A new economic and monetary model is forming. We are rapidly moving away from the old capitalism versus socialism debate. Instead, we are seeing the United States harkening back to the original system which enabled that country to catch up (and surpass) Britain. In fact, it is one that China used over the past 40 years to position itself as the second largest economy in the world.
JD Vance even mention that the future is not Friedman (Milton). This signals a shift away from the point of view that dominated conservative thought. People like Steve Moore and Larry Kudlow are going to lose their cookies.
Actually, in what I could garner, they aren't even aware of the impact of what Vance said.
In this article I will outline some of the components of the transition and how Bitcoin figures into the equation.
What backs a currency?
This is something that is hotly debated. Of course, many will claim that nothing backs the currency since the move from Bretton Woods. As I cited in other articles, Bretton Woods was dead long before Nixon. With the emergence of the Eurodollar, the management of the money supply was removed from the US. This was replaced (or augmented at a minimum) by the international banks. Here is where things are starting to change.
One of the first moves was the shift from LIBOR to SOFR. The former gave London banks control over US dollar denominated interest rates. For this privilege, the banks paid themselves a nice fee (called a vig in some circles). Jerome Powell, as Fed Chair, was able to shift the system to SOFR, a US based rate, one that the banks cannot manipulate as easily.
Another major move is the push for stablecoins. The US Treasury secretary has been talking about this for more than a year. Scott Bessent understands the shift that is about to take place. We saw the passage of the GENIUS Act last summer and now await the move on the CLARITY Act. If passed, it is believed this will shift usage away from the old "dollars" to stablecoins. Of course, the banks are fighting this since it would mean they lose more control.
We need to be clear what the administration and Bessent are doing. Basically, the creation of money is being moved away from the Fed and handed back to Treasury. Since the stablecoins are being mostly backed by T-Bills, this puts monetary expansion and contraction outside the Fed. The difference is that we are no longer looking at international banks being able to drive the show.
The real backing of any currency was alluded to be Vice President Vance. When he said the future would be more Hamiltonian, he was harkening back to a time before financialization. Ultimately, what backs a currency is the talents, capabilities, and output of a population. This is what comprises the economy.
Of course, western countries saw sectors like manufacturing obliterated. Free trade economists, like the ones listed above, sold people on the idea that a country was better off if it saved 30 cents on a bowl at a store like Walmart due to offshoring than having its manufacturing sector. Bessent also discussed the fallacy of basing an economy on consumption rather than production.
Thus, we see a major push by some countries, including the US, to reshore their manufacturing. Those that do are likely to establish a solid foundation going forward. However, there is another layer to this discussion which is likely forming.
Bitcoin has fallen out of favor. Crypto has been usurped by AI in terms of capital flow. That said, we should not overlook what is taking place.
This administration is well aware of the potential of Bitcoin. I am not going to get into the debate about where the price was intentionally crashed or not. Some believe this move was designed to force Saylor to liquidate.
Whatever the reason, my view is the US government will be accumulating Bitcoin over time. We are going to see this asset used as the main form of collateral. Right now, in large part, oil fills this role. It is one of the reasons why the Middle East was of interest to outside countries. The oil stockpiles (and production) made that a central player.
The problem with oil is it is messy. By this I mean we are looking at shipping, storage, war, and a host of other variables that accompany it. With Bitcoin, these issues disappear.
If treasury becomes the main creator of dollars, pulling that away from the Fed, and it accumulates Bitcoin over time, we see the ability to leverage that as collateral. This will spread through the entire banking system (or DeFi world if you prefer). It presents a massive shift in control, especially for the world's reserve currency.
With the advancement of stablecoins, this will spread throughout the entire world. Fortunately, it will not be done through central bank agreements (swap lines). Under this system, the change will occur one digital wallet at a time. Any individual can participate in the transition by simply engaging with USD stablecoins. It is a move that already started.
This is how we can see the ties between the USD and Bitcoin emerge.
