitcoin peaked several months before liquidity peaked, signaling a subsequent decline. We do not know if this is happening now, but we do know that the crypto cycle closely follows the liquidity cycle.

Risk Warning: This article represents only the author’s views and is provided for informational purposes only. It does not constitute investment advice, investment research, or a recommendation to trade, nor does it represent the stance of the Markets.com platform. When considering shares, indices, forex (foreign exchange), and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and may not be suitable for all investors. Leveraged products can result in capital loss. Past performance is not indicative of future results. Before trading, ensure you fully understand the risks involved and consider your investment objectives and level of experience. Trading cryptocurrency CFDs and spread bets is restricted for all UK retail clients.

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Written by:

Emma Rose

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