Written September 21, 2021
You have probably heard of the petrodollar. You may not know the ins and outs, but you have heard the term in history class or on some podcast. In a very simple and reductive way, it is an abstract noun meant to show the political and military denomination of the United States’ dollar as the sole purchasing currency of oil. By creating the exclusive medium of exchange to be their dollar, be it in treasuries, bonds or cash, the United States could “quantitatively ease” their expanding monetary supply into the ever-demanded energy commodity that is oil.
The idea of tying your monetary system to an energy system might seem a bit odd at first, but consider the actual exchange of capital to be one of time spent earning the pay (working debt for credit capital) for a direct-product-of or service-based expression of the seller’s time. It might seem trite, but time is money; perhaps the truest commodity of the free market. So, by tying your hard-earned greenbacks to an energy-derived system, one can help preserve the scarcity of time spent earning.
This is the concept behind the numerous bimetallic standards the United States has applied before, during and after the revolution of 1776. One central bank and 195 years later, Richard Nixon closed the gold window, severing the stable tie of the dollar to the price of gold, and escorted us into the wide and open skies of fiat currency. What felt like high flying through the following decades was actually falling deeper and deeper into the cavernous hole of an ever-expanding debt balloon. Monetary growth expanded from $636 billion in January 1971 to an absurd $7.4 trillion by the time our fiat experiment caught up to us in the winter of 2007. The pressures of the cascading defaults of a Frankenstein financial creation hit in 2008; a monstrous body of illicit subprime mortgage speculation with the head of a eurodollar system liquidity squeeze.
By the time the news broke of a single hedge fund in the EU defaulting, the fears of insolvency among the system ran as far as New York City. Thirteen years ago this month, a bank run at the fractionally reserved Lehman Brothers drained the 161-year-old institution in a single afternoon. Why would issues with the credit of a single firm cause a global recession? Why would a bad trade for a hedge fund have this much effect on the United States dollar system, never mind the rest of the world’s currencies? The answers are concurrently abstract in exact psychological cause, for, after all, money is just a communications tool, but shockingly simple in an economical sense. Every market, of every kind, can be reduced to simple supply and demand. Every market, at the fundamental core, consists of buyers and sellers. So how did this assumed localized liquidity crisis occurring from a hedge fund default suddenly become a worldwide problem?
Not only did they not have the money to pay the debt in liquid reserves in the bank when the chickens came to roost, but they had already previously sold packaged shares of their debt around the global financial market. Larger hedge funds happily bought these compartmentalized debts in order to allow portions of their wealth to earn interest in the form of another firm’s debt. It was a nice gambit for a while; the smaller, less liquid companies got access to much needed credit, and the larger, more established companies got to earn slim but compounding percentages on assumed future profits. Everyone’s a winner, baby. But when one of those small debtors goes under, like in the case of the narrative of a local default due to some poor and over-leveraged mortgage plays, the larger firms are caught holding the realized loss of their now defaulted debt purchases; overnight that cheap and easy debt became very expensive.
But these days of wine-and-roses ponzi of repackaged, fractionalized debt-for-credit-now was not just enjoyed by a small chain of firms but rather the near entire financial system. The once healthy and strong tree was now a rotten log, eaten away from the inside by vicious, parasitic debtors and gluttonous, grubby creditors. A system-wide dollar liquidity crunch led to defaults and bank runs while, simultaneously, defaults and bank runs led to a system-wide dollar liquidity crunch. A financial crisis perfectly placed right between a Red and Blue president should sound awfully familiar.
But in 2007, there was Ben Bernanke, nominated by George W. Bush and later renominated by Barack Obama, to bail out the banking system that just got caught with their pants down. After gambling with homeowner’s debt via fractional reserve margin plays, the American banking system turned to the lender of last resort, the Federal Reserve, to generate liquidity by printing dollars. The future money printing savant Steven Mnuchin, then of OneWest Bank, profiteered on the bailouts, collecting massive service fees and executive bonuses for the very people and corporations that caused (see: benefited from) the recession in the first place. As the working class licked their wounds and prepared for winter, the Cantillionaires feasted on an eroded housing market and cheap index funds.
