A meeting between US and Chinese officials in Anchorage, Alaska, last month, showed that the US-China struggle will no doubt continue during the administration of US President Joe Biden.
The struggle between democracies and authoritarian regimes is likely to last decades, because it stems from the fundamental difference in the two value systems — a difference that the Chinese Communist Party (CCP) sees as an existential threat. The CCP fears that Chinese might someday demand the protection of individual liberties, and has therefore waged a years-long “total war” to undermine democracies, which eventually prompted the US to fight back.
Within the various battlefronts of the CCP’s total war against democracies, the currency war could be the most critical to the establishment of the next global order.
The CCP systematically aims to disrupt the US’ source of power that is the US dollar — the reserve currency of the world that has allowed the US to enjoy “exorbitant privileges,” a term coined by former French president Valery Giscard d’Estaing in the 1960s.
No other country in the world could run trade and fiscal deficits as deep as the US’ without facing a total collapse of its own currency — so far.
To put it into perspective, US mandatory spending plus military outlays took up 135.7 percent of tax receipts last year — this means the military might of the US is “borrowed” and only sustainable if the faith in the US dollar is maintained.
The US national debt is expected to reach US$30 trillion by the end of this year, and 66 percent of the US’ entire debt load in its history would have been added in the short span of the past 13 years alone.
The US Federal Reserve is expected to finance the vast majority of the deficit spending, as the US domestic banking system runs out of capacity to buy more US government debt and international buyers run out of appetite.
The dollar-based financial system is quickly running into structural fragility as trillions of US dollars is printed out of thin air to fill fiscal gaps. The CCP knows this Achilles’ heel well and aims to exacerbate the pain.
After the US in 2013 sanctioned Iran by cutting off its access to the US dollar system, the CCP embarked on a multidecade strategy to de-dollarize itself, and eventually the world.
Two things happened at the time: One, the CCP started hoarding gold in preparation for the gold standard, and two, it created a digital currency task force at the People’s Bank of China, which eventually led to China’s digital currency, DCEP — “digital currency, electronic payment.”
This is a well-balanced move by the CCP to topple the US dollar using tools from history and future technology through gold and digital currency respectively.
How would the CCP weaponize gold? Soon after 2014, the CCP stopped funding US deficits through US Treasury purchases, and channeled that purchasing power into physical gold and other hard assets.
From 2014 to 2018, China cleverly used the depressed gold prices to import 10 to 50 tonnes of gold per month. This purchase binge, coupled with China being the largest gold producer in the world, likely put the CCP’s gold hoard materially above that of the US of about 7,400 tonnes.
Should an all-out currency war break out, the Chinese currency could adopt the gold standard and put the CCP’s gold holdings to geopolitical use.
The country that switches to the gold standard first always gets the conversion price of gold to the local currency — the local currency becomes the “unit of account” of the anchoring asset, or gold in this case.
It is likely the CCP will set the price significantly higher in renminbi terms during a currency war. This would trigger the flow of physical gold from democratic countries to the CCP, and a further depletion of gold inventory in the old financial centers by the force of the free market.
A vicious cycle of selling US dollars to buy gold in London and New York and shipping it to China for renminbi could destabilize the greenback and lead to the ultimate loss of faith in it as a reserve currency.
This chain reaction could be set off by the renminbi, as opposed to the US dollar, becoming the unit of account for gold.
Contrary to conventional wisdom, the prominence of the US dollar does not come from its “medium of exchange” function, and certainly not “store of value” function, considering the 84 percent loss of purchasing power since the 1970s after the abandonment of the gold standard.
The core of the greenback’s strength comes from the “unit of account” function of money.
Not only energy is priced in US dollars through the petrodollar system, but 80 percent of international trade involves the US dollar, more than 61 percent of all foreign bank reserves are denominated in US dollars, and nearly 40 percent of the world’s debt is priced in the greenback — all significantly outweighing the 16 percent share of the US in global GDP.
