A few days from now, my son Jonah and I are going to Japan. We will be joining my good friend Ben Beneche. Ben is a very thoughtful value investor who lives in London and has been investing in Japan for decades. Ben and I have been talking about going to Japan and visiting companies for years – we finally pulled the trigger.
We (IMA) have owned companies all over Europe, but never in Japan (SoftBank is the only exception). I am fascinated by everything Japan – its culture, people, customs, craftsmanship, food, bullet trains and, of course, people. This trip is important for understanding and potentially owning Japanese stocks.
Why am I taking Jonah? Many reasons. I hate traveling alone, which is why I always take a family member on any business trip. I love spending time with Jonah. He just graduated from CU Boulder, majoring in finance, and is in the process of looking for a job. When else am I going to have an opportunity to go on a ten-day trip with him?
Also, I believe seeing the world, seeing how other people live and think, is very important education for my kids (and me). We are limited by the myopic circles of our geography. Traveling is one way of expanding it (reading is another one). Also, some of the best memories I have of my father are from traveling with him.
If you live in Japan, and would like to meet, please drop my assistant Barbara a line at . Maybe we’ll be able to do that.
This article was published in The Financial Times (the Wall Street Journal of Europe). I have to provide my usual warning: I don’t write about politics. In this article I describe economic policy suggested by a presidential candidate and its consequences.
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Trump’s call for a bitcoin strategic reserve is a very bad idea
Politics in the US has turned into our biggest sport. Bigger than baseball, football, and basketball combined, politics has also turned us tribal — we want to win at any cost. And most importantly, we get so engrossed in the sport that we don’t realize that our future — and the future of our children — is the ball we are playing with.
At the end of July, Donald Trump went full Bitcoin (“Trump calls for US to be ‘crypto capital of the planet’ in appeal to Nashville bitcoin conference”). He wants the US to become a “Bitcoin superpower”; he promised to build a Bitcoin strategic reserve. I understand why Trump is doing this; he is a politician, and that is the cost of getting endorsements from crypto bros.
This policy would be very dangerous for the US. Let me explain why.
Money is more than just green paper with the faces of dead presidents, and more than even secure bits and bytes. There are many ways to define money. One way to look at it is as a claim on a country’s productive power and assets, reflecting the value of a nation’s economic output. Before humans started to use hard or paper money, we bartered with each other. This required a coincidence of needs — my need for milk had to coincide with your need for bread. Then we switched to commodity money (metal coins, shells), and then somewhere around the 6th century, the Chinese invented paper money. And then, with the advance of computers, money got digitized — over 90 percent of money in today’s world is digital.
There is another way to look at money — as a story. It’s a story you’ve been told not through reading but through everyday actions. Your parents went to the grocery store and traded dollar bills for milk, eggs, and donuts. And then the next day they traded the green paper for gasoline. We’ve all seen it happen countless times, through people’s actions. And now, as a society, we believe in the story of currency. This mass belief is incredibly important for society’s well-being; if it breaks down, so will society.
Now let’s look at what a reserve currency is. There would be no need for a reserve currency if there was only one country on the planet or if we never traded with other countries.
For a currency to become a reserve currency, the country that issues it needs to have a stable political system and a strong and preferably growing economy with low inflation. These factors are necessary for people to trust in parking their “reserves” in the currency, but that’s not enough. The country’s economy must be big enough to handle being the reserve currency. Let me give you an example: The Swiss franc objectively would be a great reserve currency (and it is to a small degree) — Switzerland has little debt, runs budget surpluses, and has a very stable political system. However, if people chose the Swiss franc as a main reserve currency, it would destroy the Swiss economy. The franc would appreciate in value so much that the watches Switzerland loves to export and even Swiss cheese would become unaffordable for the rest of the world.
There are many countries that have stable economies and political systems, but very few that have the size to maintain a reserve currency. China has the size, but it is an authoritarian regime — the world is less likely to put their reserves in the hands of its Communist Party. Also, China’s currency is not free-floating, and the government has significant control over the flow of currency in and out of the country.
The euro is really the only contender to the US dollar to be the world’s principal reserve currency, but the European Union is a combination of countries with different productivity levels and structurally different economies, and it has its own fundamental problems, which showed up in spades during the 2008 financial crisis.
