Can US under Donald Trump really embrace crypto-currencies?
Donald Trump has been very vocal about his support for cryptocurrencies this time around. Lets apply common sense to understand if and how US government can embrace crypto-currencies?
The USD enjoys special status as the reserve currency of the world. This gives significant (unfair) advantages to the US. They can (and do) print USD seemingly at will to pay its bills. The utopia promised by the cryptocurrencies is a world where currency supply is not controlled by a central authority. Moreover, no bank or middleman is needed to hold and transfer money from one account to another. This sounds like a most reasonable choice for a currency of trade among countries, but is the US prepared to give up its hegemony and what does it stand to gain from it?
Let’s break things down.
What is a reserve currency?
Fueled by humanity's insatiable desire for goods and services from around the world, globalization has become a cornerstone of the modern economy. This helps both the producers and consumers. Through resource specialization, countries can focus on producing what they are best at and achieve efficiency and productivity. Through world-wide competition, consumers can get a variety of products at the best prices. International trade also fosters peace and co-operation among countries.
To facilitate this trade however, the world had to come to an agreement on a currency. The US was a dominant economic and military power at the end of WW2 and more importantly, it was the largest consumer for imported goods like oil. The USD naturally became a preferred currency for trade.
It is important to note that most of the trades happen between two companies, and the government is not necessarily involved in international trades. So when a company in India wants to import oil from UAE, they must pay for it in USD. When another company in India wants to export medicines to the UK, they demand to be paid in USD. There is a very liquid global market for USD and this means the price remains relatively stable. The importers and exporters rely on this stability.
Now imagine the price of oil increases. The oil importing companies in India needs more USD to buy the same amount of oil, which means demand for USD goes up and the value of Indian National Rupee (INR) against the USD goes down. This has a domino effect, which makes production expensive and hurts the importers, further hurting the INR.
To prevent this from happening, the Indian government must somehow stabilize the supply and demand of USD. To do this, it must have a reserve of USD in its treasury, which it would release in the market through the banks to lend to the importers when the demand spikes, thus stabilizing the price of the USD against INR. This government reserve of USD might also come handy in case of natural calamities or wars when the government must buy resources from other countries.
This is why the USD is called the reserve currency.
But will the USD always remain stable?
The USD is stable because it is used as a reserve currency and because it is backed by the economic might of the US. Meanwhile, the economic supremacy of the US is guaranteed because the USD is used as a reserve currency. So this is a self-fulfilling prophecy.
Since only the US can print US Dollars, they can basically print money to pay their bills, and IT DOES! That’s quite a convenient position. And that is one of the prime reasons why I think the US would never voluntarily give up this advantage in favor of using crypto-currencies.
However, de-dollarization was a trending term a few months ago. Largely two problems confront US. First is the increasing Debt to GDP ratio and second is the stressful geopolitical situation with two active wars between Russia-Ukraine and Israel-Palestine and another conflict waiting to flair up between China and Taiwan. Let’s look into these problems in some depth.
Debt Crisis
Even though US is the richest country in the world, the government must borrow money to invest in things like infrastructure, defence, public services and welfare. The tax revenue is not enough to cover these expenses. The hope is that through this investment, their GDP and tax revenue will continue rising as it has in the past and they will be able to pay back their loans.
The US government borrows money by issuing bonds. Investors around the world and even central banks of other countries buy the US government bonds, and these are regarded as the nearly zero risk investments as they are covered by the sovereign guarantee of the US.
However, this debt has risen at an alarming pace in the last few decades. Here’s a chart generated using Google Gemini showing the growth of the US Debt against the GDP. As you can see, the debt has exceeded the GDP in the past decade.
The US must pay a Trillion dollars each year to cover just the interest on its loans. This money must come from its tax revenue and it is the third largest expense in the budget already.
If the US does not have enough money to service its debt, it would default on its loans which would destroy the confidence of the investors. The US government bond value will crash and the government will not be able to raise any more money which would have a spiraling effect on their economy. This is a situation they must avoid.
One alternative is to print more US Dollars to simply pay the debt. Once again, that sounds fishy, but in fact this is done all the time. However, this weakens the US Dollar and over time it can erode the confidence of the world on the stability of the US Dollar. In this situation the world might side-step the US and would consider using another currency to trade in.
The other alternative is to increase the revenue by raising taxes and cutting spending. However, Trump has promised to cut taxes. This seems counter-intuitive but is the long held position of the Republican party that cutting taxes stimulates consumer demand, drives more investment, leading to more jobs and eventually higher tax revenue for the government from direct and indirect sources. This is also called trickle-down economics and if it sounds far fetched, it’s because it is.
In addition, Donald Trump has also promised to cut government spending drastically. This can This means the government would reduce spending on public infrastructure like education and health care, which would mean higher costs for the citizens. They will also stop spending on infrastructure projects, which would cut demand and jobs further hurting demand.
To be fair, raising taxes is also deflationary as it reduces the amount of money in the hands of the people and hurts demand, which can also eventually lead to job losses and recession.
In balance, Republican party is expected to be more supportive to companies and foster more innovation. The Democrats have blocked merger and acquisition and IPOs. In absence of this, investors are unable to get exits from their investments in risky ventures. The Republicans are expected to relax regulations, which will drive more investment in innovation, which could boost the technological superiority and GDP of the country.
Geopolitical Situation
I don’t need to go into much details here. The reasons of the conflict are well known and understood. The problem is that US is not in a situation to fight or fund any more wars.
The US has already spent a lot of money and lent crucial missiles to Ukraine, depleting their own stock pile. Meanwhile, the war does not seem to let up and is expected to drag on like this for years. Giving up on Ukraine would mean giving up on the EU allies and forcing them to negotiate peace with Russia. This will reduce the influence of the US on the rest of the world.
If tensions flair up between China and Taiwan, the US may not have the resources to fulfill its obligations towards NATO member Taiwan. This will once again weaken the perception of US supremacy and hurt the confidence in US as a powerful ally, shifting the balance of power in favor of Russia and China.
Back to the topic
I realize we haven’t spoken about crypto-currencies in all this. But I believe it was important to give this context. It should be clear that the US is in a tough situation and the supremacy of the US and the USD is under threat. Also, neither of the parties have a perfect solution for the problem.
It’s really simple from here on. Under all this pressure, the US can only guarantee and accelerate its decline by voluntarily hurting the USD in favor of crypto currencies. The US Fed does hold reserve of Gold as a hedge against their own currency, in addition to other assets like foreign bonds and currencies. In theory they could add crypto currencies to this mix, but since crypto-currencies pose a direct threat to the USD, this would be counter-intuitive.
In fact, in the worst case scenario when everything I have described above happens and the world needs a new world order, the use of crypto-currencies in place of USD for trade could be one of the most important negotiation points.
In theory, foreseeing this eventuality, the US may want to step ahead of the crisis and take the lead in embracing crypto-currencies for international trade. But I don’t think we are at that point yet and I don’t expect the US to give up easily. I am not betting against the US at this point.
Summary
A lot of things get said during elections and not all promises get fulfilled. I think Trump is pandering to a support base by drumming up support for cryptos and he has definitely struck a cord there with supporters of crypto currencies who are naturally invested in stock markets and are quite vocal on social media too. This may make it seem like this is an important topic for the population, but in reality it is only a disproportionately represented minority that invests or trades in crypto-currencies.