Original Title: Black or White?
Author: Arthur Hayes, Founder of BitMEX; Translated by 0xjs@Jinse Finance
When asked about his pragmatic attitude toward economic systems implemented in China, former Chinese President Deng Xiaoping famously said, 'It doesn't matter whether a cat is black or white, as long as it catches mice.'
If you've ever heard Kamala Harris speak without a teleprompter, you know what I'm talking about. In the land of 'freedom,' pickup trucks, and Doritos, there are similar sophistries. I want to express my views on a malleable economic 'ism' within the peace economy under the United States. I will refer to the current policies implemented by the newly elected Trump administration and his supporters as American capitalism with Chinese characteristics.
The elites ruling the peace under the United States do not care whether the economic system is capitalism, socialism, or fascism, but whether the implemented policies help them retain power. The U.S. has not been a purely capitalist country since the early 19th century. Capitalism means the rich lose money if they make wrong decisions. This was abolished when the Federal Reserve was established in 1913. As privatization of profits and socialization of losses began to impact the nation, extreme class divides emerged between the many miserable or downtrodden people living inland and the upright, respectable, and sophisticated coastal elites, forcing President Franklin Roosevelt to correct the course and distribute some crumbs to the poor through his New Deal policies. At that time, just like now, expanding government relief for the impoverished was not a welcomed policy by the so-called wealthy capitalists.
The pendulum has swung from extreme socialism (in 1944, the top marginal tax rate for people earning over $200,000 was raised to 94%) back to the unrestrained corporate socialism that began in the Reagan era of the 1980s. Since then, the neoliberal economic policy of central bank money printing has sent money to the financial services sector, hoping wealth would trickle down from the top, which was the state of affairs before the COVID-19 outbreak in 2020. President Trump responded to the crisis by channeling his inner Roosevelt New Deal; he directly distributed the most money to everyone since the New Deal. From 2020 to 2021, the U.S. printed 40% of the existing money supply. Trump kicked off the stimulus check party, which President Biden continued during his term with popular handouts. When assessing the impact on the government’s balance sheet, a strange thing occurred between 2008 to 2020 and 2020 to 2022.
From Q2 2009 to Q2 2020 was the peak of trickle-down economics, funded by central bank money printing and euphemistically called quantitative easing (QE). As you see, the growth rate of the economy (nominal GDP) was slower than the accumulation of debt at the national level. In other words, the rich spent the government's windfall on assets. These types of transactions did not generate any actual economic activity. Therefore, issuing trillions of dollars of debt funds to wealthy financial asset holders raised the debt-to-nominal GDP ratio.
From Q2 2020 to Q1 2023, Presidents Trump and Biden went against the tide. Their Treasury Departments issued bonds, which the Federal Reserve purchased with printed dollars (QE), but the Treasury did not send bonds to the wealthy; instead, they mailed checks to everyone. Ordinary people had real cash in their bank accounts. Obviously, JPMorgan CEO Jamie Dimon received a cut of the transaction fees from government transfer payments... he is like Li Ka-Shing in America; you can't escape paying this old guy. The poor are poor because they spend all their money on goods and services, which is precisely what they did during this period. With the velocity of money far exceeding 1, economic growth boomed. That is to say, $1 of debt created more than $1 of economic activity. Thus, miraculously, the U.S. debt-to-nominal GDP ratio declined.
Inflation is rampant because the supply of goods and services does not keep pace with the purchasing power growth of the public financed by government debt. The wealthy who hold government bonds are dissatisfied with these populist policies. These bondholders suffered the worst total return since 1812. The wealthy sent out their white knight, Federal Reserve Chairman Jay Powell, to counterattack. He began raising interest rates in early 2022 to control inflation, although the public was hoping for another round of stimulus measures, such policies were prohibited. U.S. Treasury Secretary Yellen (Bad Gurl Yellen) intervened to eliminate the impact of the Federal Reserve's attempts to tighten monetary conditions. She drained the Federal Reserve's reverse repo tools (RRP) by shifting debt issuance from the long end (coupons) to the short end (bills). This provided nearly $2.5 trillion in fiscal stimulus, primarily benefiting the wealthy who have held financial assets since September 2002; the asset markets thrived as a result. Just like after 2008, this generosity from the government did not generate any real economic activity, and the U.S. debt-to-nominal GDP ratio began to rise again.