Remember how I said that currency is a story? Well, a reserve currency is a global (super) story. Many people in many other countries, who may or may not have visited the US or done business with it, have bought into this story.
They have bought in, and for the right reason. After World War II, we had the strongest, most diverse economy, replete with natural resources, and two friendly neighbors, to the north and south, and two oceans, on the east and west. We are a democracy, and our capitalist, free-market economy had turned our country into the strongest in the world, with the strongest military, no capital controls, and hey, we were responsible with our finances — our debt was manageable, and though we ran budget deficits, they were not huge.
No longer! Today our $27 trillion economy has $35 trillion in debt. We collect $4.8 trillion in taxes, but we spend $6.3 trillion — we’re running a 5.6 percent budget deficit. Already, our finances don’t inspire a lot of confidence in the US dollar: As we print more dollars every year to finance our growing budget deficits, the dollar story of an all-mighty reserve currency is losing its luster.
Anyone who is paying attention is already starting to question the trajectory of our finances as well as the state of our political system. We used to have the undisputed reserve currency because we were great on both an absolute and a relative basis. Today we are just the best alternative, not because we are so awesome but because we are a less-dirty shirt in the old laundry basket.
This brings us to Donald Trump’s rhetoric about wanting the US to build Bitcoin strategic reserves. Despite its astronomic price appreciation, the market value of Bitcoin is only about the size of Switzerland — an economy of 9 million people. Currently, Bitcoin is owned mostly by crypto bros and investors who wish they had bought it at 50 cents. This rhetoric from a presidential candidate is dangerous, and if he’s elected, this governmental policy drastically changes Bitcoin’s story, legitimizing it and making it a contender for global reserve currency status. This would be catastrophic for the US.
Bitcoin is not controlled by anyone, including our government. We cannot print more of it to finance student or medical debt forgiveness, help out with first-time buyer down payments, or deliver tax cuts when we are running huge budget deficits. Nor can our politicians print more of it to finance their campaign promises that we as a country cannot afford, just to buy themselves more votes. Yet Bitcoin, just like gold, looks shinier with every empty campaign promise and every trillion dollars we add to our debt.
What will happen if strangers fall in love with another story that is not green and doesn’t have pictures of the US presidents?
The demand for the US dollar will decline. Foreigners will stop financing our lavish lifestyle beyond our means. The interest we are paying on our debt will go up. Our budget deficits will rise, not because politicians bought more votes (at least some of the US populace will have gotten a free lunch), but because we are paying higher interest rates for past free lunches. Einstein called compounding the eighth wonder of the world. We’ll experience a lot of it, which will eventually turn into hyperinflation.
The US president and presidential candidates (if they love this country more than they love themselves) should be the US dollar’s biggest salespeople. And the Bitcoin story should not be promoted — Bitcoin should not even be accepted as a form of donation to candidates for the position of US President. Bitcoin is not going to make America great. What will help this country continue to be great is getting our debt and deficits under our control, and neither candidate is talking about that — they are too busy buying votes.
Key takeaways
- Trump’s call for a bitcoin strategic reserve is a politically motivated move to appeal to crypto enthusiasts, but it could have dangerous consequences for the U.S. economy and dollar.
- The idea behind Trump’s call for a bitcoin reserve ignores the fundamental nature of money as both a claim on a country’s productive power and a widely believed story of value.
- Trump’s call for a bitcoin policy fails to recognize that a reserve currency requires a large, stable economy and political system – conditions that Bitcoin, with its limited market size, cannot meet.
- If Trump’s call for a bitcoin reserve were implemented, it could undermine the U.S. dollar’s status as the world’s reserve currency, potentially leading to economic instability and hyperinflation.
- Rather than Trump’s call for a bitcoin strategy, presidential candidates should focus on maintaining the strength of the U.S. dollar by addressing the country’s debt and deficit issues.
I just got to read your article. Now we know, who won and that the threat of Bitcoin being used as a reserve becomes more real. It remains to be seen how many of the contracts Trump made with those who supported his campaign will be executed. Was any contract made with the people of the USA who voted for him? I see how Tesla’s stock climbed immediately after Trump’s victory. This makes for a very good investment for Musk. He spent over $100M and on November 6, his investments soared more than $26 billion according to NPR.org.
