The notion of a Strategic Bitcoin Reserve has been gaining traction among Bitcoin enthusiasts, with proposals ranging from acquiring large quantities of BTC to hold as a reserve. However, there are concerns about the feasibility and implications of such a move, particularly in the context of the US government.
The idea of a Strategic Reserve involves the US government acquiring a significant amount of Bitcoin, with proposals suggesting anywhere from 800,000 BTC to 4 million BTC. Advocates like Senator Lummis argue that this reserve would strengthen the position of the dollar and provide a hedge against economic uncertainty and monetary instability. However, there are concerns that this move could have unintended consequences and undermine the dollar’s status as the global reserve currency.
One of the main arguments against a Bitcoin reserve is that it could signal a lack of confidence in the current dollar-based system. The US issues the global reserve currency, and acquiring Bitcoin as a monetary asset could raise questions about the stability and future of the dollar. This could lead to market uncertainty and potentially disrupt the global financial system.
Moreover, the cost of acquiring such a large amount of Bitcoin would be significant, with estimates suggesting it could cost the US government billions or even trillions of dollars. This expense could be better allocated to other priorities, and the market may interpret the move as a signal that the US is considering a return to a commodity standard for the dollar with Bitcoin as the backing.
Overall, while the idea of a Strategic Bitcoin Reserve may be appealing to some Bitcoin enthusiasts, there are significant risks and implications associated with such a move. It could undermine the dollar’s status as the global reserve currency and create uncertainty in financial markets. Therefore, careful consideration and analysis are needed before pursuing such a strategy. Interest rates would spike dramatically if the US were to consider a hard break with Bretton Woods II. This would cause investors in US debt to wonder about the stability of the current monetary system. The cost of capital for everyone would rise sharply, leading to inflation and a massive redistribution of wealth. Financial markets would tumble, while Bitcoin prices would skyrocket.
If the US were to move towards a Lummis-style reserve, markets would go berserk and President Trump would likely be forced to retract the policy. The idea of a Strategic Bitcoin Reserve would be politically imprudent, as any legislation proposing it would likely be a non-starter in Congress. The executive imposing a Bitcoin reserve without Congressional approval would be undemocratic and could easily be undone by future administrations.
American citizens are effectively consulted for major spending decisions through Congress, and any major outlay like a Bitcoin reserve would require Congressional approval. Trump does not have a mandate to spend hundreds of billions of dollars on a Bitcoin reserve, and trying to bypass Congress for such a purpose would be highly unpopular.
An executive-order based policy on purchasing Bitcoin could easily be undone by a future administration, causing chaos in the Bitcoin markets. To ensure the longevity of a Bitcoin reserve, it should be implemented through bipartisan legislation or even a constitutional amendment, similar to past monetary changes in US history.
A Strategic Bitcoin Reserve would be seen as a wealth transfer from US taxpayers to wealthy Bitcoin holders, making it highly regressive and unpopular. Even if the reserve were funded in a fiscally neutral way, it would still be viewed as an undeserved handout to a small group of individuals. This would alienate the general public and turn them against Bitcoin holders, as there is currently no apparent crisis with the US dollar.
While attitudes towards a Bitcoin reserve may change in the future if de-dollarization accelerates or other countries adopt Bitcoin as a reserve asset, the idea of a Strategic Bitcoin Reserve is not feasible in the current economic and political climate. Any attempt to implement such a policy without Congressional approval would likely face significant opposition and be short-lived. Student loan forgiveness has been a topic of discussion for many years, with some arguing that it is a bailout for those who have the means to attend college and get degrees that may not lead to lucrative careers. However, President Biden’s student loan forgiveness plan aimed to benefit around 43 million Americans, a larger group than Bitcoin holders. The idea of a Bitcoin reserve, on the other hand, has sparked controversy and debate within the financial world.
The term Strategic Bitcoin Reserve (SBR) raises questions about its purpose, especially considering that the US government holds reserves of commodities like oil, grain, and rare minerals for strategic reasons. These commodities serve instrumental purposes, such as market stabilization and emergency preparedness. Bitcoin, however, lacks industrial use and does not generate cash flows, making it questionable as a strategic asset for the government.
Economist George Selgin has pointed out that the US government’s existing reserves, such as gold and foreign currency, have had little to no relevant use in recent decades. The value of the dollar is supported by factors like US GDP growth, government stability, and the dominance of US capital markets, rather than commodity reserves. Gold and Bitcoin are not significant factors in the current American monetary system.