Has Trump's new cabinet learned the right lessons from recent U.S. economic history? I believe so.
Most people believe that Scott Bassett will be chosen by Trump to succeed Yellen as U.S. Treasury Secretary. He has given numerous speeches on how to 'fix' America. His speeches and columns detail how to implement Trump's 'America First' plan, which bears a striking resemblance to China's development plan (starting from Deng Xiaoping in the 1980s and continuing to this day). The plan aims to bring key industries (shipbuilding, semiconductor factories, automobile manufacturing, etc.) back by providing government tax credits and subsidies, thereby raising nominal GDP. Eligible companies will receive cheap bank financing. Banks will once again rush to lend to real companies, as their profitability is guaranteed by the U.S. government. As companies expand within the U.S., they must hire American workers. Higher-paying jobs for ordinary Americans mean more consumer spending. If Trump limits the number of immigrants crossing over from 'shithole countries' who are wearing Mexican sombreros, eating cats and dogs, with dark skin and dirty, the impact will be further amplified. These measures stimulate economic activity, and the government funds itself through corporate profits and wage income taxes. Government deficits must remain large to fund these projects, and the Treasury funds the government by selling bonds to banks. Banks can now rebalance their balance sheets as the Federal Reserve or lawmakers have suspended the supplementary leverage ratio. The winners are ordinary workers, companies producing 'approved' products and services, and the U.S. government, whose debt-to-nominal GDP ratio decreases. This is a stronger version of quantitative easing targeted at the poor.
Wow, that sounds great. Who would oppose such a magical era of prosperity in America?
The losers are those holding long-term bonds or savings deposits. This is because the yields on these instruments will be deliberately controlled below the nominal growth rate of the U.S. economy. If wages do not keep pace with higher inflation levels, individuals will also suffer losses. If you haven't noticed, joining a union has become cool again. 4 and 40 is the new slogan. That is to say, paying workers more than 40% over the next four years, i.e., a 10% raise each year, to keep working.
For those who think of themselves as wealthy readers, don’t worry. Here’s a memo on what to buy. This is not financial advice; I'm just sharing my approach to managing my portfolio. Every time a bill passes and funds are distributed to approved industries, read it and buy stocks in those verticals. Do not save with fiat bonds or bank deposits, but rather buy gold (a hedge against the financial repression of the baby boomer generation) or Bitcoin (a hedge against the financial repression of the millennial generation).
Evidently, the hierarchy of my portfolio starts with Bitcoin, followed by other cryptocurrencies and equity in cryptocurrency-related companies, then gold stored in vaults, and finally stonks. I keep a small amount of dirty fiat currency in a money market fund to pay my American Express bill.
I will use the remainder of this article to explain how quantitative easing targeted at the rich and the poor affects economic growth and the money supply. Then, I will predict how exempting banks from the supplementary leverage ratio (SLR) will again create the ability for unlimited quantitative easing aimed at the poor. In the final section, I will launch a new index to track the supply of U.S. bank credit and show how Bitcoin outperforms all other assets when faced with shrinking bank credit supply.
Money Supply
I must express my extreme admiration for the quality of Zoltan Pozar's paper Ex Uno Plures. During a long weekend spent recently in the Maldives, I read all of his articles in between surfing, Iyengar yoga, and myofascial massages. His work will play a significant role in the remainder of this article.
I will present a series of hypothetical accounting books. The left side of T is assets. The right side of T is liabilities. Blue entries indicate value increases, while red entries indicate value decreases.
The first example focuses on how the Federal Reserve's quantitative easing purchases of bonds affect the money supply and economic growth. Of course, this example and the remaining examples will be somewhat silly to make them interesting and engaging.
