Bitcoinizing The Petrodollar
We are at a biophysical inflection point where the real value of energy rises drastically against falling real value of debt. The value of watts and atoms reclaim their rightful position against the products of debt merchants.
The geology of oil reservoirs from where the majority of global production growth now comes is such that the oil price must increase by 8-10% a year in order to outpace rapid decline curves. Oil producers earning US dollars store surpluses in US Treasuries. In essence this directs the sum of global oil revenues straight into US Gov’t coffers (minus huge fees for oligarchs and sheikhs) and is tantamount to placing the US Gov’t as the world’s only oil supplier. The “petrodollar” as this triangle of trade is known supports US debt markets far beyond what they would if reliant on tax receipts alone.
However, oil producers cannot any longer find a yield in Treasuries high enough to expand oil reserves in excess of these decline curves. As a result they are better off leaving the oil in the ground and curtailing supply. Furthermore, the higher the interest rate on Treasuries, the higher the discount rate and the higher the cost of capital, the more expensive the oil must be to justify the drilling program. The inelastic oil price means supply curtailment pushes prices and overall revenues rise, making up for steep decline curves and rising costs of capital/discount rates. Without supply curtailment, oil producers in essence can buy fewer barrels with their Treasury bonds in the long run than they sold originally to earn the surpluses. Doing so would in effect make these oil producers short the very oil they produce (negatively exposed to rising oil prices!).
The inability of the eurodollar system to finance global growth by providing a sound enough store of collateral value means that the mechanics petrodollar itself causes rising oil prices and supply curtailment, This also translates to higher and higher consumer price inflation and defacto US military obligations to in locations extremely hostile to American culture and values. Meanwhile, domestic US production puts the US in the position of global marginal oil producer. This constrains supply of US dollars the US exports in trade for crude imports, and a shortage in overseas eurodollars builds, constrains global banks’ collateral for lending growth. In the end, oil acts as nature’s financial discount rate, and underpins the US Treasury bond interest rate.
China, which stopped new accumulations of US debt in 2013, and has been broadly selling since then, will likely never again expand its US Treasury portfolio. Instead, in order to avoid the deep mismatch between the required rate of return on oil and the US interest rate, it has rotated its dollars surpluses into global commodities properties. The quotient of major overseas buyers of US debt has rapidly receded and presents an insurmountable threat for the US Treasury. The addled response of the US Gov’t is to frenetically seek wars to fight as the pretext to print new vast sums of USD in order to pay the growing shortfall. Yet it is instead incumbent on US defense strategists to decouple American discount rates from an “access of evil”-style power nexus around oil producer economics which at its center is the BRICS consortium and China’s digital RMB purchases of crude from Gulf states. Bitcoin, which possesses its own embedded energy economics, is the only answer for a US Defense Department.
A shrinking percentage of a rapidly expanding US deficit is financed through this petrodollar recycling, elevating the lower bound on US interest rates. This dynamic has incredible implications. Not only is the petrodollar and eurodollar, as well as the US Treasury market, the cause of progressive global oil shortages and restricted production, but a trigger for deficit explosions and greater internal societal and cultural weakening in the homeland through war fighting.
The eurodollar system puts the world in a leveraged short position in energy. The long US Bond/short Oil trading pair will never again see a sustained rise. Oil producers need to a better solution than the US treasury for storing surpluses. Major systemic change is necessary. The eurodollar is no longer sufficient store of value for future energy purchases in a world of where energy abundance is shrinking.
The petrodollar must be bitcoinized. By rotating trade surplus is into bitcoin, rather than US Treasuries, those surpluses over time are able to earn something closer to a natural market rate of interest. All oil producers not rotating the bulk of their surpluses into bitcoin, are in effect short bitcoin, because they are negatively exposed to the widening spread between the natural interest rate and the Treasury rate, plus the upside surprise in US credit risk which spikes each on the event of each deficit explosion and new war prosecution. The world is coming to measure wealth in technology, commodities, ecology and energy rather than debt merchant products.
Adding up all the bricks nations equals more than 50% of global exportable oil. As the world moves to multicurrency energy, the huge supply of new US dollars required to be issued in order to retire the immense overhang of existing installed US debt base in the world, rises geometrically. And because foreign countries are no longer financing, the US treasury, this new dollar issuance must be born by Americans domestically, resulting in titanic collateral destruction and downgrades in American living standards. The rotation into bitcoin as the neutral, non-state reserve asset is a strategic and cultural necessity.
Collapsing Global Trust
The case for materials bitcoinization and web3 application development as the mature outgrowth of a renewed self-custody movement
The most recent FTX-triggered sell-off in cryptocurrencies illustrated that financial engineering and financial products alone do not provide a sustainably durable source of crypto-asset demand. Extreme levels of margin debt and the failure of major stablecoin anchors to provide offsetting liquidity drove traders and stablecoin providers alike to tap Bitcoin as a primary liquidity source, which also inversely further validated bitcoin’s capacity to support the growth of the ecosystem into its next iteration.