We have seen practically nothing but unmitigated growth in markets since these purple bailouts, that really only stood to further drive wealth inequality in the coming decade, and further yet exacerbated by the pandemic. The once unifying financial protests slowly faded into a divided, bipartisan culture clash, with the liberals blaming the Bush administration and the conservatives blaming Obama’s. In a sign of mutual-assured profits, when given the opportunity to prosecute Mnuchin of aforementioned fraud, then acting DA of California and now Vice President Kamala Harris declined to press any charges whatsoever, and, in fact, he later became the Secretary Treasurer only a decade later under President Trump.
So we can see how the violent monetary base expansion of the United States dollar could inflate away the purchasing power of an individual dollar, hurting savers and those with dollar-denominated positions, but why did this not hurt the United States’ purchasing power on a net basis? Why didn’t the massive inflation of dollars, from well under $1 trillion in 1971 to $10 trillion in 2012, bring the economy to its knees and relinquish economic reserve hegemony to China or Japan, our biggest debtors? By the time millions of Americans found themselves without homes and the Occupy Wall Street movement fizzled out, the Federal Reserve was back to business as usual, raising interest rates and resuming sales of bonds to foreign entities, and eventually, to itself. How were we able to fight off the mechanics of an unhinged money supply decreasing its demand?
The reality is, the United States never truly left an energy standard, we just simply switched from a gold-backed dollar system, to an oil-based dollar system. With the decree of 1971, the gold dollar was destroyed, and in its place, the petrodollar was born. American Imperialism has worn many clothes, red and blue cloth alike, but it has always been for one purpose: to make more money. The activity in the Middle East, starting with the marines landing in Beirut in 1958, mutated into a proxy war in Afghanistan between the USSR and the U.S. during the Cold War, and finally grew into a full-scale occupation in the summer of 1990 with Bush Senior’s directed invasion of Kuwait.
By occupying the oil-rich nations of the region, the United States enforced sole denomination of the market share of all petrol sales to foreign entities in dollars. This allowed the Fed to expand our monetary supply, slowly but surely over 50 years, with no apparent loss of demand. Oil-dependent countries across Eurasia were forced to buy dollars first, before then purchasing the precious petrol needed to power their industrial expansion. By 1990, the U.S. dollar system had expanded to $3 trillion dollars. Over the next 30 years, the United States had expanded itself with maneuvers in Iraq, Syria, Lebanon, Yemen, Turkey, Jordan, Saudi Arabia and only now are we removing the last remaining military presence in Afghanistan; by the fall of 2021, the U.S. dollar system stood at $20 trillion.
So, why are we moving military presence out of the region now? Seems like an inappropriate lever to give up in a time when inflation has been acknowledged by retail and a pandemic disrupts supply chains and labor forces across the globe. Why would we want to jeopardize our world currency reserve status by removing our ability to prop up the dollar’s demand, as global interest rates sit at zero, and some, in fact, below it? A ponzi cannot simply be tapered, and we now find ourselves mere weeks away from smacking into our debt ceiling and risking default.
Historically, the United States has raised the debt ceiling countless times in recent memory, across all expressions of political spectrum in the three branches of government, and such are trained to expect the same. We have always had a place to put that new found supply of debt expansion, into the forced demands of a petrol-based dollar system. What makes this threat of default perhaps different from the 2008 crisis? It is nearly the same set up, with a diversified, debt-riddled real estate market on the brink of defaulting, with China’s Evergreen playing the role of the Lehman Brothers, causing a short-term deflationary pressure on the global dollar system. We know more printing is going to come, to prevent default of China’s real estate market, as well as prevent the U.S. from defaulting on its loans.
But it isn’t quite the same for a mathematically succinct reason; the compounding service on our near $29 trillion dollars of debt is now beyond the growth of the GDP of the country. We cannot simply raise interest rates due to this debt service, and yet with the acknowledgment of inflation running far beyond the assumed 2% per year, the once formidable long-term treasury bond yields have made the $120 trillion dollar-denominated bond market mathematically worthless. If a bank bought a large amount of 10-year bonds expecting a yield of 2% over a decade, their money is now stuck no longer generating any profits. The not-yet matured bonds went from guaranteed profits to not even keeping up with the inflationary action of the dollar in just the first year.
