Bitcoin’s success poses a risk to the dollar. Trump has to choose – DL News

Wolfgang Monschau is a columnist for DL ​​News. He is co-founder and director of Eurointelligence, and writes a column on European affairs for the New Statesman. Opinions are his own.

The cryptocurrency industry is abuzz over reports that Donald Trump may consider using the Exchange Stabilization Fund, or ESF, to create a strategic reserve of Bitcoin.

They are right to be excited, but for the wrong reasons.

The focus in the markets is only on short-term price effects. I’m not denying that the impact could be significant, but it is the long-term impact that will be more interesting – or annoying if things go wrong.

Trump didn’t really say he would do that.

It was an answer to a key question in his interview CNBC On the New York Stock Exchange.

The European Stability Fund is an emergency fund created in 1934 and used for currency intervention. In most countries, it is the central bank that intervenes in currency markets. The European Social Fund, which was part of the Gold Reserve Act of 1934, was a baby born in the immediate aftermath of the collapse of the gold standard.

Congress was concerned that this would lead to inflationary currency instability, so it created the European Stability Fund as an intervention instrument that would leave the domestic money supply untouched.

US administrations have used the European Stabilization Fund on numerous occasions to stabilize the dollar. During the global financial crisis, the Bush administration used it to support money market funds. I think of it as the ultimate capitalist slush fund.

At the end of last year, the European Stability Fund’s total assets amounted to $213 billion. If you buy Bitcoin, the idea would not be to fix the dollar value of Bitcoin.

But it will create a kind of strategic reserve of Bitcoin.

Conflicting goals

The Trump administration has some conflicting goals here. Trump loves Bitcoin, but he also hates the trade deficit and the overvalued dollar.

My reading of his economic policy priorities is that the latter is the priority, and I fear that it conflicts with the former.

There is talk of a new Plaza Agreement, named after the 1985 agreement in New York’s Plaza, where the US, Japan, Germany, the UK and France agreed on a strategy to weaken the dollar.

These days, finance ministers will likely meet at Mar-a-Lago, Trump’s residence in Florida, or at Trump Tower, which is just two blocks from the Plaza Hotel, but the idea will remain the same.

Trump may need the full force of the European Financial Stability System, and perhaps some of it, to lower the dollar’s nominal effective exchange rate.

Definitions can help if they are implemented intelligently. But it can also have the opposite effect.

The problem of global imbalance and the persistent US trade deficit arose in the fiat economy. It has nothing to do with cryptocurrencies. So the question is whether, in his fiscal policies, Trump can walk and chew gum – and juggle some other things at the same time.

The idea of ​​the Mar-a-Lago Agreement and the Bitcoin Strategic Reserve could easily conflict.

“Very clever idea”

The reason why everyone is discussing the Social Stabilization Fund is that this fund is huge and is managed under the direct control of the US administration.

If you officially classify Bitcoin as a quasi-official currency, you can use the fund to buy Bitcoin, without needing congressional approval. This is a very smart idea

Inclusion in the Environmental and Social Framework (ESF) would give Bitcoin semi-official recognition as a currency in its own right. Gold is not a real currency, but it constitutes the lion’s share of the official reserves of many central banks in the West.

Of the three classical economic definitions of money—a medium of transaction, a store of value, and a unit of account—gold has maintained the concept of a store of value. Bitcoin answers the first question: a means of transactions.

Whether Bitcoin is a store of value is a matter of debate. I think, at the moment, its price is too volatile to meet this characteristic, but it has the potential to act as a hedge against inflation in the long term.

Bitcoin won’t suddenly become a central bank reserve asset like gold, but inclusion in the European Social Fund would be a big deal.

Economic theory makes a sharp distinction between money and capital, but modern financial markets are clearly non-dual. We won’t wake up one day to discover that Bitcoin is our money. But it gradually takes on some properties of money.

“gravedigger”

The move to a cryptocurrency-friendly regulatory regime in the US will also help.

nomination Paul AtkinsAs the next chairman of the Securities and Exchange Commission, a pro-crypto securities lawyer is a sign of the times.

Trump is the first Western leader to support cryptocurrencies.

It’s not just the raw capitalism of cryptocurrencies and the disruptive power of cryptocurrencies that attracts him.

He also wrongly believes, in my view, that cryptocurrencies will help the United States strengthen its global role, especially its competitive position against China. During the interview, he said that he wants the United States to be the country of cryptocurrencies, not China.

When we talk about Trump, we must always remember that he is a zero-sum kind of guy. He sees cryptocurrencies as an investment opportunity, and wants these investments to be made in the United States.

But if Bitcoin really succeeds, it could pose a clear and present danger to the US dollar in particular.

The US State Department and Treasury can impose sanctions on any global dollar transaction, even outside the United States, because all dollar flows must pass through US markets. But no one can impose sanctions on the blockchain.

The only parts of the cryptocurrency world that are subject to regulation are exchanges and derivatives products – not Bitcoin itself.

Trump may unwittingly end up as the gravedigger of the dollar-based global financial system.

This is one of the rare examples of a large economic experiment in real time. It is best to watch it from a safe distance.