However, the increasingly procyclical speculative behavior in most crypto-asset also illustrates that the general lack of discipline in self-custody for the sake of greater access to margin debt is extremely destructive to capital values. Demonstrating the inability of even rampant levered speculation to serve as the antidote to more aggressive prosecutions of global macro and interest rate distortions by central banks, the profile of the digital asset investor population will likely trend more deeply toward self-custody. They also demonstrate that non-collateralized platforms quickly fail and that only asset-backed ecosystems can attract sustained engagement from a decentralized pool of contributors.
Up until the most recent rout, the crypto-asset trade has been mostly another financial-engineering and speculative retail product offering to “play” the siloed liquidity offset game for which all financial assets have been coopted. Because the cryptosphere has discredited itself so aggressively by all but abandoning its original ethos, it could struggle to offer the promise which fueled prior bull markets. The drawing-off of capital from self-custody practices onto the balance sheets of leveraged intermediaries has cast the cryptosphere as merely a high beta version of the broken legacy framework. And more frustratingly, it layered on an additional volatility tax atop a what in essence is a fragile derivative copy of that framework, while backwardly validating it in all but name. Its future will be in the opposite direction. Riveted to real world assets and cash flows, or it will evaporate.
The nexus of global central bank manipulation, public treasury profligacy and fractional bank credit excess have destroyed so much collateral and capital value, the winner-take-all advantage to well-collateralized incumbents has only strengthened in the last three years. And this will likely continue as global bond yields and discount rates rise.
Greater degrees of self-custody as insulation against systemic breakdowns will be viewed as necessary by a wider swath of crypto-asset users. Likewise, a re-anchoring of investor interest to Web3 applications which address real-economy challenges where genuine shortages exist and the solving of serious problems will unlock more value than has previously been allowed by their use as inflationary financialization offsets. A more sophisticated expression of the same desire to protect crypto-asset capital values from a rise in market volatility will arise in its wake. Self-custody and industrial utility are both necessary to insulate financial value from cryptosphere-wide malinvestment. This thesis will be the primary driver of greater, more widespread and more durable capital flows into Web3 networks in the ensuing five years.
Integrating Web3 applications with commodity and industrial value should also be seen as a primary way to allow most global participants to exit that legacy system which imposes so many taxes as to make its use only affordable to the extremely-well capitalized. Ultimately, they can prospectively do the things nation states can no longer do, and carry greater trust in the process. More articulate alignment and integration of Web3 with Main St. economics and physical assets is the only likely path to reestablishing widespread Web3 appeal and credibility. By replacing leveraged speculative activity with demand derived from industrial and commodity value generation, markets should temper margin debt appetite with real world cash flow valuation discipline. Meanwhile, this riveting is the only tool which allows for the complete permeation of gig-economy and microtransaction-based economics outside of major Nasdaq-listed provider portals like Uber, etc. Real world cash flow yields anchored by the transparency and dividend delivery from even the most deminimis economic activity provide one of the most powerful assets yet to access global capital. While this may be less than necessary in the United States, the developing world already uses tools like this as their primary means of payment. Although none facilitate deep capital formation at a local or regional level.
Meanwhile, the state’s framework of promulgating specious securities laws to prevent democratic access to financial assets as a means of throttling the access to inflationary specie, counterfeit leverage and fractional credit creation away from all but a tiny cabal of Cantillon insiders, can only be overcome by opensource cryptographic systems which offer access to basic commodity and industrial value creation. Perversely, in the most recent bull market, financial derivatives and margin debt offered by intermediaries intercepted and absorbed a huge amount of the capital that would have otherwise gone into supporting the original development of projects relevant to Main St. and industry. It is incumbent even on bitcoin maximalists to advocate for the suppression of proprietarily leveraged, margin-debt-offering intermediaries from discrediting the use of bitcoin in industry: even maxis should eschew profiting from bitcoin bull markets as merely profiteering from statist monetary undermining, trading in-line with the state itself, and instead advocate for non-financialized commodity production and industrial uses and self-custody.
The Decisive Decade
Sophisticated, bitcoin-based technology ecosystems are the front-running defense product
Modern power is the ability to surveil and choke-point technology, trade and digital networks of all kinds. Semiconductors, telecom, and critical minerals are the three major vectors of great power competition. Monetary networks are the chokepoint between all three – the virtualization of the Mahon Doctrine.
China is vulnerable to American coercion around financial networks, and by extension energy, agriculture, and semiconductors. This is its top existential security challenge. China is attempting to replicate US financial power represented in the global correspondent bank monetary/eurodollar system. But their architecture attempts to impose a predictably technocratic way that facilitates even greater coercion over the world than the CCP accuses the US of having against them in its capacity to inflict sanctions and financial censorship on unfriendly regimes.
This techno-authoritarian system, rather than being organic and bottom-up like the original eurodollar and western banking system, is built around the capacity of the Chinese central bank to censor financial transactions as its primary modality. Built on a network of direct central bank-to-central bank relationships on a digitally-native rails of Chinese source code, the system represents an enormous threat to the capacity of the United States to leverage financial power for protracted war and defense applications. Success of this network means that the Bretton-Woods consortium will no longer be paying the bill when the US decides to go to war. Instead, Americans and the US dollar will suffer far more disproportionately than they have in the past 70 or 80 years. A national debt of $100 trillion or more is not at all out of the question.