I hear what you say about the allure of the shiny new thing, but I wonder about the wisdom of trying to protect the USD in this way.
This may seem like a magic trick, but the following idea is intriguing. Luke Gromen has proposed it for some time now.
The Federal Reserve Banks would tender all their gold certificates to Janet Yellen.
These certificates currently record the 261 million oz of gold they represent at ~$42/oz, about $11 billion.
Janet Yellen would then issue new gold certificates at the current market value of around $2,500.
This revaluation would generate a cash balance at the Federal Reserve Banks of ~$652 billion.
The Federal Reserve Banks would then remit the difference of $641 billion to the Treasury General Account.
Janet Yellen would then purchase this amount of Bitcoin and set it aside in the hope that it would one day be sufficient to repay a substantial chunk of the Federal Debt.
Magic – thoughts?
I look at this from a historical perspective. People of Jewish heritage have been forced to leave countries with whatever they could carry, and with belongings searched for currency, gold, diamonds, and any other wealth. Based on current conditions, I expect that parts of Europe and non-European countries with English speaking European ancestors (U. S., Canada, Australia, New Zealand) to, before 2040, also have mass exodus of Jews. In this context, bitcoin can only be good, unless it puts in mortal danger Jews who don’t have enough wealth to bribe their way out, but unable to convince border security they have no bitcoin.
Absent this context, I keep wealth in stocks and ETFs. American stocks are mostly overvalued, and almost all Western countries have the same currency issues facing these States. With Japan’s annual birth rate at under 400,000, and its death rate at more than twice that, real estate is quite reasonable in Japan, especially considering its beauty and safety, but a factory needs workers and customers, and a growing company needs to find new workers. The demographic crisis is the intended outcome of the nearly worldwide governmental financial crisis. Debt default was not helpful in the 1923-1933, and the current budget crisis is 10-100 times worse that the crisis that led to WW2. I don’t think bitcoin will break the system, but that’s because I think the system already needs a fix in the quadrillions of dollars
But if eggs are $2.50 or $3.50 per dozen matters not, if I can afford one dozen eggs. If certain proposals pass into law, I expect permanent shortages of popular food items. This sounds very Soviet, and Soviet conditions can persist for decades.
I think you have a skewed picture of what is being proposed. You are confusing the concept of a “strategic reserve” and the concept of a “reserve currency”. I don’t think Mr. Trump has any intention of replacing bitcoin for the dollar as a reserve currency.
We have a strategic petroleum reserve, but nobody is saying that we should replace the dollar with petroleum. We also have a strategic gold reserve at Fort Knox. The dollar used to be backed by a fixed amount of gold, but that ended in 1971, so we went from having a gold-backed currency to having a strategic gold reserve.
A strategic bitcoin reserve would be very similar to the above-mentioned entities. It would be a pool of bitcoins that the US could fill when the price is low and sell off when the price is high. As bitcoin has minimal and highly predictable inflation associated with it, it could end up (similar to gold) being an inflation hedge. The current volatility of bitcoin’s valuation is a problem, but that volatility will likely become less of an issue over time as supply and demand come into more of an equilibrium. In fact, if the US started a bitcoin strategic reserve there would be a significant increase in demand as the US would be a buyer and therefore more other players would be attracted to the market. The fact that bitcoin and ether are more easily accessible due to the creation of ETFs will likely increase demand as well. Since only a small fraction of the world’s population owns any bitcoins, if their popularity and ease of access increase even minimally there should be a significant price appreciation.
The other factor that snooty people in the US who dump on bitcoin fail to appreciate is that since we do have the world’s reserve currency we don’t have to worry about moving money around. Most of the world’s population doesn’t have that luxury. Imagine you are Ukranian and want to get out with your accumulated savings. You could convert your assets into hryvni and walk across the border with them, but they wouldn’t be spendable and might not be convertible. You could convert your assets into gold or euros or dollars and carry them with you, but you would be vulnerable to theft or extortion. If you converted your assets to bitcoin, however, all you need to carry them with you anywhere in the world is the 12-word seed phrase that secures your bitcoin wallet. Also, if you lived somewhere with an unstable currency (looking at you, Argentina!) and didn’t have the ability to convert your pesos into dollars and to store them somewhere, converting them to bitcoins (more or less) maintains their value and makes the problem of safely storing them a nonissue.
can’t wait to see your non-polito column on featherweight harris’ call for price control
I would argue little about fact that bitcoins are not controlled by anybody, i think that’s just been sales or promoting argument of it. I think there is just very few who owns the most of it and therefore they control it pretty easily and it makes this even more worse ….
