Geopolitics of Bitcoin, Part VII

The Long March to bitcoinize the institutions has begun.

November 02, 2023

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Off of a 5,000 year low in interest rates, a mean reversion is underway. Tangibles are being revalued over credit. The US dollar funding markets will likely never again be able to price risk correctly as a consequence of a debt saturation greater than any other period in history. Even under more and more acute pressure, the titanic size of new US Treasury issuances about to take place forecloses any rapid reversion.

The zero bound interest rate has starved commodity producers of profitability for nearly a generation. Chronic under-investment has nonetheless meant prices have been higher than they would have otherwise been. The gap in between has been transferred to banking cartels as a kind of colonial extraction on both sides, buyers and producers.

The war to negotiate how far credit assets fall, and how far commodity assets rise, from real estate and bonds into commodities, has been underway for ~18 months. However, the likelihood that this negotiation will be allowed to fully take place, and not truncated by some major event (pandemic, kinetic war) is low. Any such even translates into even further into exacerbated debt issuance atop what is already anticipated.

Christine Lagarde urging for fiscal unity betrays the true agenda of the ECB – full on debt consolidation of the Euro Zone to be swapped for a perpetual bond paying some 50 basis points, and to scrap the euro for an ECB-issued CBDC and defacto default on $14T in negatively-yielding bonds. The Eurozone wants to do away with commercial banking and fashion a single loop from central bank to private borrower, and to do away with private formation of capital altogether while they’re at it. In short – communism.

Jerome Powell might be the first real bond vigilante. His stance appears as though he wants hikes up to 6% or more, so when he finally starts cutting, rates can reset back to 4-4.5%. Yes, it is Ponzi scheme. But it’s not alone. This reset will crush the other the debt Ponzi schemes of the world. The largest Ponzi scheme must crush the other Ponzi schemes to drink their milkshake and absorb their capital flight, in order to perpetuate the large Ponzi scheme. This includes the eurodollar and the euro currency, the JGB market, and of course also the RMB

As a headline example, in 2022, the interest rate hike divergence between the Fed and the Bank of England. The Fed tightened 75bps, and the UK 50. This signaled to markets a deep interest rate hike divergence was building for which the Bank of England could never recover, unable to keep pace with an ever-expanding interest rate purchasing power parity gap against the dollar. This also caused new issuance of UK government bonds to go “No bid” that month. No buyers for UK bonds.

The Fed can front run global central banks in interest rate hikes to trigger capital flight from those bonds in those countries into US bonds. By preemptively devaluing credit the fastest, the Fed forces write-downs on other central banks which they cannot afford.

Powell recognizes that the US can support global dollarization no longer. They are in the process of attempting to de-dollarizing the world. Commodity producer nations are simultaneously attempting to dedollarize their national debts because they understand this as well. The US does not possess enough financial capacity to support any further growth in global debt, let alone eurodollar debt and other non-core bonds or even its own bonds for that matter. Powell must head-off a collapse of the dollar by triggering cascading failures in global debt markets through raising interest rates ahead of the pack. Cascading failures will also trigger create historic volatility in currencies. Capital flight into the core US bond will absorb capital flight from non-core currency and bonds. Absorbing peripheral Ponzis into the treasury’s Ponzi will allow the US Treasury to continue forcing commodity producer nations into a negative carry vis-a-vis their reserve replacement hurdle rates to subsidize the titanic amount of new Treasury issuance on the horizon.

An opportunity arises for Treasuries held on foreign bank balance sheets, which collateralize the eurodollar, to be absorbed into the domestic US banking system by US banks with direct repo market window access – a kind of defacto Quantitative Tightening. At some point there may be no new high-quality, money-good collateral in offshore banking.

Oil and strategic commodities producers must be short the dollar headed into an engineered short squeeze orchestrated by a preemptive and hawkish Fed as the USD absorbs capital flight from peripheral nations, but suppressed yields on Treasuries where those USD must be stored, causing a negative carry. Meanwhile, as oil producers need prices to rise to make up for this negative carry, the price of oil has been manipulated downward in futures markets.

Strategic commodity producers need to be long and instrument which allows them to earn above what the dollar price of oil allows them to. The petrodollar is dying the death of 1,000 cuts as a result. The next best reserve asset is gold. The BRICS are attempting to build out the infrastructure for trading oil in gold. But this is slow, cumbersome, extremely high friction, and the mutual reliance on trust amongst BRICS nations is laughable. Furthermore, gold is hackable, both from the standpoint of new mined supply growth, warfare and theft, and gaming amongst BRICS members and in futures markets the same fashion the oil price is suppressed today.

Bitcoin steps in as the apex reserve asset. Bitcoin is only hackable through carelessness around custodianship of private keys. Bitcoin mining infrastructure to support transference has been built more than 50% built out already. Libyan jihadis and Kurodasan can both agree on the state of the bitcoin ledger. And… gold is simply an inferior money to bitcoin.

The Fed has guaranteed that the financial premium stored in the ECB, BoJ, BoE, PBoC, etc. which will be absorbed into Treasuries will in greater proportion leak out into commodities markets as the only way to gain exposure to the real interest rate and avoid negative carries. While capital flees foreign banking systems, the US dollar strengthens against other currencies but still weakens against commodities. Commodities capture an outsized percentage of the capital flight, even if much smaller by absolute volume. Among these, bitcoin as the hardest commodity store of value with the thinnest tradable supply, will be the most asymmetrically impacted market in the world.

The Fed in its competition has guaranteed that performance on bonds can never structurally outpace performance of bitcoin. The Long March to bitcoinize the institutions has begun.

-RC