After dismissing Bitcoin as a scam during his first White House stint, Trump warmed to cryptocurrencies during his re-election campaign. To complete his conversion, on the 6th of March the 47th President signed an executive order to set up a “Strategic Bitcoin Reserve and a US Digital Asset Stockpile”.
The United States government sensibly stockpiles a number of materials that it may need during an emergency, including oil, military gear, medical supplies and, of course, gold. But, if you own the printing presses of the world’s reserve currency, what’s the point of hoarding – on some government owned hard drive – crypto currencies lacking any intrinsic utility? Especially if you have constrained yourself, as Trump has done in the aforementioned executive order, never to sell the crypto you stashed away? The logic of strongarming the Federal Reserve to create a crypto stash, as in the case of every Trump pronouncement, is one part self-serving bluster, one part trolling of his opponents but, also, one part strategy.
The self-serving bluster part was made painfully obvious as Donald and Melania Trump pocketed tens of millions of dollars from the otherwise pointless meme-coins they issued three days before his inauguration. The trolling of his opponents part was also on display as he was signing the executive order forcing the Fed to hold and maintain a cryptocurrency reserve. While ceremoniously putting his exorbitant signature on the order’s dotted line, he beamed with the grin of a cheeky peasant who had just broken into the Baron’s pristine drawing room, spoiling the splendour of its Persian rugs with his muddied boots. That’s how Democrats and mainstream Republicans felt watching Trump elevate the crypto currencies favoured by libertarians, cranks and criminals to the lofty status previously reserved for solid gold and US Treasury bills.
However, in the midst of this cacophony of creepy profiteering, triumph and despair, it is easy to lose sight of the interesting role that Trump’s strategic crypto reserve plays in his broader economic masterplan. And that would be our mistake. Trump’s economic team has a two-pronged strategy by which to recast the global economic order in America’s long-term interests: To devalue the dollar while maintaining its global dominance.
This seemingly contradictory strategy, that would boost US exports (as the dollar becomes cheaper) while pushing down the US government’s borrowing costs (as foreign wealth piles into US long-term debt) is intended to extend US hegemony while also bringing back manufacturing to America. Tariffs, in this context, are the chief weapon by which to pressurise America’s friends and foes to unload their dollar speculative holdings while also buying even more long-dated US Treasury bills.
Be that as it may, what does crypto have to do with any of this? To get a whiff of the answer, take the case of Japanese institutions that hold in excess of $1 trillion of dollars, the result of decades of Japanese net exports to the United States. To drive the dollar down, but avoid strengthening the pretensions to reserve currency status of either the euro or China’s renminbi up, Trump would like to bully Tokyo to dump most of these dollars in the money markets but not convert them into euros or renminbi. What could do the trick? How about convincing, with an element of strongarming, the Japanese to swap their dollars for crypto? That would work, especially if the Federal Reserve dominated the crypto scene. What else could Trump have meant, in the text of his 6th March executive order, when commenting that, while the US already owns considerable crypto assets (the result of confiscations), it “has not maximized its strategic position as a unique store of value in the global financial system”?
More intriguingly, four days later, on the 10th of March, Trump endorsed stablecoins, going out of his way to express his “strong support for the efforts of lawmakers in Congress as they work on bills to provide regulatory certainty for dollar-backed stablecoins and the digital assets market.” In so doing, he added a fascinating new dimension to the idea of forcing non-American institutional investors into moves that serve his economic masterplan.
What are these stablecoins and why does Trump’s economic team look at them as particularly promising tools in the pursuit of their twin strategy? Stablecoins are, by design, a contradiction in terms. The whole point of Bitcoin, the first cryptocurrency, was to stick it to the man – to central bankers and their fiat currencies, the dollar chiefly. But, confusingly, stablecoins are marketed as crypto versions of the dollar. For example, Tether (USDT), USD Coin (USDC) and Binance USD (BUSD) are dollar-denominated crypto currencies that offer you the anonymity, versatility and universality of Bitcoin while also claiming to guarantee full convertibility to the dollar on a one-for-one basis. Indeed, some of the world’s largest banks and non-bank financial institutions are scrambling to launch stablecoins, hoping to capture a slice of a cross-border payments market. Last month, Bank of America signalled it was working on such a stablecoin, following the example of PayPal, Revolute, Stripe and many others.
