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In a 59 pages paper for the Bitcoin Policy institute, Pines presents a crisp analysis of the challenges facing the dollar and the opportunities bitcoin presents.
He begins where we often end the dollar’s history in these Trustnodes pages, until now.
In 1971, following increased expenses from the Vietnam war which led to more drawing downs of gold by European nations, the gold standard was ended in the United States.
About three years later, a deal was struck with Saudi Arabia to denominate its oil in usd, which we now call the petro dollar.
“If Saudi Arabia’s industrial capacity is increased, the thinking here goes, she will want to spend more money earned from oil on technology and equipment in the United States, and this should lead to a rise in output. The sale of sophisticated military equipment, such as modern jet fighters, would also absorb some of the oil money,” a report from the time says.
America thus gives Saudis dollars for oil, and the Saudis in turn invest these dollars in US companies and US treasury bonds.
Very much a win win, as the wonder of Dubai illustrates, but the dollar’s reserve status requires a structural deficit, with China in particular exploiting this system, Pines says.
“The U.S. economy is simply not large enough (as a percentage of the world economy) to indefinitely sustain its role as the global reserve currency,” he argues, before adding:
“Playing this role for as long as we have has caused systemic damage to our domestic manufacturing and industrial capacity, made us vulnerable to fragile supply chains and reliant on our principal strategic adversary for most of our consumer imports as well as critical components for defense articles.
It is apparent that the current petrodollar reserve currency system is fraying. This system worked for a time, but no longer serves our interests.”
Then he unusually claims “it is in our strategic national interest to seriously consider how Bitcoin can play a key role in an alternative model that helps preserve our global position and counter the malign plans of our adversaries.”
Just as Saudi Arabia cycles back the dollars to US, “a resurgent China accumulated dollar reserves recycled into U.S. treasuries to maintain its currency peg.”
But China stopped buying US treasuries in 2013, the same time that it announced the Belt and Road initiative.
Rather than investing those dollars in treasury bonds, China now provides USD loans to countries in Africa and Asia to build its own influence network across the globe.
In addition, “China can recycle their accumulated dollars from our trade deficits back into our equity markets and use that financial power to exert political influence over US corporations.”
And the problem is that America has to keep doing it because the need to continuously supply a dollarized world with USD further shifted the domestic economic pattern towards services and imported goods consumption.
“We’ve handed China massive dollar reserves which, instead of recycling into refinancing our bonds, they’ve used to go on a spending spree around the world, buying up hard assets and taking large-scale positions in western equity and real-estate markets. China and a handful of other nations now own over $12 trillion in U.S. equities, up from $2 trillion in 2010.
The current dollar system is becoming a threat to national economic security. Note that this runs counter to the typical refrain: we can print the world’s reserve currency and receive real goods and services in exchange. Seems like a good deal. Not quite. China turns around and buys up our real estate and stocks and farmland with those dollars. We have thus traded ownership of our hard, productive assets to China in exchange for consumable, perishable goods. This doesn’t exactly put the US in a great position from which to project strength in a period of great power competition.”
But bitcoin can change this and can help the United States “not merely fight rear-guard actions to preserve its status in the legacy global order.” Instead US can utilize “non-traditional approaches that give us an asymmetric advantage, applying strategies that our adversaries have not anticipated—that put them on the back-foot, forced to respond to our initiative.”
“Bitcoin could help reinvigorate our domestic economy, regain the strategic initiative, and buttress the global rules-based international order upon which the prosperity of our citizens is secured,” Pines says.
“To the extent that U.S. national security stands to gain from domestic technology innovation, appreciation in our equity markets, and as an attractive destination for global talent, Bitcoin gives us a clear advantage over other economic blocs and adversary nations that reject or stifle its adoption, as they pursue techno-authoritarian governance and analog commodity money systems.”
Starting with mining, Pines argues bitcoin can consume what otherwise would be flared gas, helping the environment.
In addition, bitcoin can subsidize renewable energy as bitcoin mining can be turned on and off as needed, stabilizing the grid.
In fact he goes as far as to say bitcoin miners have emerged as the ‘holy grail’ form of controllable load and frequency control, able to dynamically respond within seconds to adjust their demand. Pines says:
“Bitcoin mining augurs a renaissance in the American energy industry: improving our ability to be energy independent, capturing and reducing environmentally harmful emissions and waste, improving the economics and demand profile for renewable generation, bolstering the resilience and stability of our increasingly burdened electrical grids, and driving investment and innovation in nuclear power for the first time in decades.”
In regards to the latter, that’s based on a US nuclear energy startup, Oklo, announcing a 20-year commercial partnership with retail-oriented U.S. Bitcoin mining company Compass Mining.
But this mining aspect seems to be stated more for completeness, with Pines quickly returning to the role of the dollar in stating:
“The only way to reverse these deeply embedded structural flows that sap our national strength and security is to shift the global monetary system towards a neutral reserve asset like Bitcoin and give up the ‘exorbitant burden’ of the U.S. Treasury-based dollar system.
Note that moving away from a system where the U.S. Treasury is the reserve asset for the world is not the same as abandoning the dollar as the world reserve currency. Dollars, as a medium of exchange and unit of account, will continue to be in high demand. However, we must gradually replace the Treasury as the reserve store-of-value asset, for which function they are increasingly ill-suited at negative real rates. This will not happen overnight and any transition must be orderly, but we must recognize the unsustainability of the present system and explore alternatives that preserve our position in the world economic order.”
