Original title: Black or White?

Author: Arthur Hayes, founder of BitMEX; compiled by 0xjs@Golden Finance

When asked about his pragmatic attitude toward implementing economic systems in China, former Chinese President Deng Xiaoping once said, "It doesn't matter whether a cat is black or white, as long as it catches mice, it's a good cat."

If you have ever heard Kamala Harris speaking without a teleprompter, you know what I mean. In the land of 'freedom', pickup trucks, and Doritos, there are similar fallacies. I want to express my views on a form of malleable economic 'ism' within the peaceful economic system under U.S. governance. I will term the current policies of the newly elected Trump president as American capitalism with Chinese characteristics.

The elites ruling the peace under the U.S. do not care whether the economic system is capitalism, socialism, or fascism; they care whether the policies implemented help them retain power. The U.S. has not been a purely capitalist country since the early 19th century. Capitalism means that the rich lose money if they make wrong decisions. This was abolished when the Federal Reserve was established in 1913. As privatized profits and socialized losses took their toll on the country, creating extreme class division between the many miserable or disgraceful people living inland and the decent, respectable, sophisticated coastal elites, President Franklin Roosevelt had to correct course and redistribute some crumbs to the poor through his New Deal policies. At that time, just as now, expanding government assistance to the underprivileged was not a policy welcomed by the so-called rich capitalists.

The pendulum has swung from extreme socialism (in 1944, the highest marginal tax rate for individuals earning over $200,000 was raised to 94%) back to the unrestrained corporate socialism that began in the Reagan era in the 1980s. Since then, the neoliberal economic policy of central bank money printing has been sending money to the financial services industry in the hope that wealth would trickle down from the top. This policy was the status quo before the COVID-19 outbreak in 2020. President Trump responded to the crisis by channeling his inner Roosevelt through the New Deal; he distributed more money to everyone than since the New Deal. From 2020 to 2021, the U.S. printed 40% of the total amount of existing dollars. Trump kicked off the stimulus check party, and President Biden continued the popular handouts during his term. When assessing the impact on the government's balance sheet, a strange thing occurred between 2008-2020 and 2020-2022.

From 2009 to Q2 2020, it was the peak of trickle-down economics, funded by central bank money printing and euphemistically referred to as quantitative easing (QE). As you can see, the growth rate of the economy (nominal GDP) is slower than the accumulation of debt at the national level. In other words, the rich spend the government windfall on assets. These types of transactions do not generate any real economic activity. Thus, handing trillions of dollars of debt funding to wealthy financial asset holders has increased the ratio of debt to nominal GDP.

From Q2 2020 to Q1 2023, Presidents Trump and Biden went against the trend. Their Treasuries issued bonds, and the Federal Reserve purchased those bonds with printed dollars (QE), but the Treasury did not send bonds to the wealthy; instead, it mailed checks to everyone. The common folk had real cash in their bank accounts. Clearly, JPMorgan Chase CEO Jamie Dimon profited from the transaction fees of government transfer payments... he is like Li Ka-shing in America; you can’t escape paying this old man. 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 flourished. That is to say, $1 of debt created over $1 of economic activity. Therefore, miraculously, the debt-to-nominal GDP ratio in America decreased.

Inflation is rampant because the growth of supply in goods and services is not keeping pace with the increase in purchasing power financed by government debt. The wealthy holding government bonds are not pleased with these populist policies. These wealthy bondholders have suffered the worst total return since 1812. The rich sent their white knight, Federal Reserve Chairman Jay Powell, to counteract. He started raising interest rates in early 2022 to control inflation, even though the masses were hoping for another round of stimulus, but such policies were banned. U.S. Treasury Secretary Yellen (Bad Gurl Yellen) intervened to mitigate the Federal Reserve's attempts to tighten monetary conditions. She depleted the Fed's reverse repurchase tool (RRP) by shifting debt issuance from the long end (coupons) to the short end (bills). This provided nearly $2.5 trillion in fiscal stimulus, mainly benefiting the wealthy who have held financial assets since September 2002; the asset markets prospered as a result. As was the case after 2008, these government handouts 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 replace Yellen as U.S. Treasury Secretary; he has given numerous speeches detailing how to 'fix' America. His speeches and op-eds detail how to implement Trump's 'America First' agenda, which bears a striking resemblance to China's development plan (starting with Deng Xiaoping in the 1980s and continuing to this day). The plan aims to bring key industries (shipbuilding, semiconductor plants, automobile manufacturing, etc.) back by providing government tax credits and subsidies, thereby boosting nominal GDP. Qualifying companies will receive cheap bank financing. Banks will once again scramble to lend to real companies since their profitability is guaranteed by the U.S. government. As companies expand domestically, they will have to hire American workers. Ordinary Americans receiving higher-paying jobs means more consumer spending. If Trump limits the number of immigrants crossing from 'shit-hole countries' wearing Mexican sombreros, eating cats and dogs, with dark skin, and filthy, the effect will be magnified. These measures stimulate economic activity, with the government receiving funding through corporate profits and income taxes. The government deficit must remain large to finance these programs, and the Treasury funds the government by selling bonds to banks. Banks can now readjust their balance sheets as the Federal Reserve or lawmakers have suspended the supplemental 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 reinforced version of quantitative easing aimed at the poor.

