The U.S. Will Weaponize The Dollar By Backing It With Bitcoin

If Tether is true to their word and continues to back USDT with U.S. government debt, we could see a scenario in the near future where 80% of the overall stablecoin market is backed by U.S. federal government debt. Is this how the U.S. finds a service to the unwinding petrodollar system?Interestingly, the U.S. needs to find a solution to its financial obligation issues, and quickly. Would the U.S. strongly raising rates lead to a capital flight to the U.S., a nation that has a comparatively much healthier banking system than its rivals in China, Japan and Europe?(Source)I do think its intriguing that by some metrics the U.S. banking system is revealing comparatively fewer indications of tension than in Europe or the rest of the world, validating the thesis that SOFR is insulating the U.S. to a degree. As mentioned earlier, the money making of bitcoin not only assists the U.S. economically, but it also straight injures our monetary rivals, China and to a lesser degree, Europe– our expected ally.Will the U.S. understand that backing the dollar with energy directly harms China and Europe?

This is a viewpoint editorial by Luke Mikic, a writer, podcast host and macro analyst.This is the 2nd part in a two-part series about the Dollar Milkshake Theory and the natural progression of this to the “Bitcoin Milkshake.” In this piece, well check out where bitcoin fits into an international sovereign debt crisis.The Bitcoin Milkshake TheoryMost people think the money making of bitcoin will most harm the United States as its the nation with the existing international reserve currency. I disagree. The monetization of bitcoin benefits one nation disproportionally more than any other country. Like it, invite it or prohibit it, the U.S. is the country that will benefit most from the monetization of bitcoin. Bitcoin will help to extend the life of the USD longer than numerous can conceive and this post discusses why.If we progress on the assumption that the Dollar Milkshake Thesis continues to decimate weaker currencies around the world, these countries will have a decision to make when their currency goes through hyperinflation. A few of these countries will be required to dollarize, like the more than 65 countries that are either dollarized or have their regional currency pegged to the U.S. dollar. Some may pick to adopt a quasi-gold standard like Russia recently has. Some may even choose to embrace the Chinese yuan or the euro as their regional circulating medium and system of account. Some regions could copy what the shadow federal government of Myanmar have done and adopt the Tether stablecoin as legal tender. But most notably, some of these nations will adopt bitcoin.For the nations that might embrace bitcoin, it will be too volatile to use and make economic computations as an unit of account when its still so early in its adoption curve.(Source)Despite what the consensus story is surrounding those who state, “Bitcoins volatility is reducing because the institutions have gotten here,” I strongly think this is not a take rooted in truth. In a previous post written in late 2021 analyzing bitcoins adoption curve, I laid out why I believe the volatility of bitcoin will continue to increase from here as it takes a trip through $500,000, $1 million and even $5 million per coin. I believe bitcoin will still be too volatile to utilize as a true system of account till it breaches eight figures in todays dollars– or when it soaks up 30% of the worlds wealth.(Source)For this factor, I believe the countries who will adopt bitcoin, will also be required to adopt the U.S. dollar particularly as a system of account. Countries adopting a bitcoin standard will be a Trojan horse for continued worldwide dollar dominance. Put aside your opinions on whether stablecoins are shitcoins for just a 2nd. With current developments, such as Taro bringing stablecoins to the Lightning Network, imagine the possibility of moving stablecoins around the world, instantly and for almost absolutely no fees.The Federal Reserve of Cleveland seems to be paying very close attention to these advancements, as they recently released a paper entitled, “The Lightning Network: Turning Bitcoin Into Money.”Zooming out, we can see that since March 2020, the stablecoin supply has actually grown from under $5 billion to over $150 billion. (Source)What I discover most intriguing is not the rate of development of stablecoins, but which stablecoins are growing the fastest. After the recent Terra/LUNA fiasco, capital ran away from whats viewed to be more “risky” stablecoins like tether, to more “safe” ones like USDC. (Source)This is since USDC is 100% backed by money and short-term debt.BlackRock is the worlds largest asset supervisor and recently headlined a $440 million fundraising round by purchasing Circle. It wasnt simply a financing round; BlackRock is going to be acting as the primary possession supervisor for USDC and their treasury reserves, which is now nearly $50 billion.