This creates a perpetual demand for the greenback globally and an irreplaceable position in the human economic psyche.
Every move by the CCP on the US dollar has been laser-focused on disrupting its unit of account function. This deliberate external bombardment, coupled with internal weakness due to the loss of fiscal and monetary discipline of the US dollar, spell grave prospects for the liberal order.
If the currency war were to be lost against the CCP, most other battlefronts would not matter — trade, 5G, biotechnology, etc.
That is, until bitcoin came along to turn the tide of the battle.
Bitcoin has grabbed the attention of the investment world as the quickest asset in history to reach US$1 trillion market capitalization, with the highest volatility-adjusted returns (meaning low volatility considering the returns).
Bitcoin has in the past few months also captured the imagination of corporations, as Tesla and other insightful companies started to adopt it as a treasury asset that would profoundly redefine competitive advantages in their core businesses.
However, to the fault of all these headline grabbing developments, the world might be overlooking the national security implications of this unhackable, infinitely scarce network that has emerged for the first time in human history.
While central banks around the world scramble to create central bank digital currencies in which the CCP has at least a five-year technological lead — essentially a lost cause and a waste of resources for democracies — bitcoin has quietly secured a pivotal win for the US dollar and the liberal order in the currency war against the CCP.
Bitcoin is almost always quoted in US dollar terms. More than 82 percent of fiat-currency trading in bitcoin is in the greenback, and more than 95 percent of bitcoin transactions in China are facilitated through US dollar-linked stablecoins.
The dominance of the US dollar as the “unit of account” of bitcoin would only strengthen after the US Office of the Comptroller of the Currency in January approved banks to use US dollar stablecoins.
Bitcoin and the US dollar are two sides of the same coin. The US dollar provides the unit of account function for bitcoin, and bitcoin transfers its geopolitically important anti-fragile trait to the US dollar. The bitcoin network is indestructible and its idea is a threat to the CCP — the party in 2017 tried to ban bitcoin, and failed.
If bitcoin were to overtake gold’s size in four years — a mathematical certainty in this columnist’s view — the US dollar in turn would also have secured its position in the financial order of the future, regardless of the CCP’s gambit in gold or DCEP.
The national security of the liberal order would be the biggest beneficiary of bitcoin’s rise.
To the advantage of democracies, the CCP inherently can never fully understand or adopt bitcoin, which has liberty and self-sovereignty built into its programming codes. Bitcoin is the antithesis to totalitarianism.
The effects are already evident. CCP-friendly corporations have largely lagged behind on the adoption of bitcoin as a treasury asset due to their false faith in a centralized authority, as opposed to decentralized consensus-based network such as bitcoin.
Chinese miners of bitcoin also have for years exchanged their pristine bitcoin for depreciating fiat currency, at a great financial and national security loss to the CCP.
It is crucial for democratic nations to understand the national security implications of bitcoin, especially for Taiwan, which is in a fight for its survival against the CCP’s encroachment.
Recent factually incorrect comments by central bank Governor Yang Chin-long (楊金龍) dismissing bitcoin are reminiscent of those in the CCP — which is a concerning development.
Clouded by the “yes to blockchain, no to bitcoin” myth and a lack of national security awareness, several local governments that sponsored blockchain projects in Taiwan also have a high risk of being assimilated by the CCP’s Blockchain Services Network.
If they are not careful, Taiwanese might be helping the CCP build a digital “One Belt, One Road,” which would have much greater threats than 5G.
On the brighter side, Taiwan has one of the most friendly legal environments when it comes to developing the bitcoin ecosystem because of its legal classification as a “virtual asset,” a much more accurate definition of the bitcoin network. Not a security, and certainly not a currency.
Currencies would always be the privilege of nations, and bitcoin is the much-needed aid to the currencies of democracies in the fight against CCP’s currency war.
James Lee is a former hedge fund chief investment officer.
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