Wow, sounds great. Who would oppose such a miraculous era of prosperity in America?

Losers are those who hold long-term bonds or savings deposits. This is because the yields on these instruments will be intentionally controlled below the nominal growth rate of the U.S. economy. If wages do not keep up with the higher inflation levels, people will also incur losses. If you haven't noticed, joining a union has become cool again. 4 and 40 are the new slogans. That is, pay workers over 40% more in the next 4 years, which means a 10% raise each year to keep working.

For those readers who think they are wealthy, don’t worry. Here’s a memo on what to buy. This is not financial advice; I’m just sharing my portfolio management. Each time a bill passes and funds are allocated to approved industries, read it and buy stocks in those vertical industries. Don’t save with fiat currency bonds or bank deposits; buy gold (the baby boomer hedge against financial repression) or Bitcoin (the millennial hedge against financial repression).

Clearly, the hierarchy of my portfolio starts with Bitcoin, then other cryptocurrencies and equities related to cryptocurrencies, followed by gold stored in a vault, and finally stonks. I would 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 money supply. Then, I will predict how exempting banks from the supplemental leverage ratio (SLR) will recreate the ability for unlimited quantitative easing targeted at the poor. In the final section, I will introduce a new index to track the supply of bank credit in the U.S. and show how Bitcoin performed better than all other assets when the supply of bank credit contracted.

Money supply

I must express my extreme admiration for the quality of Zoltan Pozar's paper Ex Uno Plures. During a long weekend recently spent in the Maldives, I read his entire article in between surfing, Iyengar yoga, and myofascial massages. His work will play a significant role in the remainder of this article.

I will publish 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 bond purchases through quantitative easing affect the money supply and economic growth. Of course, this example and the rest that follow will be somewhat foolish to make them interesting and engaging.

Imagine you are Powell during the regional banking crisis in the U.S. in March 2023. To vent, Powell goes to a tennis club at 370 Park Avenue in New York City to play squash with another millionaire financial partner. Powell's friend becomes furious.

This friend, whom we shall call Kevin, is a hot-tempered financier who said, "Jay, I have to sell my house in the Hamptons. I've put all my money into Signature Bank, and apparently, I don't qualify for federal deposit insurance because my balance exceeded the limit. You have to do something. You know what it would be like if Bonnie had to stay in town for a day in the summer. She's unbearable."

Jay responded, "Don't worry, I understand what you mean. I will implement $2 trillion in quantitative easing. To be announced on Sunday night. You know the Federal Reserve always supports you. Without your contributions, who knows what America would look like. Imagine if Donald Trump regained power because Biden had to deal with a financial crisis during his term. I remember Trump stealing my girl at Dorsia in the early '80s; fuck that guy."

The Federal Reserve established a bank term funding program aimed at addressing the banking crisis, which is different from direct quantitative easing. But allow me to take some artistic liberties here. Now, let’s see what effect a $2 trillion quantitative easing would have on the money supply. All figures will be in the billions.

1. The Federal Reserve buys $2,000 of U.S. Treasury bonds from BlackRock and pays with reserves. JPMorgan Chase fulfills its banking duties by facilitating this swap. JPMorgan Chase receives $2,000 in reserves and deposits $2,000 with BlackRock. The Federal Reserve's quantitative easing leads to banks creating deposits, which eventually turn into money.

2. BlackRock has now lost U.S. Treasury bonds and must lend this money to others, meaning acquiring another interest-bearing asset. BlackRock CEO Larry Fink does not associate with the poor. He only works with industry leaders. But now, he is immersed in the tech sector. There is a new social networking loot app building a community for users to share voluptuous photos. It’s 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 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 stop reading and start browsing the web, this group’s productivity has declined. Anaconda funds stock buybacks by issuing debt for tax optimization, so they don’t have to repatriate retained earnings abroad. Reducing the number of shares not only boosts the stock price but also increases their earnings, as even if their earnings don’t 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 the nobles have $2,000 in bank deposits after selling their stock.