(Source)The abovementioned Tether seems following in the steps of USDC. Tether has long been slammed for its opaqueness and the reality its backed by risky commercial paper. Tether has been considered as the uncontrolled offshore U.S. dollar stablecoin. That being said, Tether offered their riskier commercial paper for more beautiful U.S. government financial obligation. They also consented to undergo a complete audit to improve transparency. If Tether is true to their word and continues to back USDT with U.S. government financial obligation, we could see a situation in the future where 80% of the total stablecoin market is backed by U.S. federal government debt. Another stablecoin provider, MakerDao, also capitulated today, purchasing $500 million government bonds for its treasury. It was important that the U.S. dollar was the main denomination for bitcoin during the first 13 years of its life during which 85% of the bitcoin supply had been launched. Network effects are hard to change, and the U.S. dollar stands to benefit most from the proliferation of the general “crypto” market. This Bretton Woods III framework correctly describes the problem facing the United States: The country requires to find somebody to purchase their debt. Many dollar doomsayers presume the Fed will have to monetize a lot of the debt. Others say that increased policies are on the method for the U.S. commercial banking system, which was regulated to hold more Treasurys in the 2013-2014 age, as countries like Russia and China started divesting and slowing their purchases. However, what if a proliferating stablecoin market, backed by government debt, can help absorb that lost need for U.S. Treasurys? Is this how the U.S. discovers an option to the relaxing petrodollar system?Interestingly, the U.S. needs to find an option to its debt problems, and quick. Nations around the world are racing to escape the dollar-centric petrodollar system that the U.S. for decades has actually had the ability to weaponize to entrench its hegemony. The BRICS countries have actually revealed their intentions to create a brand-new reserve currency and there are a host of other countries, such as Saudi Arabia, Iran, Turkey and Argentina that are applying to become a part of this BRICS collaboration. To make matters worse, the United States has $9 trillion of debt that develops in the next 24 months. Who is now going to buy all that debt?The U.S. is as soon as again backed into a corner like it was in the 1970s. How does the nation protect its nearly 100-year hegemony as the global reserve currency issuer, and 250-year hegemony as the worlds dominant empire?Currency Wars And Economic Wild CardsThis is where the thesis becomes a lot more speculative. Why is the Fed continuing to aggressively raise rates of interest, bankrupting its expected allies like Europe and Japan, while apparently sending the world into a global depression? “To battle inflation,” is what were told.Lets explore an option, possible reason the Fed might be raising rates so strongly. What alternatives does the U.S. need to safeguard its hegemony? In a world presently under a hot war, would it appear so far-fetched to speculate that we could be going into a financial cold war? A war of reserve banks, if you will? Have we ignored the “weapons of mass damage?” Have we forgotten what we did to Libya and Iraq for attempting to route around the petrodollar system and stop using the U.S. dollar in the early 2000s? (Source)Until six months earlier, my base case was that the Fed and reserve banks around the world would act in unison, pinning rates of interest low and utilize the “monetary repression sandwich” to pump up away the globes unsustainable and huge 400% debt-to-GDP ratio. I expected them to follow the economic blueprints set out by two financial white documents. The very first one released by the IMF in 2011 entitled, “The Liquidation Of Government Debt” and then the second paper released by BlackRock in 2019 titled, “Dealing With The Next Downturn.”I also expected all the reserve banks to operate in tandem to approach carrying out central bank digital currencies (CBDCs) and working together to execute the “Great Reset.” When the data modifications, I alter my opinions. Given that the creepingly collaborated policies from federal governments and main banks around the globe in early 2020, I think some countries are not so aligned as they once were. Until late 2021, I held a strong view that it was mathematically impossible for the U.S. to raise rates– like Paul Volcker performed in the 1970s– at this phase of the long-lasting debt cycle without crashing the international financial obligation market.Debt held by the public is almost as high as times during WWIIBut, what if the Fed wants to crash the worldwide debt markets? What if the U.S. acknowledges that a strengthening dollar causes more pain for its worldwide rivals than on their own? What if the U.S. acknowledges that they would be the last domino left standing in a cascade of sovereign defaults? Would collapsing the international debt markets cause hyperdollarization? Is this the only economic wild card the U.S. has up its sleeve to prolong its reign as the dominant worldwide hegemon?(Source)While everyone is waiting for the Fed pivot, I think the most crucial pivot has actually already occurred: the Dalio pivot.(Source)As a Ray Dalio disciple, Ive developed my whole macroeconomic framework on the concept that “cash is trash.” I believe that mantra still applies for anyone using any other fiat currency, however has Dalio came across some new information about the USD that has actually altered his mind?Dalio composed a sensational book “The Changing World Order: Why Nations Succeed or Fail” that information how wars happen when worldwide empires clash. (Source)Has he concluded that the United States could be ready to weaponize the dollar, making it not so trashy? Has he concluded that the U.S. isnt going to willingly enable China to be the worlds next rising empire like he as soon as announced? Would the U.S. aggressively raising rates cause a capital flight to the U.S., a nation that has a relatively healthier banking system than its competitors in China, Japan and Europe? Do we have any proof for this extravagant left-field, theoretical scenario?Lets also not forget, this is not just a race with the United States versus China. The second-most utilized foreign currency in the world– the euro– probably would not mind gaining power from a decreasing U.S. empire. We need to ask the question, why is Jerome Powell declining to align financial policies with one of our closest allies in Europe?