This is an opinion editorial by Luke Mikic, a writer, podcast host and macro analyst.
This is the second part in a two-part series about the Dollar Milkshake Theory and the natural progression of this to the “Bitcoin Milkshake.” In this piece, we’ll explore where bitcoin fits into a global sovereign debt crisis.
The Bitcoin Milkshake Theory
Most people believe the monetization of bitcoin will most hurt the United States as it’s the country with the current global reserve currency. I disagree.
The monetization of bitcoin benefits one nation disproportionally more than any other country. Like it, welcome it or ban 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 many can conceptualize and this article explains why.
If we move forward 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. Some of these countries will be forced to dollarize, like the more than 65 countries that are either dollarized or have their local currency pegged to the U.S. dollar.
Some may choose to adopt a quasi-gold standard like Russia recently has. Some may even choose to adopt the Chinese yuan or the euro as their local medium of exchange and unit of account. Some regions could copy what the shadow government of Myanmar have done and adopt the Tether stablecoin as legal tender. But most importantly, some of these countries will adopt bitcoin.
For the countries that may adopt bitcoin, it will be too volatile to make economic calculations and use as a unit of account when it’s still so early in its adoption curve.
Despite what the consensus narrative is surrounding those who say, “Bitcoin’s volatility is decreasing because the institutions have arrived,” I strongly believe this is not a take rooted in reality. In a previous article written in late 2021 analyzing bitcoin’s adoption curve, I outlined why I believe the volatility of bitcoin will continue to increase from here as it travels through $500,000, $1 million and even $5 million per coin. I think bitcoin will still be too volatile to use as a true unit of account until it breaches eight figures in today’s dollars — or once it absorbs 30% of the world’s wealth.
For this reason, I believe the countries who will adopt bitcoin, will also be forced to adopt the U.S. dollar specifically as a unit of account. Countries adopting a bitcoin standard will be a Trojan horse for continued global dollar dominance.
Put aside your opinions on whether stablecoins are shitcoins for just a second. With recent developments, such as Taro bringing stablecoins to the Lightning Network, imagine the possibility of moving stablecoins around the world, instantly and for nearly zero fees.
The Federal Reserve of Cleveland seems to be paying close attention to these developments, as they recently published a paper titled, “The Lightning Network: Turning Bitcoin Into Money.”
Zooming out, we can see that since March 2020, the stablecoin supply has grown from under $5 billion to over $150 billion.
What I find most interesting is not the rate of growth of stablecoins, but which stablecoins are growing the fastest. After the recent Terra/LUNA debacle, capital fled from what’s perceived to be more “risky” stablecoins like tether, to more “safe” ones like USDC.
This is because USDC is 100% backed by cash and short-term debt.
BlackRock is the world’s largest asset manager and recently headlined a $440 million fundraising round by investing in Circle. But it wasn’t just a funding round; BlackRock is going to be acting as the primary asset manager for USDC and their treasury reserves, which is now nearly $50 billion.
The aforementioned Tether appears to be following in the footsteps of USDC. Tether has long been criticized for its opaqueness and the fact it’s backed by risky commercial paper. Tether has been viewed as the unregulated offshore U.S. dollar stablecoin. That being said, Tether sold their riskier commercial paper for more pristine U.S. government debt. They also agreed to undergo a full audit to improve transparency.
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 total stablecoin market is backed by U.S. government debt. Another stablecoin issuer, MakerDao, also capitulated this week, buying $500 million government bonds for its treasury.
It was crucial 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 released. Network effects are hard to change, and the U.S. dollar stands to benefit most from the proliferation of the overall “crypto” market.
This Bretton Woods III framework correctly describes the issue facing the United States: The country needs to find someone to buy their debt. Many dollar doomsayers assume the Fed will have to monetize a lot of the debt. Others say that increased regulations are on the way for the U.S. commercial banking system, which was regulated to hold more Treasurys in the 2013-2014 era, as countries like Russia and China began divesting and slowing their purchases. However, what if a proliferating stablecoin market, backed by government debt, can help soak up that lost demand for U.S. Treasurys? Is this how the U.S. finds a solution to the unwinding petrodollar system?
Interestingly, the U.S. needs to find a solution to its debt problems, and fast. Nations around the world are racing to escape the dollar-centric petrodollar system that the U.S. for decades has been able to weaponize to entrench its hegemony. The BRICS nations have announced their intentions to create a 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 partnership. To make matters worse, the United States has $9 trillion of debt that matures in the next 24 months.
Who is now going to buy all that debt?
The U.S. is once again backed into a corner like it was in the 1970s. How does the country protect its nearly 100-year hegemony as the global reserve currency issuer, and 250-year hegemony as the globe’s dominant empire?
Currency Wars And Economic Wild Cards
This is where the thesis becomes a lot more speculative. Why is the Fed continuing to aggressively raise interest rates, bankrupting its supposed allies like Europe and Japan, while seemingly sending the world into a global depression? “To fight inflation,” is what we’re told.
Let’s explore an alternative, possible reason why the Fed could be raising rates so aggressively. What options does the U.S. have to defend its hegemony?
In a world currently under a hot war, would it seem so far-fetched to speculate that we could be entering an economic cold war? A war of central banks, if you will? Have we forgotten about the “weapons of mass destruction?” 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?
Until six months ago, my base case was that the Fed and central banks around the globe would act in unison, pinning interest rates low and use the “financial repression sandwich” to inflate away the globe’s enormous and unsustainable 400% debt-to-GDP ratio. I expected them to follow the economic blueprints laid out by two economic white papers. The first one published by the IMF in 2011 titled, “The Liquidation Of Government Debt” and then the second paper published by BlackRock in 2019 titled, “Dealing With The Next Downturn.”
I also expected all the central banks to work in tandem to move toward implementing central bank digital currencies (CBDCs) and working together to implement the “Great Reset.” However, when the data changes, I change my opinions. Since the creepingly coordinated policies from governments and central banks around the world 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 did in the 1970s — at this stage of the long-term debt cycle without crashing the global debt market.
But, what if the Fed wants to crash the global debt markets? What if the U.S. recognizes that a strengthening dollar causes more pain for its global competitors than for themselves? What if the U.S. recognizes that they would be the last domino left standing in a cascade of sovereign defaults? Would collapsing the global debt markets lead to hyperdollarization? Is this the only economic wild card the U.S. has up its sleeve to prolong its reign as the dominant global hegemon?
While everyone is waiting for the Fed pivot, I think the most important pivot has already happened: the Dalio pivot.
As a Ray Dalio disciple,…