4. The wealthy shareholders of Anaconda did not immediately spend the money they received. Larry Gagosian (note: founder of a famous gallery) hosted a lavish party at the Miami Basel Art Fair. Even though various things went awry, the financial elite decided to purchase the latest canvas graffiti to elevate their qualifications as serious art collectors and impress the bad guys at the booth. The seller of the artwork belongs to the same economic class as the buyers. The net effect of sponsoring 'artworks' is that the seller's bank account is debited, and the buyer's account is credited.

After all these transactions, no real economic activity has been generated. The Federal Reserve injected $2 trillion of printed money into the economy, which merely increased the bank deposits of the wealthy. Even financing for an American company did not lead to growth, as these funds were used to inflate stock prices, creating zero jobs. $1 of quantitative easing resulted in an increase in the money supply of $1, leading to $0 of economic activity. This is not a good use of debt. Therefore, from 2008 to 2020, the debt-to-nominal GDP ratio of the wealthy rose during the quantitative easing period.

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 for you at less than minimum wage?) to continue working.

Trump: "Fuck, do I need to shut down the economy just because some quacks think the flu is real?"

Advisor: "Yes, Mr. President. I should remind you that those who primarily die from complications related to COVID-19 infections are obese baby boomers like yourself. I should also add that if people over 65 get sick and need hospitalization, treating all those over 65 will be quite expensive. You need to lock down all non-essential workers."

Trump: "This will lead to an economic collapse; let's give everyone checks 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. Similar to the first example, the Federal Reserve conducts quantitative easing by purchasing $2,000 of Treasury bonds from BlackRock using reserves.

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 was purchasing Treasury bonds rather than corporate bonds. JPMorgan Chase helped BlackRock convert its bank deposits to reserves held by the Federal Reserve, which could then 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 mails stimulus plans to everyone, primarily to the vast majority of common folk. This causes the TGA balance to shrink, while the reserves held by the Federal Reserve increase accordingly, turning these reserves into deposits for the common folk at JPMorgan Chase.

4. The common folk are just common folk, spending all the stimulus on the new Ford F-150 trucks. Fuck electric vehicles; this is America, so they are all indulging in that black gold. The common folk's bank accounts are debited, while Ford's bank account is credited.

5. When Ford sells these trucks, it does two things. First, they pay workers' wages, transferring bank deposits from Ford's account to ordinary workers' accounts. Then, Ford goes to the bank for loans to increase production; as you can see, the lending generates its 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 banks are happy to provide these loans given the strong economy and high-paying jobs. Ordinary bank loans create additional deposits, just like Ford borrowing money does.

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.

From this example, it can be seen that quantitative easing targeted at the poor stimulates economic growth. The Treasury's issuance of stimulus encourages the common folk to buy trucks. Due to the demand for goods, Ford is able to pay employee wages and apply for loans to increase production. Employees with high-paying jobs qualify for bank credit, allowing them to consume more. $1 of debt generates over $1 of economic activity. This is a good outcome for the government.

I want to further discuss how banks can 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 auctions bonds, with JPMorgan Chase acting as a primary dealer, purchasing these bonds with reserves held by the Federal Reserve. Selling bonds will increase the Treasury's TGA balance at the Federal Reserve.

5. Similar to the previous example, the checks sent by the Treasury look like deposits of common folk at JPMorgan Chase.

When the Treasury issues bonds purchased by the banking system, it converts reserves held by the Federal Reserve that have no productive effect on the economy into deposits held by the common folk, which can then be used to purchase goods and generate economic activity.

Another T chart. What happens when the government implements industrial policy by promising tax breaks and subsidies to companies producing goods and services needed for production?

In this example, the peace under the U.S. is exhausting the bullets required for gunfights inspired by Clint Eastwood's Westerns in the Gulf. The government passed a bill promising subsidies for bullet production. Smithson applied for and received a contract to supply ammunition to the military. Smithson was unable to produce enough bullets to fulfill the contract, so they applied to JPMorgan Chase for a loan to build a new factory.

1. JPMorgan's credit officer confidently lends $1,000 to Smithson after receiving a government contract. The lending action creates $1,000 out of thin air.

2. Smithson built factories that created wages for the common people, which ultimately turned into deposits at JPMorgan Chase. The money created by JPMorgan Chase became deposits for those most inclined to consume, the common people. I have talked about how the consumption habits of the common people create economic activity. Let’s slightly change this example.

3. The Treasury needs to subsidize Smithson by issuing $1,000 of new bonds at the auction. JPMorgan Chase attends the auction to purchase bonds but has no reserves to buy them. Since there is no longer any stigma associated with using the Federal Reserve's discount window, JPMorgan Chase uses its Smithson bond assets as collateral for Federal Reserve reserve loans. These reserves are used to purchase newly issued Treasury bonds. The Treasury then pays Smithson the subsidy, which becomes a deposit at JPMorgan Chase.