As Trump and as most of these bitcoin “prophets” they really don’t understand the money functions and key characteristics of money/ currency. As You said countries currency is backed with its economy and this facts should say it all.
Yes, foreigners will stop financing your lavish lifestyle that is beyond your means. It my estimation its going to be expedited by a collapse in stock, bond and real estate prices and the value of the dollar itself. Question is: Just how long can the FED and the big banks keep propping the system up.
Thank you for this clear and accurate article–I appreciate it that you explain so well that those of us with no financial background can understand the issues. I hope you have a wonderful time in Japan with your son, and look forward to reading more about your experience.
I could agree, if there was any chance politicians would address spending and start cutting expenses. They won’t, they can’t and they never will. Since FDR’s banning of gold ownership in 1933, our currency become untethered from reality. From 1850 to 1912, a $20 gold piece jumped from a value of $20 to $20.36. Since 1913, a $20 gold piece is worth over $2,500 or an inflation rate of 1,250%. Because the government has the ability to print unlimited amount of money, politicians have let spending spiral out of control and never considered cutting expenses. This 1,200 inflation rate imposed on the US taxpayer is nothing more than a tax, albeit hidden and after the fact. If politicians were require to get voter approval to increase taxes for their frivolous projects or unnecessary wars, the taxpayers would convincingly vote down nearly every one. For politicians to address spending and expenses, It would fly in the face of everything that benefits them. For example, how does Joe Biden build wealth to over $50M, while never holding a productive job? As a comparison, I’ve earned more per year than Biden, since the mid-1980’s and trust me, I don’t have $50M. I’m considerably poorer, while being 100% productively employed for over 40 years, with a considerably better education on economics, finances, business and accounting, than the dolt napping in the White House. Obviously, he was bought early and he stayed bought.
There have been over 20 hyperinflationary economies in 20 different countries, since 1900. All of them were faced with the same decision/dilemma: 1) Cut expenses or 2) Print more money. Actually, it was no decision at all, nor did it take much time, as 100% of them made the same decision and continued to print money, until they had destroyed their nation.
Quite frankly, Bitcoin is our only hope. The US$ is dying and will certainly die. That is, unless someone can prove me wrong, in that one should never underestimate the belief, that politicians can always make things worse.
Educate yourself. Don’t trust the government to do the right thing or trust them at all. My recommendation is to read, When Money Destroys Nations, about the hyperinflation in Zimbabwe. Then go about protecting yourself, as the government will get to a point, where they can protect no one.
I would sure like to be wrong. And if I am, my financial preparations continue to benefit me, as I started buying gold/silver a couple of decades ago and Bitcoin in the last 7 or 8 years. These have increased in value, quite significantly. I spent quite a bit on my gun collection, which is also considerably more valuable. IF I am wrong, I could cash out on any of these, as any time.
1) Not sure I followed your math: “ We collect $4.8 trillion in taxes, but we spend $6.3 trillion — we’re running a 5.6 percent budget deficit. ”. By my math that is a 31% deficit. The spending is 31% higher than the income. Unless your revenue and spend numbers are wrong, that is REALLY scary and we will blow up rather soon.
2) Not sure I followed your reasoning: “ Bitcoin is not controlled by anyone, including our government. We cannot print more of it to finance student or medical debt forgiveness, help out with first-time buyer down payments, or deliver tax cuts when we are running huge budget deficits. Nor can our politicians print more of it to finance their campaign promises that we as a country cannot afford, just to buy themselves more votes. ”. That right there is EXACTLY the reason a non-fiat currency would be far better for the country than paper dollars. What are you arguing here? That the profligate and irresponsible spending you enumerate is important to maintain?
(6.3-4.8)/27=5.6%
Why do you divide by 27, not by 4.8?
4.8 is the amount collected in taxes.