What makes stablecoins of particular interest to Trump is their promise to keep their value tethered to the dollar. But, how can they promise this and is their promise credible? In theory, this promise can be met if the stablecoin issuer holds, in some vault, one dollar for every token it issued. But, of course, holding zero-interest bearing dollars in a vault would be anathema to any self-respecting financier. So, even if the stablecoin issuer truly owns an equal amount of dollars to the tokens it has issued, it will immediately trade these dollars for some safe, interest-bearing, dollar-denominated asset – like 10-year US Treasury Bills. This way the issuer is true to their word of backstopping their tokens with real bucks while, at the same time, earning interest. It is an arrangement after Donald Trump’s heart and, I believe, at the centre of the idea of his strategic crypto reserve.
By setting up a US crypto reserve containing dollar-backed stablecoins, the US authorities are signalling to dollar-holding foreign dollar holders that the US government is endorsing their ownership of these coins. During the negotiations that Trump plans to have with various governments, with tariffs dangling like a Damocles sword above their head, subtle hints will be dropped that the President will be mightily pleased were foreign investors to buy these stablecoins using their own dollars. If they do buy them, the dollar supply will increase, the dollar exchange rate will dip, no other fiat currency will emerge as a potential suitor to the dollar’s reserve currency status, and dollar-denominated stablecoins will rise in value. As these tokens will now be worth more than a dollar, their issuer will have an incentive to issue more tokens to restore the one-to-one exchange rate with the dollar. In the process, they will buy, with proceeds from the additional tokens they issue and sell, more long-dated US Treasuries to backstop their increased token supply. Bingo! Trump’s twin strategy is served: the dollar will have devalued while demand for long-term US government debt will rise, thus pushing down US Treasury yields and his government’s debt servicing costs.
Upon hearing this, deafening alarm bells should be sounding in our heads. For if this strategy works, and stablecoins become a pillar of the New Hegemony Trump envisages, a timebomb will have been planted in the foundations of the global monetary system. Monetary history is littered with the corpses of outfits guaranteeing the convertibility of some newfangled currency with a time-honoured store of value. The Gold Standard itself was such a scheme, the post-war Bretton Woods system another.
Take Bretton Woods as an example, the Gold Standard’s last evolution and a system whose functioning coincided with capitalism’s Golden Age – the 1950s and 1960s. The idea was that the West’s currencies would be tethered, with fixed exchange rates to the dollar. Moreover, the dollar itself would be anchored to gold at a fixed conversion rate of $35 to an ounce of the magic metal. As long as the US remained a surplus economy, exporting to Europe and Japan goods and services of great dollar value than that of its imports, the system worked fine: America’s surplus dollars were sent to Europe and Japan (in the form of aid, direct investment and loans) and were recycled back to the US with every Boeing jet or Westinghouse refrigerator that European and Japanese customers purchased using the dollars that had come their way.
Alas, by the late 1960s, this recycling system broke down irreparably. The US had turned into a deficit economy, which meant that it began continually to flood Europe and Japan (later China too) with more and more dollars minted to finance US net imports. As long as non-Americans were happy to hoard their dollars, there was no problem. But, the more dollars they had the more sceptical they became that the US government would honour its promise to hand over an ounce of gold to anyone with $35: the makings of a run on gold. Indeed, when several runs on America’s gold took place (the most famous of which involved a French naval vessel arriving in New Jersey laden with greenbacks, to be converted into Fort Knox gold), President Nixon tore up the Bretton Woods agreement, ended the dollar’s convertibility to US government gold and messaged the Europeans, in Trumpian style, “the dollar is our currency but it is your problem”.
So, here is the point: If the mighty US Empire, at the height of its world hegemony, could not honour the fixed conversion rate (of $35-to-one-ounce-of-gold) that was the feted postwar financial system’s anchor, what gives us the confidence to imagine that a private outfit, like Tether or Binance, can do it sustainably? Nothing! Indeed, logic dictates the opposite because of the structure of the incentives Trump is planting with his strategic crypto reserve. Think about it: The more dollars go into stablecoins, the lower the yields on US Treasury bills and the stronger the stablecoin issuers’ incentives to invest in riskier assets – even to issue additional tokens without backing them with additional dollar-denominated safe assets. The more this goes on, the greater the reliance of the US government, and of the global monetary system, on privateers acting responsibly when their incentives are to act less responsibly. Does this classic case of moral hazard remind you of anything? If not, watch The Big Short again!
Note: The above article is best read in conjunction with my earlier op-ed on Trump’s Economic Masterplan
For the UNHERD site where it was first published, click here.