This example illustrates how the U.S. government uses industrial policy to induce JPMorgan Chase to make loans and uses the assets created by those loans as collateral to purchase additional U.S. Treasury bonds from the Federal Reserve.

Constraints

It seems that the Treasury, the Federal Reserve, and banks are operating 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 real economic activity.

2. They can fill the bank accounts of the poor, who often use relief funds to purchase goods and services, thereby generating real economic activity.

3. They can guarantee the profitability of specific participants within certain industries. This enables businesses to leverage bank credit for expansion, generating actual economic activity.

Are there any constraints?

Yes, banks cannot create unlimited amounts of money because they must allocate expensive equity for each debt asset held. 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. This is why, at some point, banks cannot meaningfully participate in bidding for U.S. Treasury bonds or issuing corporate loans.

Equity capital must be used for mortgages and other types of debt securities for a reason. If a borrower goes bankrupt, whether a government or a company, someone must bear the losses. Given that banks decide to create money to lend or buy government bonds for profit, it is fair that their shareholders bear the losses. When losses exceed bank equity capital, banks will fail. When banks fail, depositors will lose their funds, which is terrible. However, from a systemic perspective, it is worse that banks cannot continue to increase the amount of credit in the economy. Given that part of the formal financial system needs stable credit issuance to survive, bank failures could cause the entire house of cards to collapse. Remember—one player's asset is another player's liability.

When bank equity credit runs out, 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 false balance sheet that distorted the company's health. Then they withdrew cash from the fund and handed it to their wives, hoping it would escape bankruptcy, and when the fund failed, the bank had nothing to seize, leaving the loan worthless. This is fictional; Su and Kyle are good people. They would never do what I described ;) Signature provided substantial campaign contributions to U.S. Senate Banking Committee member Elizabeth Warren. Using their political influence, Signature persuaded Senator Warren that they deserved to be rescued. Senator Warren called Powell and told him the Federal Reserve had to exchange dollars at par for 3AC debt via the discount window. The Federal Reserve complied, allowing Signature to swap 3AC bonds for new dollar bills, enabling the bank to sustain any deposit outflows. Again, this did not actually happen; this is just a 'stupid' example. But the moral of the story is that if banks don't put enough equity at risk, the entire population will ultimately pay for the currency depreciation.

Perhaps my hypothetical example makes some sense; this 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 Singapore mansion 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 bank credit. In this case, they must change the rules so that 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) are exempt from the so-called supplemental leverage ratio (SLR).

If U.S. Treasury bonds, central bank reserves, and/or approved corporate debt securities are exempt from SLR constraints, banks can purchase an unlimited amount 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, the U.S. credit markets were in a standstill at that time. The Federal Reserve needed banks to lend to the U.S. government again by participating in Treasury bond auctions, as the government was about to launch a stimulus plan worth trillions without tax revenues to cover it. The exemptions were very effective. This led to banks purchasing massive amounts of U.S. Treasury bonds. The downside is that after Powell raised interest rates from 0% to 5%, the prices of the same U.S. Treasury bonds plummeted, triggering the regional banking crisis in March 2023. There’s no such thing as a free lunch.

The levels of bank reserves also limit banks' willingness to purchase U.S. Treasury bonds at auctions. When banks feel that their reserves at the Federal Reserve have reached their minimum comfortable reserve level (LCLoR), they will stop participating in auctions. You only know afterward what the LCLoR is.

This is a chart from a presentation by the U.S. Treasury Borrowing Advisory Committee (TBAC) on October 29, 2024 (Financial Resilience in the Treasury Market). This chart shows that the proportion of Treasury bonds held by the banking system is shrinking relative to the total outstanding debt, thus approaching LCLoR. This is an issue because as the Federal Reserve sells off (QT) and surplus national central banks sell (or stop investing) their net export earnings (de-dollarization), the marginal buyers in the Treasury bond market become fickle bond trading hedge funds.

This is another chart from the same presentation. As you can see, hedge funds are offsetting deficiencies. But hedge funds are not real currency buyers. They are engaging in arbitrage by buying cheap spot Treasury bonds and shorting Treasury futures contracts. The cash portion of the trade is financed by the repo market. Repo refers to exchanging assets (Treasury bills) for cash at a certain interest rate for a set period of time. The pricing of overnight financing using Treasury bonds as collateral in the repo market is based on the available amount of commercial bank balance sheets. As balance sheet capacity decreases, repo rates rise. If the financing cost of Treasury bonds rises, hedge funds can only purchase more Treasury bonds when the price drops relative to the futures price. This ultimately means that the price of Treasury bonds at auction must decrease, 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 nor provide funding for hedge funds to buy U.S. Treasury bonds at affordable prices. This is why the Federal Reserve must exempt banks from the SLR again. It increases the liquidity of the Treasury bond market and allows for unlimited quantitative easing that can be targeted at the productive part of the U.S. economy.