Hello Vitaliy
Thank you for sharing your ideas and opening up this discussion. Your main argument suggests that anything outside of the US dollar system would be detrimental, particularly for the US. I’m not here to say you’re wrong—I actually agree with many of your points. However, I disagree with your solution and your view on the future trajectory of the US dollar as a reserve currency. The US dollar’s dominance is over, and those who have managed it will be held responsible.
Having followed your writings for some time, I know you immigrated from Soviet Russia after the fall of communism. I understand how this experience shapes your perspective on the US and its economic system. However, I believe your view overlooks math and economic trends. In 1991, the US debt-to-GDP ratio was 44%. Today, as you pointed out, it’s 123%. The US you immigrated to has changed; it’s now a shell of what it once was, weakened by decades of monetary and fiscal mismanagement. If we stick to your analogy of money as a “story,” then the authors of this “super story”—the US dollar as a reserve currency—are its people. And many of these authors have abused their power, leading to an era of “kicking the can down the road.” I’m a Gen Z, born in 2000. That can is being kicked right at my generation. You mentioned “getting our debt and deficits under control,” but honestly, the math of it all makes me laugh. How could this possibly be achieved? By raising taxes? By assuming perpetual growth? By lowering interest rates indefinitely? The hard truth is that it won’t happen. And I’ve learned not to trust any politician who claims otherwise. The only foreseeable way to reduce debt is by inflating the currency further, harming the majority’s living standards while enriching a select few. This is not a sustainable path to unity or prosperity in America.
The US has a monopoly on its currency, and with the “power of the printer,” this power is far too tempting to resist. I don’t trust it will stop—and why should you? This is why I disagree with your argument. Politics or government policies cannot halt the decline of the US dollar’s status as a reserve currency. This brings me to my belief in Bitcoin’s value proposition.
You asked, “What will happen if strangers fall in love with another story that is not green and doesn’t have pictures of US presidents?”
I believe a better story could emerge. Why should one country have the authority to write the economic story for the entire world? I struggle to understand this idea. Isn’t this stance against the principles of a free market? A shift to a different economic story wouldn’t be easy or without its challenges, but clinging to the current narrative just because it benefits a few while disadvantaging many, particularly in places like Africa and South America, isn’t a story I want to be a part of. I want to help write a better story, not one that perpetuates a comfortable life for a few while others struggle. Of course, I understand why the US would want to maintain its dominance—it’s been at the top for a long time, and a fall from grace is intimidating. But history shows us that every great empire, dynasty, or country eventually faces decline.
So, while I hear and understand your perspective and deeply value your thoughts, my view comes from a different place. As a 24-year-old, I might not have as much experience or education, but I don’t see that as a limitation. I’m using my perspective as a strength. I don’t believe the US dollar’s status will crumble overnight or even in the next decade, but the US’s unrivaled power is already waning. And I say this as a proud American. Bitcoin represents a new story—a free market narrative that can’t be controlled or manipulated.
Thank you for reading my long comment. I’m passionate about this topic because it impacts my generation profoundly; even if many don’t fully understand the effects, we feel it every day
Kind and peaceful regards,
Jordan Weinstein
You’ve just made the most compelling argument for why the U.S SHOULD buy Bitcoin. Let’s trade dollars which are becoming worth less and less for Bitcoin which is becoming worth more and more.
There are 180 currencies in the world and approximately 1/3 of them had inflation rates higher than 7% last time I checked. I think a currency controlled by math and not by vote buying politicians is a worthwhile endeavor.
We know bitcoin’s exact inflation rate for the next 100 years. governments can’t print more of it if they wanted to. That seems a bit more stable than a government that is perhaps on the verge of entering a dept spiral and hoping to print their way out of it.
The US should buy Bitcoin before everyone else figures out that it is better suited to be the world’s reserve currency.
While I greatly respect the depth of your knowledge, the excellence of your written works, and the beauty of your father’s artwork, the fact is that America’s political leaders will NOT address the problem of their profligate spending until a disaster occurs. It’s just easier for them to keep kicking the can down the road. As more countries realize that it’s not their responsibility to prop up the US dollar and finance our lavish lifestyle, they will abandon us for gold, bitcoin, oil, lithium, or who knows what. Our children will live through terrible times, not because of Bitcoin, and not because of Donald Trump. The problems created have occurred over generations, created by lying presidents and politicians who thought that they could spend their way out of ever increasing debt. I may not live to see it, but the US economy will eventually fall, taking much of the world with it. Some problems have no solution. I fear that the decline in the US dollar is one of them. Electing Donald may flatten the curve, and Harris will simply accelerate the decline. But the slope of the dollar’ value is not positive.