This poses an enormous threat to American citizens, as historically the United States has often worked to mimic the tactics of its enemies in combating its adversaries rather than surging forward with liberty-focused applications. The New Deal, the Patriot Act, The US Fed and the Income Tax Act, the Tariff of Abominations. The list goes on. This makes popular bitcoin ownership and access to strategic commodities indispensable for individual Americans. Even if the inflationary climate of the next 15 years does not materialize.
In this regime, the only thing more valuable than the bitcoin itself is bitcoin mining capacity, driven by the proprietary ownership of energy assets at scale. Capturing bitcoin-based revenues driven by western purchases and investments volumes into strategic minerals can be equally as powerful. This means that technology networks which can proliferate transparency, compliance, and trust in these investment flows and generate bitcoin revenues in compensation will become among the most valuable technology networks in the next 30 years.
This is in some sense built into the nature of economies. Technology grows rapidly, but financial arrangements are calcified. Large imbalances grow between the economics of underlying firms with their progressive technology improvements and the statutory manner of their original financing. Technology also changes the manner of the financing itself. This new age not only revolves around the re-collateralization of the West, but also around re-engineering the manner in which things are financed.
The US, and by extension private capital and entrepreneurship, must be supportive of such independent technology networks. They must be formed on digitally-native rails, decentralized ledgers, and they must offer commercial value greater than what the globalization of China’s coercive central bank digital currency can offer to authoritarian regimes in undeveloped countries. Therefore, they must be censorship-resistant and freedom forward. They also must be collateralized by pools of energy and strategic commodities. And done so in an organic way such that they facilitate capital formation, and preserve the store of value function money must serve.
A central pillar of such ecosystems should be the unrivaled security of the bitcoin network and the Lightning network. The second essential factor is the integration of producing commodity assets to spur network adoption. Another central factor must be decentralized telecommunications infrastructure, which is resilient against physical attack. These networks are the leading edge of the new arms race.
Proponents of United States hegemony and hegemony of the US dollar may be unfriendly to bitcoin. But they certainly prefer bitcoin over a globalized China CBDCs. China is well aware of the enormous surveillance value attendant on the SWIFT network. A replacement or duplicate global surveillance network controlled by China infiltrating 30 – 50% of global commodities markets and even retail transactions would be an extreme negative for global free trade and prosperity, and would critically also be highly negative for bitcoin’s expansion.
China’s inability to pair their incredible dependency on commodity imports from the “global south“ with their inability to project military power around the world has pushed them to propagate their financial and surveillance apparatus into all of these networks. Yet the United States is also dependent on many of those countries for its strategic and technological dominance. The sophistication of Chinese techno-authoritarianism pushing into these resource-rich, undeveloped countries will continue to undermine capacity of the United States to make the world pay for expansions in its defense budget, defend any liberal order, and secure its own trade networks on which most of the world’s standard of living depends, regardless of if the US or some other freedom-forward society is the hegemon.
Meanwhile, China approaches authoritarian regimes in resource-rich countries who are made politically and economically vulnerable by emerging technologies, and offers them a devil’s bargain. They bring a technology stack for surveillance and digital currencies plus capital investment (through which they often overpay in order to secure positional advantage) and bribery. This way they can export their entire governance model, as well as their technology and their worldview, onto these vulnerable regimes. East African countries leaders, from Ethiopia to the Cape, have all attended training camps proffered by the CCP on how to replicate one-party state government in their countries in a new iteration of Comintern. All of them subsequently signed up for a CCP sponsored, surveillance-driving telecom deals.
Americans, in particular, drastically underestimate how disruptive and adversely powerful a financial surveillance network is, especially when coupled with other physical infrastructure like logistics, telecommunications and commodities production and delivery. Equally pernicious is the capacity of central banks to censure everyday life activities like taxis and public transportation, airports, grocery stores, etc. This financial power essentially equates to the capacity to incarcerate individuals at will in their homes for transient and non-transparent reasons. The Chinese capacity to erect a full-on global retail CBDCs is completely incompatible with the existence of a free republic or a global trade network.
Well-collateralized permissionless monetary networks are necessary to the security of a free state.
When these hardware-integrated networks can be interwoven with securely decentralized ledgers and foreign direct investment into commodities development, the West can create a wedge between coercion-driven systems propagated by the CCP, and the fallow nations and industries which it co-opts.
Commercialization, voluntarism-supporting technology ecosystems, in particular around mining and energy, anchored by bitcoin and the Lightning Network, and even privately issued dollar-based and commodity-based stablecoins not only must be the American answer, but are the only way to generate truly profitable, broad-based development and prosperity in the developing the world.
To Be Continued….
-RC
The Geopolitics of Bitcoin – Part I
The Geopolitics of Bitcoin – Part II
The Geopolitics of Bitcoin – Part III
The Geopolitics of Bitcoin – Part V