If you are unsure whether the Treasury and the Federal Reserve have realized the need for relaxing bank regulations, TBAC clearly states what needs to be done on slide 29 of the same presentation:

Tracking digits

If Trump's economics operates as I just described, we must focus on the amount of bank credit growth we expect to see. Based on the examples above, we know that quantitative easing for the rich is achieved by increasing bank reserves, while quantitative easing for the poor is achieved by increasing bank deposits. Fortunately, the Federal Reserve provides two data points for the entire banking system each week.

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 used to track the amount of bank credit in the U.S. In my view, this is the most important indicator of the money supply. As you can see, sometimes it leads Bitcoin, as in 2020, and sometimes it lags Bitcoin, as in 2024.

However, more importantly, how an asset performs when bank credit supply contracts. Bitcoin (white), the S&P 500 index (gold), and gold (green) have all been divided by my bank credit index. The indices of these values are 100, as you can see, Bitcoin has outperformed since rising over 400% since 2020. If you could only do one thing to combat fiat currency depreciation, it would be Bitcoin. You cannot argue with mathematics.

The path forward

Trump and his monetary acolytes have made it very clear that they will pursue policies that weaken the dollar and provide necessary funding for the return of American industry. Given that the Republicans will control all three branches of government for the next two years, they can pass Trump's entire economic plan without facing any effective opposition from the Democrats. Note that I believe Democrats will join the money printing party, as which politician can resist giving away free stuff to voters?

The Republicans will first pass legislation encouraging key commodity and material manufacturers to expand domestic production. These bills will be similar to the (CHIPS Act), (Infrastructure Act), and (Green New Deal) passed by the Biden administration. As businesses accept these government subsidies and obtain loans, bank credit growth will surge. For those who consider themselves stock-picking experts, buy stocks in listed companies that produce what the government wants to manufacture.

At some point, the Federal Reserve will capitulate and at least exempt U.S. Treasury bonds and central bank reserves from the SLR burden. At that time, the path to 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 shown that the velocity of money under such policies is far higher than that of traditional quantitative easing aimed at the rich under Federal Reserve oversight. Therefore, we can expect Bitcoin and cryptocurrencies to perform as well as, if not better than, they did from March 2020 to November 2021. The real question is, how much credit will be created?

The COVID stimulus plan injected about $4 trillion in credit. This event will become more severe. The growth rate of defense and healthcare spending alone is outpacing nominal GDP. As the U.S. increases defense spending to respond to the shift to a multipolar geopolitical environment, it will continue to grow rapidly. The proportion of people over 65 in the U.S. population will peak in 2030, meaning healthcare spending growth will accelerate from now until then. No politician can cut defense and healthcare spending because if they do, they will soon be voted out. All this means that the Treasury will be busy injecting massive amounts of debt into the market quarter after quarter to keep things running. I have previously shown how combining quantitative easing with Treasury borrowing has caused the velocity of money to exceed 1. This deficit spending will enhance the nominal growth potential of the U.S.

Speaking of relocating American businesses back domestically, the costs associated with achieving this will also reach trillions of dollars. Since 2001, when China was allowed to join the World Trade Organization, America 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 move their supply chains from China to so-called cheaper countries realize that the integration of so many suppliers in China's eastern coastal regions is so deep and efficient that even with much lower hourly wages in Vietnam, these companies still need to import intermediate parts from China to produce finished goods. In summary, readjusting supply chains to America will be a daunting task, and if it must be done for political expediency, the costs will be astronomical. I mean, cheap bank financing must be provided at rates ranging from single digits to low double digits to move production capacity from China to America.

It took $4 trillion to reduce the debt-to-nominal GDP ratio from 132% to 115%. Assuming the U.S. further reduces it to 70%, the level seen in September 2008, simply using linear extrapolation means that $10.5 trillion in credit would need to be created to achieve this deleveraging.

This is why Bitcoin is reaching $1 million, as prices are set at the margin. As the free trading supply of Bitcoin decreases, the most historically legal currency will be chased not only by Americans but also by Chinese, Japanese, and Western Europeans seeking a safe haven. 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 U.S. as 'American capitalism with Chinese characteristics.'