Bitcoin’s resurrection is thought to be Mark Zuckerberg’s doing. Facebook’s sudden entry into the cryptocurrency space, many insist, gave digital money a new lease on life.
That is, until you consider the simultaneous rally in gold. Bitcoin’s surge above US$11,000 only has one possible connection with the yellow metal’s jump above $14,000: a US dollar in jeopardy.
Just something for the Group of 20 crowd gathering in Osaka this week to consider.
The global trade war will top the agenda. So will US President Donald Trump’s summit with China’s Xi Jinping. The main topic should be waning confidence in the linchpin of the international system. Adding to the drama, the dollar and US Treasury securities are under assault not from China or Russia, but Trump’s policies.
The dollar’s Trump troubles started with old-fashioned overborrowing. That gigantic $1.5 trillion 2017 tax cut was just the biggest example of his profligacy. In only two-and-a-half years, Trump put America on a trajectory toward a $22 trillion debt and $1 trillion annual deficits.
As the 2020 election approaches, Trump is hinting at more tax cuts, even greater military spending and a multi-billion vanity project of a wall on the southern border. All that borrowing has Trump’s Asian bankers nervous.
Collectively, China and Japan own $2.2 trillion of Treasury debt – and the proverbial bag should yields begin surging. Yields on 10-year debt are now just below 2%.
Then came Trump’s tussle with the Federal Reserve. Unprecedented in American history, the White House is actively tangling with the globe’s most respected monetary authority. Early on, Trump dumped widely respected Fed Chair Janet Yellen in favor of Jerome Powell.
It was a unique hire, as Powell isn’t an economist but a former investment banker. Once he came on board in February 2018, Powell pushed on with Yellen’s policy of gradual rate hikes. The plan was to normalize US rates, which had been slashed to zero amid the 2008 Lehman Brothers crisis.
But Powell’s four tightening moves in 2018 irked Trump. The president thinks those rate hikes deadened the stimulative effects of his tax cut. Doubtful, given that the 3.6% US unemployment rate is the lowest in 50 years.
First Trump attacked the Fed, calling its policymakers “crazy.” Then he mulled firing Powell, backing off when he realized he might not have the authority to do so without cause. The damage is done, though.
Assault on institutions
The spectacle marks his latest assault on US institutions. He’s slammed the judiciary, the legislature, the press and reduced the Treasury Department to little more than a protector of his personal tax returns. Now, the Fed is in harm’s way.
Trump has even taken to slamming other central bankers. Take Mario Draghi, the European Central Bank president, who Trump bashed for expressing a willingness to ease. After the euro dropped, Trump tweeted that the ECB was “making it unfairly easier” for Europe “to compete against the USA. They have been getting away with this for years, along with China and others.”
This is as much about envy as anger. Trump wishes he had his own Draghi pledging to do “whatever it takes” to stabilize growth. The difference, of course, is that the US hardly needs the monetary jolt Europe does. Still, Trump is reminding markets that a currency war may soon complement his tariff arms race against Asia.
Trump’s borrowing binge and rhetorical bromides are costing the dollar its hard-won credibility. That’s lending credibility not just to gold, but less conventional would-be safe havens.
Crypto assets have their doubters, Facebook’s “like” aside. For good reason, given the massive hacking scandals of the last five years. The yo-yo price action and regulatory confusion among governments hardly helps.
Even so, many a Chinese billionaire find cryptocurrencies an irresistible way to spirit cash out of the mainland. Not surprisingly, Beijing has been clamping down on Bitcoin trading, initial coin offerings and crypto mining.
Only time will tell if cryptocurrencies can live up to the “digital gold” hype. The same goes for the “non-correlation” theory that blockchain-derived assets don’t follow conventional ones.
That may indeed be true of Bitcoin following gold higher. More coincidence than correlation, it still points to a rough patch for the dollar. Are G20 officials meeting June 28-29 sufficiently focused on the biggest threat to the global financial system? We’ll soon find out. But Bitcoin and gold bulls aren’t buying it.