The last time we saw the markets on the ropes was March 2020; oil futures went negative, bitcoin halved in value, and precious metals and stock indexes across the economy hemorrhaged value simultaneously. If you were lucky enough to have supplied yourself with the knowledge, it was a once-in-a-generational buying opportunity for commodities. A mere two months later, Bitcoin nodes across the globe enforced the third of 33 supply issuance halvenings and decreased the block reward from 12.5 BTC to 6.25 BTC per mined block. For the first time ever, the relative bitcoin supply issuance was below 2%, and thus below the average inflation of both gold coming out of the ground and the average inflation of the United States dollar. By that same time next year, bitcoin had run from just above $3,200 to nearly $65,000. There were very few aware of it at the time, but on that dark Thursday back in March, a new financial instrument was born: the bitcoin-dollar.
Satoshi Nakamoto’s Bitcoin was directly inspired by the events of 2008, immortalizing The Times’ headline from January 9, 2009, in its inaugural genesis block. Today, we find ourselves again on the brink of another bail out. A signaling of the Fed on their dot chart of tapering off bond purchases causes market retraction, and an explanation the next day by a Fed chair causes dovish reclaims of yesterday’s all-time highs. If we raise interest rates, we can no longer afford our debt service, and if we don’t raise interest rates, we allow further debt expansion, monetary debasement and loss of purchasing power of the net dollar system. How can we continue to keep up demand for the dollar while still pumping the money supply to pay off our compounding debts? In retrospect, it was inevitable that the first country to adopt bitcoin would be dollarized. El Salvador, the first nation state to adopt bitcoin as legal tender, is one of 66 dollarized countries in the world. Not only does nearly 70% of the population remain unbanked but almost a quarter of their GDP is created via USD-denominated remittance payments. Native to the execution of their Chivo wallet, a Lightning-enabled app based on Jack Maller’s Strike, is the use of a stablecoin pegged to the dollar. In fact, in a few regions, Strike directly uses the oft-misunderstood Tether, or USDT; the largest stable coin by market cap at nearly $70 billion.
Why does this matter? Aren’t customers simply using the dollar stable coin for a moment before transferring and storing their value onto the Bitcoin network? By creating an infrastructural on-ramp to Satoshi’s protocol that is denominated in dollars, in effect, we have recreated the same, ever-present demand for an inflating supply of dollars demonstrated in the petroldollar system. This does not mean you can not use euros or pounds to purchase bitcoin, just like there was never a literal monopoly on the sale of oil in dollars, but the volume on BTC trading pairs is arguably inconsequential outside of dollar-denominated markets; BTC/USD pairs make up the vast majority of volume on the global market. By expanding the Tether market cap to $68.7 billion during the first dozen-or-so years of Bitcoin’s life, when 83% of total supply was issued, the U.S. market made sure the value being imbued into the now-disinflationary protocol would forever be symbiotically related to the dollar system.
Tether isn’t simply “tethering” the dollar to bitcoin, but permanently linking the new global, permissionless energy market to the United States’ monetary policy. We have recreated the petroldollar mechanisms that allow a retention of net purchasing power for the U.S. economy despite monetary base expansion. If the peg of a dollar-denominated stablecoin falls below one-to-one, large arbitrage opportunities are created for investors, bankers and nation states to acquire dollar-strength purchasing power for 99 cents on the dollar. This occurs when expanding stablecoin supply leads to less demand, and those trying to purchase dollar-denominated commodities on bitcoin/USD pairs are forced to sell at a slight perceived loss. So, like any market, when supply increases causes demand to decrease, the selling price moves down; the selling price moving down briefly below a dollar causes demand to increase and suddenly we are repegged at 1:1.