Imagine you are Powell during the U.S. regional banking crisis in March 2023. To vent, Powell goes to a squash court with another millionaire financial partner at 370 Park Avenue in New York City. Powell's friend is furious.
This friend, whom we will call Kevin, is a hot-tempered financier who said, 'Jay, I have to sell my house in the Hamptons. I put all my money into Signature Bank, and obviously, I'm not eligible for federal deposit insurance because my balance exceeds the limit. You have to do something. You know what it's like when Bonnie has to stay in town for a day during the summer. She's unbearable.'
Jay responded, 'Don't worry, I understand what you mean. I will implement a $2 trillion quantitative easing policy. It will be announced Sunday night. You know the Federal Reserve always supports you. Without your contribution, who knows what America would become? Imagine if Donald Trump regained power because Biden had to deal with a financial crisis while in office. I remember Trump stealing my girl at Dorsia in the early '80s, fuck that guy.'
The Federal Reserve has established a bank term financing program, which is designed to address banking crises, distinct from direct quantitative easing. But allow me to exercise some artistic freedom here. Now, let’s see what impact $2 trillion in quantitative easing will have on the money supply. All numbers will be in billions.
1. The Federal Reserve purchases $2,000 worth of U.S. Treasury bonds from BlackRock and pays with reserves. JPMorgan fulfills its banking duties by facilitating this swap. JPMorgan receives $2,000 in reserves and deposits $2,000 with BlackRock. The Federal Reserve's quantitative easing leads banks to create deposits, which ultimately turns into currency.
2. BlackRock now lost U.S. Treasury bonds and must lend this money to someone else, i.e., acquire another income-generating asset. BlackRock CEO Larry Fink does not associate with the poor. He only collaborates with industry leaders. But now he is immersed in the tech sector. There is a new social networking spoils application building a community for users to share voluptuous photos. It is called Anaconda. Their slogan is, 'My anaconda don’t want none unless you got buns, hun.' Anaconda is in the growth stage, and BlackRock is happy to purchase $2,000 worth of bonds.
3. Anaconda is a pillar of American capitalism. They conquered the market by getting the male population aged 18-45 addicted to their app. As they stopped reading and started browsing the web, this group's productivity has decreased. Anaconda funded stock buybacks through issuing debt to optimize taxes so they wouldn't have to repatriate retained earnings abroad. Reducing the number of shares not only boosts the stock price but also increases their earnings because even if their earnings do not grow per share, their earnings will increase due to a lower denominator. Therefore, passive index investors like BlackRock are more likely to buy their stock. The result is that after selling the stock, there is $2,000 in bank deposits.
4. The wealthy shareholders of Anaconda did not immediately spend the money they received. Larry Gagosian (note: founder of a famous gallery) hosted a grand party at the Miami Basel Art Fair. Despite various things going wrong, the financial elite decided to purchase the latest canvas graffiti to elevate their status as serious art collectors and impress the bad actors at the booth. The sellers of the artwork belong to the same economic class as them. The net effect of sponsoring 'art' is that the seller's bank account is debited, while the buyer's account is credited.
After all of these transactions, no real economic activity was generated. The Federal Reserve injected $2 trillion of printed money into the economy, and all it did was increase the bank deposits of the rich. Even financing for an American company did not bring any growth, as the funds were used to inflate stock prices, creating zero jobs. $1 of quantitative easing resulted in an increase of $1 in the money supply, leading to $0 in economic activity. This is not a good use of debt. Thus, from 2008 to 2020, the debt-to-nominal GDP ratio of the rich increased during the period of quantitative easing.
Now, let's look at President Trump's decision-making process during the COVID-19 pandemic. Recall March 2020: the pandemic had just begun, and Trump's advisors instructed him to 'flatten the curve' (remember that nonsense?). He was advised to shut down the economy, allowing only 'essential workers' (remember them? Those poor souls delivering to you below minimum wage?) to continue working.
