Bitcoin - The United States' Geopolitical Masterstroke

The creation of a strategic reserve of bitcoins is seen as the most significant monetary earthquake since the end of the Bretton Woods agreements in 1971.

The Dilemma

The American Senator Cynthia Lummis could lay the first stone of a renovation of the international monetary system.

As it stands, her bipartisan bill (Bitcoin Act) proposes to buy one million bitcoins, or 5% of the total supply. The accumulation is expected to occur over five years with the aim of holding them for at least 20 years.

Instead of financing this reserve with debt, Cynthia Lummis suggests selling gold reserves and drawing on the profits made by the Fed. The Fed indeed collects interest on several trillion dollars worth of Treasury bonds purchased through the famous Quantitative Easing.

This strategy should be viewed in parallel to the rapid decline of the dollar’s share in global currency reserves. In light of the global mistrust of the dollar, it is enlightening to take a brief historical detour to grasp the significance of creating an American bitcoin reserve.

It was at Bretton Woods that the British Pound was officially dethroned by the dollar, more than a year before the end of World War II. The United States imposed the greenback as the pivot currency against which all other currencies would float.

Gold was established as a safeguard to ensure that international trade was conducted on an equal footing. In other words, Washington had to convert the dollar into gold on demand, which prevented it from abusing the printing press to finance imports.

However, this system harbored the seed of its own destruction. The pitfall was articulated as early as 1960 by Joseph Triffin. Triffin’s dilemma explains that countries whose currency is an international reserve currency must necessarily run a trade deficit to allow other countries to hold it in reserve.

This mathematical imperative means that a permanent trade deficit is the necessary condition for supplying the world with its currency.

From Gold to Petrodollar

The United States had to provide the international currency while promising to convert it into gold. But with the growth of international trade, it soon became impossible to keep this promise while maintaining a fixed parity of 35 dollars per ounce of gold.

So much so that after just two small decades, there were already seven times more dollars in circulation around the world than there was gold at Fort Knox. This was particularly due to the costly Vietnam War and the U.S. oil crisis, which led them to import a lot of oil from the Middle East.

The Bretton Woods agreements collapsed when France and other European countries demanded the conversion of their dollars into gold. President Richard Nixon ultimately ended the “Gold Standard” in 1971.

This was followed by the advent of the so-called petrodollar system. What appeared to be a serious economic weakness (the oil crisis of 1971) turned out to be a windfall rarely seen in history. The master geopolitical stroke was to force OPEC nations to sell their oil exclusively for dollars.

Oil being the lifeblood of any industrialized economy, the entire world was compelled to remain loyal to the dollar. As a result, the United States could allow its trade deficit to rise without the dollar depreciating. The United States is the only nation with this privilege.

The explanation lies in the fact that the dollars accumulated by exporting nations are not converted into their national currencies but are invested in U.S. debt (to earn interest). Such is the exorbitant privilege: to display a chronically trade-deficit balance while easily accumulating debt at a low cost.

The flip side is that U.S. public debt now represents 37% of global public debt. The U.S. government owes 7 trillion dollars to the rest of the world…

Securing bitcoins before (almost) everyone else would help to reduce the bill. This is the objective displayed by Senator Cynthia Lummis.

BRICS and Dedollarization

Many nations fear that the United States will not repay, and the “freezing” of Russian reserves (300 billion euros and dollars) has not helped matters. Dedollarization is now a stated goal of the BRICS, recently joined by three major oil exporters (Iran, United Arab Emirates, and Saudi Arabia).

The balance of power is no longer the same as it was in the 1970s. China has become the world’s largest economy in purchasing power parity. The BRICS+ make up 46% of the global population and account for 35% of the global GDP (PPP).

Among other metrics, the club is responsible for about 25% of global exports. It also produces 42% of wheat, 52% of rice, and 46% of soybeans. Furthermore, it accounts for 43% of oil production (and 44% of global reserves). Or even 35.5% of natural gas production (and 53% of reserves).

An evolution of the international monetary system is inevitable in the coming years. Washington is aware of this, and geopolitical tensions are a direct consequence of this fear. It is in this context that one must analyze the American ambition to create a bitcoin reserve.

Bitcoin has all the attributes of a perfect international reserve currency. The first reason is that it resolves Triffin’s paradox by being stateless. The second is that it can circulate easily, a requirement that has always been lacking for gold.

Thus, after the windfalls that were the purchase of the territories of Manhattan, Louisiana, California, and Alaska, the United States is again getting ready to make the deal of the century.

https://twitter.com/saylor/status/1860810000513327230

It was only natural that it would be the United States that would take the plunge first since it has the most to lose if bitcoin establishes itself as the reserve asset of the next millennium. If all goes as planned, Michael Saylor predicts that a single bitcoin will reach 13 million dollars.