Adversaries are trying to change the international monetary order, Pines says, and are positioning for what comes after. Bitcoin thus at the very least needs to act as a backup asset, in case the United States needs to print too much due to a confrontational crisis. He argues:
“The U.S. possesses a distinct advantage: given that such a large amount of Bitcoin is held by U.S. residents, we stand to disproportionately benefit from its monetization.
A dramatic re-valuation of gold is another viable alternative, but this would have the effect of also benefiting our adversaries, as Russia and China have been aggressively adding to their sovereign gold holdings over the past several years.”
And if the beneficial analysis is not sufficient, “bitcoin is a clear and present threat to China’s strategic ambitions for the e-RMB as well as its efforts to enforce capital controls,” Pines says, continuing:
“Even if the U.S. didn’t stand to itself directly benefit from Bitcoin’s technological innovation, energy incentives, and value growth, we indirectly gain from the constraints it places on China.
The existence of Bitcoin is a severe complication for China’s CBDC ambitions, presenting an attractive store of wealth and effective cross-border payment system to those BRI nations that China seeks to entangle with the e-RMB.
The e-RMB will be an attractive tool for certain states that trade directly with China. We should encourage Bitcoin’s adoption in these nations as an open-source and freedom-promoting alternative that comes with on-ramps and transaction rails that facilitate dollar-exchange and associated dollar-demand as well.
China has banned Bitcoin in its own country, but cannot do the same across the rest of Eurasia, the Middle East, and Africa, many nations of which have relatively permissive cryptocurrency regimes.
In fact, China’s banning of Bitcoin mining led to the U.S. almost immediately taking the hashpower lead. At the heart of the ‘new Silk Road’ Kazakhstan and Russia now round out the top three nations for Bitcoin mining, with Russia’s soviet-era overcapacity in hydro production and cold Siberian climate rapidly emerging as a prime destination for exiled Chinese miners.
Bitcoin could thus serve as a potential ‘wedge’ issue that divides China from its extended sphere of influence, putting China’s Bitcoin hostility at odds with the domestic interests of its erstwhile allies and ‘friends’.”
The analysis goes into far more detail both in regards to how the current dollar reserve system is not working in the interest of national security, and in regards to how it can be employed in a wider strategy, but in summarizing the entire point of this thesis, Pines says:
“Faith in fiat currency built on a foundation of ever expanding (and unsustainable) sovereign debt, while strong at the moment, is not invulnerable. U.S. adversaries may be posturing for a new monetary order that is recentered on a hard asset (i.e., gold) linked to energy (e.g., oil) and marginal control over the price of consumer goods and global supply chains. Russia and China stand to benefit from such a new (or really old) monetary system.
Bitcoin presents the U.S. with an opportunity to shape an alternative system that is also built on a hard asset (i.e., BTC) linked to energy (i.e., proof-of-work Bitcoin mining), and allow the U.S. to reverse the structural trade flows that have off-shored domestic manufacturing and made us acutely vulnerable to Chinese-dominated production and supply chains.
If one forgets for a moment the novel and unique aspects of Bitcoin, one can see the outlines of an arrangement that closely approximates the current ‘petrodollar’ system.
Just as that system is implicitly backed by energy (via the oil trade and the threat of U.S. military kinetic action), Bitcoin is a monetary asset directly linked to energy production (via the integration of mining with domestic grids and energy sources, giving us a plurality of global hashrate).
Crypto-eurodollars, aka stablecoins, provide the bridge between the existing implicitly energy-linked dollar system and this new explicitly energy-anchored proof-of-work hybrid Bitcoin-dollar system.
In this system, as Bitcoin continues its volatile monetization and remains a low velocity asset principally used as a long-term store of value, USD fiat units would continue to serve as a global medium of exchange as well as domestic legal tender.
During this period of transition, as the U.S. onshores more of global hashpower, accrues a disproportionate share of Bitcoin among its citizens, and uses crypto-eurodollar stablecoins to counter the e-RMB, the USD stands to at least holds its relative position as the reserve currency.”
He even goes further and says “Bitcoin, if it succeeds at home and abroad, can help the U.S. and its liberal allies achieve our enduring objective to ‘keep the world safe for democracy.'”
Concluding with “preconception bias and cognitive inertia are limiting in an era of rapid change. Those who fail to adapt, fail.”
All of which makes it sound less like a bitcoiner talking about national security, and more like the national security guys taking the microphone in an unofficial capacity to talk about bitcoin.
There were whispers about them last summer when there was a big debate regarding Senate passing a paid for crypto section in the Infrastructure bill.
Janet Yellen had to fight off the national security Senators to get it through, though an amendment was agreed but did not pass due to procedural pecularities.
We did wonder at the time as to what exactly was the thinking in the national security circles to strongly back bitcoin. Well, this 59 pages document clarifies that now and very fully, with the statement that bitcoin is patriotic, most American, and for freedom, no longer quite sounding as a bit out there.
Because Pines makes a persuasive argument that bitcoin is in America’s interest and can even help it to both counter adversaries and increase the resilience of its monetary system.