(Source)In this illuminating 2021 webinar, at the Green Swan main banking conference, Powell blatantly refused to accompany the “green main banking” policies that were discussed. This visibly irritated Christine Lagarde, head of the European Central Bank, who was also part of the event.(Source)Some of the quotes from Powell because interview are illuminating.(Source)(Source)Is this a sign the U.S. is no longer a fan of the Great Reset ideologies coming out of Europe? Why is the Fed also ignoring the United Nations asking them to lower rates?(Source)We can speculate about what Powells intents may be all the time, but I choose to look at information. Given that Powells preliminary heated dispute with Lagarde and the Feds subsequent rate increase on the reverse repo days after, the dollar has actually annihilated the euro.Reverse repo rates initially increased on May 31, 2022In April 2022, Powell was dragged into another “debate” with Lagarde, led by the head of the IMF. Powell reaffirmed his stance on climate change and central banking.The plot thickens when we think about the implications of the LIBOR and SOFR interest rate transition that happened at the start of 2022. Will this rate of interest change allow the Fed to trek interest rates and insulate the banking system from the contagion thatll occur from a wave of global financial obligation defaults in the broader eurodollar market?(Source)I do believe its fascinating that by some metrics the U.S. banking system is showing comparatively fewer signs of tension than in Europe or the rest of the world, verifying the thesis that SOFR is insulating the U.S. to a degree. A New Reserve AssetWhether the U.S. is at war with other reserve banks or not does not change the truth that the country needs a brand-new neutral reserve possession to back the dollar. Developing an international deflationary bust, and weaponizing the dollar is only a short-term play. Scooping up properties on the low-cost and weaponizing the dollar will only force dollarization in the short-term. The BRICS countries and others that are disappointed with the SWIFT-centered financial system will continue to attempt and de-dollarize to develop an option to the dollar. The global reserve currency has been informally backed by the U.S. Treasury note for the previous 50 years, considering that Nixon closed the gold window in 1971. In times of danger, people go to the reserve possession as a way to obtain dollars. For the past 50 years, when equities sell, investors fled to the “safety” of bonds which would value in “run the risk of off” environments. When the Treasury market became illiquid, this dynamic developed the structure of the infamous 60/40 portfolio– up until this trade eventually broke in March 2020.(Source)As we shift into the Bretton Woods III period, the Triffin dilemma is lastly becoming illogical. The U.S. requires to discover something to back the dollar with. I discover it not likely that they will back the dollar with gold. This would be playing into the hands of Russia and China who have far bigger gold reserves.This leaves the U.S. with their backs against a wall. Faith is being lost in the dollar and they would undoubtedly wish to keep their global reserve currency status. The last time the U.S. remained in a similarly susceptible position was in the 1970s with high inflation. It appeared like the dollar would stop working till the U.S. successfully pegged the dollar to oil through the petrodollar arrangement with the Saudis in 1973. The nation is confronted with a comparable quandary today but with a different set of variables. They no longer have the choice of backing the dollar with oil or gold.Enter Bitcoin!Bitcoin can stabilize the dollar and even extend its worldwide reserve currency status for a lot longer than lots of people anticipate! Most notably, bitcoin provides the U.S. the one thing it requires for the 21st-century financial wars: trust. Nations might rely on a gold-backed (petro-)ruble/yuan more than a dollar backed by worthless paper. Nevertheless, a bitcoin-backed dollar is far more trustworthy than a gold-backed (petro-)ruble/yuan. As discussed previously, the money making of bitcoin not just assists the U.S. financially, but it also directly injures our monetary competitors, China and to a lesser degree, Europe– our supposed ally.Will the U.S. recognize that backing the dollar with energy straight injures China and Europe? China and Europe are both facing considerable energy-related headwinds and have both infamously banned Bitcoins proof-of-work mining. I made the case that the energy crisis in China was the real factor China prohibited bitcoin mining in 2021. Today, as we shift into the digital age, I think a basic shift is coming: For countless years, money has been backed by trust and gold, and safeguarded by ships. However, in this millennium, cash will now be backed by encryption and math, and safeguarded by chips.If you will allow me to once again take part in some speculation, I believe the U.S. comprehends this truth, and is getting ready for a deglobalized world in various methods. The U.S. seems the Western nation taking the friendliest method to Bitcoin. We have senators all across the U.S. tripping over themselves to make their states Bitcoin hubs by enacting friendly guideline for mining. The fantastic hash migration of 2021 has actually seen the lions share of the Chinese hash being moved to the U.S., which now houses over 35% of the worlds hash rate.