The reason this works uniquely with bitcoin versus oil or gold is the verifiable, auditable and scarce monetary policy of the Nakamoto Consensus; there will never be more than 21 million bitcoin. By combining a decentralized timestamp server via proof-of-work to solve the digital double-spend problem, with a hard-capped token distribution that is innately tied to its security and decentralized governance, bitcoin is the only commodity to break the pressures of increasing demand on inflating supply. If gold doubles in price, gold miners can send double the miners down the shaft and inflate the supply twice as fast, thus decreasing demand and price. But no matter how many people are mining bitcoin, no matter how high the hash rate increases this month, the supply issuance remains at 6.25 bitcoin per block. Bitcoin is the only decentralized financial model in existence, and most likely the idea of a “decentralized stable coin” is pure logical fallacy.
How can you distribute, secure and order transactions in a decentralized manner when the monetary policy itself is innately tied to the whims and dot plots of a seven-person centralized Federal Reserve? Tether and the grander stablecoin system is a money market for the digital financial market place at large. By creating a robust, heavily margined ecosystem perpetuated and overwhelmingly supported specifically with inflows from dollar-denominated tokens, Tether and the like have pegged the short- and medium-term success of the bitcoin market to the dollar; when bitcoin retracts, arbitrage opportunities now exist for the dollar system to inflate further into the hard-capped, ever-demanded monetary system of Bitcoin. This pendulum-like market mechanism is the key component of the most important technological advancement in the finance world since the energy-based bimetallic and oil standards of yore. The world economy now finds itself irreversibly changed by the dawn of the bitcoin-dollar era.
Perhaps we should be less surprised by this realization than we are; the clues for an encouraged and implicit governmental policy approach to the dollarization of bitcoin are numerous. For starters, SHA-256, one of the secure hashing algorithms used in the Bitcoin network, was invented by the National Security Agency. But from strictly a financial and regulatory standpoint, the United States has significantly much more to lose than most with a net loss of purchasing power of the reserve dollar system.
Nearly four times as much profit was generated by Americans off bitcoin investments in 2020, at around $4.1 billion, than the second closest nation (China at $1.1 billion). Would the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) let American investors send a lofty percentage of our retail GDP value to an open-source network without a plan to conserve our purchasing economy? An ETF has yet to be approved by either of these regulating bodies, and yet they allow companies like MicroStrategy to take advantage of zero-interest rates and amass cheap debt to make, by all definitions and metrics, a speculative attack on the U.S. dollar system. The six figures of bitcoin purchased on their balance sheet are now worth billions of dollars, surely raising the attention of their next-door neighbors in Langley Park. If the U.S. was afraid of losing economic hegemonic status via bitcoin speculation, they would simply not allow exchanges and companies to do such dealings within their jurisdictions.
In regards to new financial regulations, legislation like Basel 3 requires companies to have considerable holdings of on-sheet liquidity to offset speculations into commodities and assets. On New Year’s Day, any bank wanting to hold a bitcoin or gold position would also be required to hold an equal-part dollar to dollar-denominated value of their investments. This forces a net demand for dollars in the dollar system in spite of a loss of individual purchasing power due to inflation. There is certainly a future regulatory reckoning coming in the unregistered security sales of centralized protocols with known human leadership, but even Gary Gensler, the now acting chair of the SEC, has determined Bitcoin and Nakamoto’s innovation as “something real.”
You can almost reductively view the consumption-based, ever-expanding debt bubble of fiat currency as a large balloon, and the conservation-encouraging, hard-capped and distributed protocol of Bitcoin as a vacuum. By allowing somewhere for the United States monetary supply to inflate into, we can pay off our immense debts without losing any demand or net-purchasing power via the congruent appreciation of bitcoin to the dollar. Pegging this new energy remittance market to the dollar during the increasingly important first decade of tokenized supply issuance has now forever linked the fates of the purchasing power of the dollar to the store of value properties of bitcoin. The United States has proven time and time again that they will do whatever is necessary to protect the purchasing power of the dollar system. The bitcoin-dollar is simply the next evolution of the energy-capital system needed for a functioning global economy. Perhaps the time has come for the Oracle of Omaha to take his own advice and never bet against America; the petrodollar died in March 2020, but like a phoenix rising from the oily ashes, so, too, was born the bitcoin-dollar.
This is a guest post by Mark Goodwin. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.