Proponents of a Bitcoin reserve have yet to provide a compelling argument for why Bitcoin should be held as a reserve asset over other options like gold or equities in companies like Apple or NVIDIA. While Bitcoin may be globally liquid and immune to seizure, it does not offer unique benefits that would justify its designation as a strategic reserve asset. Gold, with its longer track record and stability, would be a more logical choice if the US were to re-monetize a hard asset.
Ultimately, the idea of a Bitcoin reserve presents challenges and complexities that extend beyond the realm of traditional strategic assets. While the financial world is becoming increasingly interested in Bitcoin, its role as a reserve asset for the US government remains a topic of debate and skepticism. The Biden administration’s massive infrastructure spending has been a point of contention for many, including myself. I found it to be extremely wasteful and unnecessary, leading me to question the wisdom of further government intervention in the private sector, especially through the issuance of more dollars. As a firm believer in the principles of a markets-based capitalist economy, I am wary of the government’s incursion into areas that are traditionally left to the private sector.
In the United States, the government typically refrains from using its monetary tools to intervene in markets beyond setting interest rates. Its primary role is to establish and enforce the rules of the economic system, rather than actively investing in commodities for speculative purposes. This is why many were skeptical of Biden’s decision to release oil from the strategic petroleum reserve – it seemed like an unnecessary interference in the market.
I firmly believe that the private sector, with its fund managers and capital allocators, is better equipped to make investment decisions in commodities and assets that will appreciate over time. By allowing the private sector to operate freely, the government can still benefit from the resulting capital gains taxes. I have more faith in the expertise of private sector professionals than in government bureaucrats when it comes to managing investments.
When it comes to the idea of creating a reserve of Bitcoin, I see no compelling argument for doing so at this time. The US dollar is not in crisis – in fact, it is thriving compared to other currencies. While there may be concerns about inflation and the dollar’s purchasing power, there is no immediate need for a Bitcoin reserve. The dollar remains the dominant global reserve currency, with no clear challenger in sight.
The recent discussion around establishing a Bitcoin reserve seems to be driven more by political considerations than economic necessity. While Bitcoin has shown promise as a global monetary asset, it is still too volatile and illiquid to play a significant role in the US monetary system. As Bitcoin continues to mature and gain acceptance, it may become a more viable option for governments to consider in their portfolios.
Ultimately, there is no urgency for the US government to establish any kind of reserve, whether it be in Bitcoin or another asset. The government has plenty of time to observe how Bitcoin evolves and decide if and when it should be included in its portfolio. It is important to proceed with caution and consider all possible implications before making any decisions that could have far-reaching consequences.
In conclusion, while the long-term solvency of the US government is a valid concern, there are more prudent ways to address it than by hastily establishing reserves of unproven assets. By allowing the private sector to operate freely and carefully considering all options, the government can make informed decisions that benefit the economy as a whole. The current Federal net outlays as a share of GDP are at the top end of the range over the last century, exceeded only by the level during and after WWII. Despite a decline from the highs during Covid, the deficit remains elevated, leaving very little breathing room in case of a recession. The reckless spending of the last four years, with bipartisan consensus, has led to a burst of inflation that we are still grappling with.
Moreover, the dollar’s share of global FX reserves has decreased from 70% to 60% over the last quarter-century, raising concerns among certain buyers of US Treasuries after the US confiscated Russia’s reserves in 2022. While no crisis seems imminent, there is a potential long-term issue with the dollar that could escalate if a recession occurs and the government is unable to engage in massive stimulus spending due to high rates and a significant deficit.
In light of these challenges, there are several steps that could be taken to address the situation:
1. Increase GDP growth through various means, such as promoting cheaper energy, fostering high-growth industries like AI, and empowering the private sector.
2. Slash government expenditures, which are often more wasteful than equivalent capital deployed in private markets, to reduce the deficit.
3. Limit political intervention in dollar markets and acknowledge that the sanctions-making power of the dollar may affect its international utility.
4. Allow inflation to run hot for a period to decrease the debt load in real terms.
Fortunately, the incoming Treasury Secretary Scott Bessent’s 3-3-3 plan aligns with these recommendations, offering a promising strategy without the need for Bitcoin.
In conclusion, it is essential to address the current fiscal challenges to ensure long-term financial stability and prosperity. By implementing prudent measures and strategic planning, the government can navigate through these turbulent times and secure a sustainable economic future.