(Source)Recent sanctions on Russian miners could just further accelerate this hash migration. Apart from some noise in New York, and the delayed area ETF choice, the U.S. looks as though its accepting bitcoin. (Source)In this video, Treasury Secretary Janet Yellen discusses Satoshi Nakamotos development. The SEC Chair Gary Gensler constantly distinguishes Bitcoin from “crypto” and has actually likewise praised Satoshi Nakamotos creation.(Source)ExxonMobil is the largest oil company in the U.S. and revealed it was using bitcoin mining to offset its carbon emissions. Theres the concern, why has Michael Saylor been allowed to wage a speculative attack on the dollar to purchase bitcoin? Why is the Fed launching tools highlighting how to price eggs (and other items) in bitcoin terms? If the U.S. was so opposed to prohibiting bitcoin, why has all of this been allowed the country?(Source)Were transitioning from an oil-backed dollar to a bitcoin-backed dollar reserve asset. Crypto-eurodollars, aka stablecoins backed by U.S. debt, will offer the bridge in between the existing energy-backed dollar system and this new energy-backed bitcoin/dollar system. I find it extremely poetic that the country based on the ideology of liberty and self-sovereignty appears to be placing itself to be the one that many benefits from this technological development. The bitcoin-backed dollar is the only alternative to an increasing Chinese risk placing for the worldwide reserve currency. Yes, the United States has dedicated numerous atrocities, I d argue that sometimes theyve been guilty of abusing their power as the international hegemon. Nevertheless, in a world thats being quickly consumed by ramped totalitarianism, what takes place if the magnificent U.S. experiment fails? What happens to our civilization if we enable a social-credit-scoring Chinese empire to rise and export its CBDC-backed digital panopticon to the world? I was when one of these individuals cheering for the demise of the U.S. empire, but I now fear the survival of our very civilization depends on the survival of the nation that was originally based on the principles of life, liberty and property.ConclusionsZooming out, I wait my original thesis that we are in a new monetary order by the end of the decade. Nevertheless, the occasions of the previous months have definitely sped up that already-rapid 2030 timeline. I likewise stand by my original thesis from the 2021 article surrounding how bitcoins adoption curve unfolds due to the fact that of how broken the current monetary regime is. (Source)I think 2020 was the financial inflection point that will be the driver that takes bitcoin from 3.9% international adoption to 90% adoption this years. This is what crossing the chasm involves for all transformative technologies that reach mainstream penetration.(Source)There will nevertheless be lots of “enthusiastic minutes” along the way, like there remained in the German Weimar hyperinflationary occasion of the 1920s. (Source)There will be dips and spikes in inflation, like there was in the 1940s during U.S. government deleveraging. (Source)Deglobalization will be the perfect scapegoat for what was always going to be a years of government financial obligation deleveraging. The financial contractions and spasms are ending up being more regular and more violent with each drawdown we experience. I believe the bulk of fiat currencies remain in the 1917 phases of the Weimar devaluation. (Source)This post was extremely centered on nation-state adoption of bitcoin, however do not forget whats really unfolding here. Bitcoin is a Trojan horse for freedom and self-sovereignty in the digital age. Interestingly, I likewise feel that hyperdollarization will accelerate this serene revolution. Devaluation is the occasion that triggers individuals to do the work and find out about money. Once a lot of these power-hungry totalitarians are required to dollarize and no longer have the control of their local money printer, they may be more incentivized to take a bet on something like bitcoin. Some may even do it out of spite, not wanting to have their financial policy determined to them by the U.S. (Source)Money is the primary tool used by states to exercise their autocratic, authoritarian powers. Bitcoin is the technological innovation thatll dissolve the nation-state, and fracture the power the state has, by eliminating its monopoly on the money supply. In the same way the printing press fractured the power of the vibrant duo that was the church and state, bitcoin will separate cash from state for the very first time in 5,000+ years of financial history.(Source)So, to answer the dollar doomsdayers, “Is the dollar going to die?” Yes! What will we see in the interim? De-dollarization? Maybe on the margins, but I think we will see hyperdollarization followed by hyperbitcoinization.This is a guest post by Luke Mikic. Viewpoints expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.