Agree US debt is a problem.
Not sure why our elected representatives lack incentive to move toward a balanced budget.
I care but feel disenfranchised from any levers of influence
What governments dislike bitcoin the most? I believe bitcoin can coexist with other currencies. It might just br the lever needed to empower the weak, impoverised, and oppressed around the world. The dollar as a reserve currency didn’t do much for Argentina.
I’m as concerned about how Iran, China, Russia, N Korea and their kindred of Cain view us as I am about maintaining reserve currency status.
I agree that Bitcoin is a bad idea. Just like NFT.
Your assertion that no political candidate is getting our debt and deficits under our control stems from your position as an investor, a capitalist. You are inherently vested in a US dollar. For the same reason, you don’t like unions. They are eating the capitalist’s cake. We all want to eat “the cake”. I also have my own bias when it comes to political preferences. But one thing will unite us all when someone touches our democracy. There are lots of things at stake because Trump derailed the Republican party.
Your views on the U.S. dollar as a reserve currency are accurate. Our national standard of living is partially financed by the entire world. Without the dollar as a reserve currency, citizens of the U.S would see hard times like they only read about in fictional books. I hope we can do something as a country to put ourselves on a more steady financial footing. I am amazed the situation has not come to a head already. I guess as you wrote, our currency is just the least worst option–for now. I hate owning gold, but I feel as though it would be imprudent not to hold some.
There are real goods and services in the economy. Then there are proxies, for convenience and to to save search costs. That’s been true since the first warehouse receipts in Sumeria, to letters of credit from the Knights Templar in the holy lands, all the way to gold, and then paper money. The US dollar has been the preëminent token for the last hundred years.
Now, however, proxies are subject to country risk and inflation. Over-printing currency destroys value and is politicians’ favorite way of hidden theft.
Bitcoin and similar arose solely to prevent overprinting, at loss of sovereign backing. Those who create value now must choose their poison.
This morning during my morning drive I was thinking of this exact idea -why would Trump think this is a good idea and if elected, would his Treasury Secretary ask him to walk back his promise. Good or bad, he has been good at keeping his promises. I really enjoyed your analysis. Taking away doubts about the reserve status capacity of the US dollar has to be a priority for the next president.
Agreed that Bitcoin has no place in being a reserve currency. BUT..
I would find it great that “We cannot print more of it to finance student or medical debt forgiveness, help out with first-time buyer down payments, or deliver tax cuts when we are running huge budget deficits. Nor can our politicians print more of it to finance their campaign promises that we as a country cannot afford, just to buy themselves more votes.”
Except we can “deliver tax cuts” in a deficit as it promotes spending possibly more overall tax intake even though the percentages are lower. Seems like you are not a supply sider. The answer for now is to control the spending and not raise taxes on anyone. Trump has run a business or 2 😉 The alternatives make government their own business so it becomes power for them and the way they make money, and we all pay for it. Plus, how can any wall-street / investor think it’s ok to even float out there that they would tax unrealized gains – on anyone!
I’m a huge Vitaliy fan, and agreed (as usual) with what he writes about President Trump’s Bitcoin Reserve proposal. That said, has last six words about the candidates (“they are too busy buying votes”) only applies to Kamala Harris. She is a far graver threat to both a Free America as well as a functioning Capitalist society, and would be a disaster to Investors. It’s a shame that this article didn’t include that counterbalance, because it leaves a very incorrect assumption.
Fabulous explanation of reserve currency and the bitcoin madness. I will pass it on.
Re your trip to Japan. I lived there 5 years in 1981/82 and 1994/97 and loved it. Our granddaughter, studying at Oxford Asian studies, spent last year in Japan (she is fluent in Japanese) so we used the occasion and visited Japan last year for 3 weeks. Great idea taking your son, it broadens the horizon immensely. Japan is one of the few countries that I still admire.
Best,
Jay Zednik