Trump: 'Fuck, just because some quacks think the flu is real, I have to shut down the economy?'
Advisor: 'Yes, Mr. President. I should remind you that the main ones dying from complications caused by COVID-19 infections are obese boomers like you. I should also add that if those over 65 get sick and need to be hospitalized, treating all those over 65 will be expensive. You need to lock down all non-essential workers.'
Trump: 'This will lead to an economic collapse; let's just send checks to everyone so they won't complain. The Federal Reserve can buy the debt issued by the Treasury to fund these distributions.'
Using the same accounting framework, let's gradually understand how quantitative easing helps the poor.
1. Like the first example, the Federal Reserve conducts quantitative easing by purchasing $2,000 worth of Treasury bonds using reserves from BlackRock.
2. Unlike the first example, the Treasury was involved in the flow of funds. To pay for Trump's stimulus checks, the government had to borrow money by issuing Treasury bonds. BlackRock purchased Treasury bonds instead of corporate bonds. JPMorgan helped BlackRock convert its bank deposits into reserves held by the Federal Reserve, which could be used to purchase Treasury bonds. The Treasury receives deposits from the Federal Reserve in its Total Government Account (TGA), similar to a checking account.
3. The Treasury sent out stimulus plans to everyone, primarily mailing them to the broad masses of civilians. This led to a reduction in TGA balances, while the reserves held by the Federal Reserve increased correspondingly, becoming deposits for civilians at JPMorgan.
4. Ordinary civilians are just that; they spent all their stimulus on new Ford F-150 trucks. Screw electric cars, this is America, so they are splurging on that black gold. The bank accounts of civilians were debited, while Ford's bank accounts were credited.
5. When Ford sells these trucks, it will do two things. First, they pay workers' wages, and bank deposits are transferred from Ford's accounts to ordinary workers' accounts. Then, Ford goes to the bank to take out a loan to increase production; as you can see, the issuance of loans generates its own deposits from the recipient Ford and increases the money supply. Finally, ordinary workers want to go on vacation and get personal loans from banks, as the economy is strong and high-paying jobs make banks happy to provide these loans. Ordinary bank loans create additional deposits, just like Ford borrowing money.
6. The ending balance of deposits or funds is $3,000. This is $1,000 higher than the $2,000 initially injected by the Federal Reserve through quantitative easing.
This example illustrates how quantitative easing aimed at the poor stimulates economic growth. The Treasury distributed stimulus measures encouraging civilians to buy trucks. Due to demand for goods, Ford was able to pay employee wages and apply for loans to increase production. High-paying employees qualify for bank credit, enabling them to consume more. $1 of debt generates over $1 of economic activity. This is a good outcome for the government.
I want to discuss further how banks provide unlimited financing to the Treasury.
We will start from Step 3 above.
4. The Treasury is issuing a new round of stimulus plans. To raise funds, the Treasury is auctioning bonds, with JPMorgan acting as a primary dealer, using reserves held by the Federal Reserve to purchase these bonds. Selling bonds will increase the Treasury's TGA balance at the Federal Reserve.
5. Like in the previous example, the checks sent by the Treasury appear as deposits for civilians at JPMorgan.
When the Treasury issues bonds purchased by the banking system, it transforms reserves held by the Federal Reserve that have no productive effect on the economy into deposits held by civilians, which can be used to buy goods and generate economic activity.
Here’s another T-chart. What happens when the government implements industrial policy by promising tax breaks and subsidies to companies producing necessary goods and services?
In this example, the peace under the United States is exhausting the bullets needed for gunfights in the Persian Gulf inspired by Clint Eastwood's Western movies. The government passed a bill promising subsidies for bullet production. Smith & Wesson applied for and received a contract to supply ammunition to the military. Smith & Wesson was unable to produce enough bullets to fulfill the contract, so they applied for a loan from JPMorgan to build a new factory.
1. After receiving a government contract, JPMorgan's credit officer confidently loans $1,000 to Smith & Wesson. The loan creation magically creates $1,000.
2. Smith & Wesson built a factory that created wages for ordinary civilians, which ultimately became deposits at JPMorgan. The money created by JPMorgan turned into deposits for those with the highest propensity to consume, namely ordinary civilians. I have explained how the consumption habits of ordinary civilians create economic activity. Let's slightly change this example.
3. The Treasury needs to issue $1,000 in new bonds at auction to subsidize Smith & Wesson. JPMorgan attends the auction to purchase bonds but has no reserves to buy them. With no stain left in using the Federal Reserve's discount window, JPMorgan uses its Smith & Wesson corporate bond assets as collateral for a Federal Reserve reserve loan. These reserves are used to purchase newly issued Treasury bonds. The Treasury then pays the subsidy to Smith & Wesson, which becomes a deposit for JPMorgan.
This example shows how the U.S. government uses industrial policy to induce JPMorgan to issue loans and uses the assets created by those loans as collateral to buy additional U.S. Treasury bonds from the Federal Reserve.
Constraints
It seems that the Treasury, the Federal Reserve, and banks operate a magical money-making machine that can accomplish one or more of the following tasks:
1. They can inject financial assets into the rich without triggering any actual economic activity.
2. They can fill the bank accounts of the poor, who often use relief funds to purchase goods and services, thus generating real economic activity.
3. They can guarantee the profitability of specific players in specific industries. This allows companies to leverage bank credit for expansion, generating actual economic activity.
Are there any limitations?
Yes, banks cannot create unlimited amounts of money because they must allocate expensive equity for every debt asset they hold. In technical terms, different types of assets come with risk-weighted asset costs. Even so-called 'risk-free' government bonds and central bank reserves incur equity capital costs. That is why, at some point, banks can no longer meaningfully participate in bidding for U.S. Treasury bonds or issue corporate loans.
Equity capital must be used to secure mortgages and other types of debt securities for a reason. If a borrower defaults, whether a government or a corporation, the losses must be borne by someone. Given that banks decide to create currency to lend or purchase government bonds for profit, it is fair for their shareholders to bear the losses. When losses exceed bank equity capital, the bank will collapse. When banks collapse, depositors lose their funds, which is terrible. However, from a systemic perspective, it is even worse that banks cannot continue to increase the amount of credit in the economy. Given that part of the fiat financial system requires stable credit issuance to survive, bank collapses could cause the entire house of cards to collapse. Remember — one player's assets are another player's liabilities.
When the equity credit of banks is exhausted, the only way to save the system is for the central bank to create new fiat currency and exchange it for the bank's negative assets. Imagine Signature Bank lending only to Su Zhu and Kyle Davies of the now-defunct Three Arrows Capital (3AC). Su and Kyle provided the bank with a fake balance sheet that distorted the health of the company. Then, they pulled cash from the fund and gave it to their wives, hoping to shield it from bankruptcy, and when the fund went bankrupt, the bank had nothing to seize, and the loan was worth zero. This is fictional; Su and Kyle are good people. They would never do what I just described ;) Signature provided significant campaign donations to U.S. Senate Banking Committee member Elizabeth Warren. Using their political clout, Signature persuaded Senator Warren that they deserved to be saved. Senator Warren called Powell and told him that the Federal Reserve must exchange dollars at par for 3AC debt through the discount window. The Federal Reserve did as requested, and Signature was able to convert 3AC bonds into new dollar bills, allowing the bank to absorb any deposit outflows. Similarly, this didn’t actually happen; this is just a 'stupid' example. But the moral of the story is that if banks do not put enough equity on the line themselves, the entire population will end up paying for it due to currency depreciation.
Perhaps my hypothetical example makes some sense; here is a recent report from (The Straits Times):
The wife of Zhu Su, co-founder of the now-bankrupt cryptocurrency hedge fund Three Arrows Capital (3AC), successfully sold her mansion in Singapore for $51 million, despite some of the couple's other assets being frozen by the court.
Back to reality.
Assuming the government wants to create unlimited amounts of bank credit. In that case, they must change the rules to exempt Treasury bonds and certain types of 'approved' corporate debt (which can be categorized by type, such as investment-grade bonds, or by industry, such as debt issued by semiconductor companies) from the so-called supplementary leverage ratio (SLR) restrictions.
If U.S. Treasury bonds, central bank reserves, and/or approved corporate debt securities are exempt from SLR constraints, banks can purchase unlimited amounts of debt without incurring any expensive equity burdens. The Federal Reserve has the authority to grant exemptions. They did this from April 2020 to March 2021. If you recall, at that time, the U.S. credit market was frozen. The Federal Reserve needed to allow banks to lend to the U.S. government again by participating in Treasury bond auctions, as the government was about to roll out trillions of dollars in stimulus plans without the tax revenue to pay for it. The exemptions were very effective. This led banks to purchase large amounts of U.S. Treasury bonds. The downside is that after Powell raised interest rates from 0% to 5%, the same U.S. Treasury bond prices plummeted significantly, leading to the regional banking crisis in March 2023. There is no such thing as a free lunch.
The level of bank reserves also limits the willingness of the banking industry to purchase U.S. Treasury bonds at auctions. When banks feel that their reserves at the Federal Reserve have reached the minimum comfortable reserve level (LCLoR), they will stop participating in auctions. You only know what the LCLoR is after the fact.
This is a chart from the U.S. Treasury Borrowing Advisory Committee (TBAC) presentation on October 29, 2024, titled (Financial Resilience of the Treasury Market). This chart shows that the proportion of Treasury bonds held by the banking system is decreasing, thus nearing LCLoR. This is a problem because as the Federal Reserve sells off (QT) and surplus foreign central banks sell off (or stop investing) their net export earnings (de-dollarization), the marginal buyers of Treasury bonds in the market are becoming erratic hedge fund traders.
This is another chart from the same presentation. As you can see, hedge funds are making up for the shortfall. But hedge funds are not true buyers of currency. They are engaging in arbitrage trades, buying cheap cash Treasury bonds and shorting Treasury futures contracts. The cash component of the trade is financed by the repo market. A repo refers to exchanging an asset (Treasury bills) for cash at a certain interest rate over a specified period. The pricing for overnight financing using Treasury bonds as collateral in the repo market is based on the amount available in commercial bank balance sheets. As balance sheet capacity shrinks, repo rates rise. If the cost of financing Treasury bonds increases, hedge funds can only buy more Treasury bonds when prices drop relative to the futures prices. This ultimately means that the prices for auctioning Treasury bonds must fall, and yields must rise. This is not what the Treasury wants to happen, as it needs to issue more debt at increasingly cheaper prices.
Due to regulatory constraints, banks cannot purchase enough U.S. Treasury bonds or provide funding for hedge funds to purchase U.S. Treasury bonds at affordable prices. This is why the Federal Reserve must once again exempt banks from the SLR. It increased liquidity in the Treasury bond market and allowed for unlimited quantitative easing targeting the productive sectors of the U.S. economy.
If you’re unsure whether the Treasury and the Federal Reserve have realized the necessity of loosening bank regulation, TBAC explicitly states what needs to be done on slide 29 of the same presentation:
Tracking Numbers
If Trump's economics works as I just described, then we must focus on how much bank credit growth we expect to see. According to the above example, we know that quantitative easing aimed at the rich is achieved by increasing bank reserves, while quantitative easing aimed at the poor is achieved by increasing bank deposits. Fortunately, the Federal Reserve provides two data points for the entire banking system weekly.
I created a custom Bloomie index, which is a combination of reserves and other deposits and liabilities <BANKUS U index >.
This is my custom index for tracking the amount of U.S. bank credit. In my view, this is the most important indicator of money supply. As you can see, sometimes it leads Bitcoin, such as in 2020, and sometimes it lags behind Bitcoin, such as in 2024.
However, more importantly, how does an asset perform when its supply of bank credit shrinks? Bitcoin (white), the S&P 500 index (gold), and gold (green) have all been divided by my bank credit index. These values are indexed to 100; as you can see, Bitcoin has outperformed, rising over 400% since 2020. If you can only do one thing to fight the depreciation of fiat currency, it’s Bitcoin. You can’t argue with math.
The Way Forward
Trump and his monetary sidekicks have made it very clear that they will pursue policies that weaken the dollar and provide necessary funding for the repatriation of U.S. industries. Given that the Republicans will control all three government branches for the next two years, they can pass Trump's entire economic plan without effective opposition from Democrats. Note that I believe Democrats will join the money printing party, as what politician can refuse to hand out free stuff to voters?
The Republicans will first pass a bill encouraging key goods and materials manufacturers to expand domestic production. These bills will be similar to the ones passed by the Biden administration (the CHIPS Act), (the Infrastructure Act), and (the Green New Deal). As companies accept these government subsidies and obtain loans, bank credit growth will surge. For those who pride themselves on being stock-picking experts, buy shares of publicly traded companies that produce what the government wants to manufacture.
At some point, the Federal Reserve will surrender, at least relieving the SLR burden on U.S. Treasury bonds and central bank reserves. By then, the path for unlimited quantitative easing will be clear.
The combination of legislative industrial policy and SLR exemptions will lead to a massive influx of bank credit. I have demonstrated that the velocity of money circulation under such policies is far higher than the traditional quantitative easing aimed at the rich under Federal Reserve supervision. Therefore, we can expect that the performance of Bitcoin and cryptocurrencies will be as good as or even better than the performance from March 2020 to November 2021. The real question is, how much credit will be created?
The COVID stimulus plan injected approximately $4 trillion in credit. This event will be even more severe. The growth of defense and healthcare spending outpaces nominal GDP. As the U.S. increases defense spending to respond to a shift toward a multipolar geopolitical environment, they will continue to grow rapidly. The proportion of people aged 65 and older in the U.S. population will peak in 2030, meaning healthcare spending growth will accelerate from now until then. No politician can cut defense spending and healthcare, as they will soon be voted out if they do. All of this means the Treasury will be busy injecting large amounts of debt into the markets quarter after quarter to keep it running. I have previously shown how combining quantitative easing with Treasury borrowing allows the velocity of money circulation to be greater than 1. This deficit spending will increase the nominal growth potential of the U.S.
Speaking of bringing American businesses back domestically, the cost of achieving this goal will also reach trillions of dollars. Since 2001, when China was allowed to join the World Trade Organization, the U.S. has voluntarily handed over its manufacturing base to China. In less than thirty years, China has become the world's factory, producing the highest quality products at the lowest prices. Even companies that wish to shift their supply chains from China to so-called cheaper countries realize that the integration of so many suppliers in China's eastern coastal areas is so deep and efficient that even with Vietnam's much lower hourly wages, those companies still need to import intermediate parts from China to produce finished products. In short, recalibrating the supply chain to the U.S. will be a daunting task, and if it must be done for political expedience, the costs will be extremely high. I'm talking about providing cheap bank financing of up to single digits to low double digits to transfer production capacity from China to the U.S.
It took $4 trillion to bring the debt-to-nominal GDP ratio down from 132% to 115%. Suppose the U.S. further reduces it to 70%, the level seen in September 2008. Just using linear extrapolation would mean needing to create $10.5 trillion in credit to achieve this deleveraging.
This is why Bitcoin is set to reach $1 million, as prices are set at the margin. As the free trading supply of Bitcoin diminishes, the most legitimate currency in history will chase safe havens not only from Americans but from the Chinese, Japanese, and Western Europeans as well. Invest more, retain more.
If you doubt my analysis of the impact of quantitative easing on the poor, just read the economic history of China over the past thirty years, and you will understand why I refer to the new economic system under the United States as 'American capitalism with Chinese characteristics.'
