Trump’s call for a bitcoin strategic reserve is a very bad idea

Painting is by my father, Naum Katsenelson. Prints available on Katsenelson.com.

A few days from now, my son Jonah and I are going to Japan. We will be joining my good friend Ben Beneche. Ben is a very thoughtful value investor who lives in London and has been investing in Japan for decades. Ben and I have been talking about going to Japan and visiting companies for years – we finally pulled the trigger.

We (IMA) have owned companies all over Europe, but never in Japan (SoftBank is the only exception). I am fascinated by everything Japan – its culture, people, customs, craftsmanship, food, bullet trains and, of course, people. This trip is important for understanding and potentially owning Japanese stocks.

Why am I taking Jonah? Many reasons. I hate traveling alone, which is why I always take a family member on any business trip. I love spending time with Jonah. He just graduated from CU Boulder, majoring in finance, and is in the process of looking for a job. When else am I going to have an opportunity to go on a ten-day trip with him? 

Also, I believe seeing the world, seeing how other people live and think, is very important education for my kids (and me). We are limited by the myopic circles of our geography. Traveling is one way of expanding it (reading is another one). Also, some of the best memories I have of my father are from traveling with him.

If you live in Japan, and would like to meet, please drop my assistant Barbara a line at pa@imausa.com. Maybe we'll be able to do that. 

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This article was published in The Financial Times (the Wall Street Journal of Europe). I have to provide my usual warning: I don’t write about politics. In this article I describe economic policy suggested by a presidential candidate and its consequences.

Trump’s call for a bitcoin strategic reserve is a very bad idea

You can read this article in Spanish here or Russian here.

Politics in the US has turned into our biggest sport. Bigger than baseball, football, and basketball combined, politics has also turned us tribal — we want to win at any cost. And most importantly, we get so engrossed in the sport that we don’t realize that our future — and the future of our children — is the ball we are playing with.

At the end of July, Donald Trump went full Bitcoin (“Trump calls for US to be ‘crypto capital of the planet’ in appeal to Nashville bitcoin conference”). He wants the US to become a “Bitcoin superpower”; he promised to build a Bitcoin strategic reserve. I understand why Trump is doing this; he is a politician, and that is the cost of getting endorsements from crypto bros.

This policy would be very dangerous for the US. Let me explain why.

Money is more than just green paper with the faces of dead presidents, and more than even secure bits and bytes. There are many ways to define money. One way to look at it is as a claim on a country’s productive power and assets, reflecting the value of a nation’s economic output. Before humans started to use hard or paper money, we bartered with each other. This required a coincidence of needs — my need for milk had to coincide with your need for bread. Then we switched to commodity money (metal coins, shells), and then somewhere around the 6th century, the Chinese invented paper money. And then, with the advance of computers, money got digitized — over 90 percent of money in today’s world is digital.

There is another way to look at money — as a story. It’s a story you’ve been told not through reading but through everyday actions. Your parents went to the grocery store and traded dollar bills for milk, eggs, and donuts. And then the next day they traded the green paper for gasoline. We’ve all seen it happen countless times, through people’s actions. And now, as a society, we believe in the story of currency. This mass belief is incredibly important for society’s well-being; if it breaks down, so will society.

Now let’s look at what a reserve currency is. There would be no need for a reserve currency if there was only one country on the planet or if we never traded with other countries.

For a currency to become a reserve currency, the country that issues it needs to have a stable political system and a strong and preferably growing economy with low inflation. These factors are necessary for people to trust in parking their “reserves” in the currency, but that’s not enough. The country’s economy must be big enough to handle being the reserve currency. Let me give you an example: The Swiss franc objectively would be a great reserve currency (and it is to a small degree) — Switzerland has little debt, runs budget surpluses, and has a very stable political system. However, if people chose the Swiss franc as a main reserve currency, it would destroy the Swiss economy. The franc would appreciate in value so much that the watches Switzerland loves to export and even Swiss cheese would become unaffordable for the rest of the world.

There are many countries that have stable economies and political systems, but very few that have the size to maintain a reserve currency. China has the size, but it is an authoritarian regime — the world is less likely to put their reserves in the hands of its Communist Party. Also, China’s currency is not free-floating, and the government has significant control over the flow of currency in and out of the country.

The euro is really the only contender to the US dollar to be the world’s principal reserve currency, but the European Union is a combination of countries with different productivity levels and structurally different economies, and it has its own fundamental problems, which showed up in spades during the 2008 financial crisis.

Remember how I said that currency is a story? Well, a reserve currency is a global (super) story. Many people in many other countries, who may or may not have visited the US or done business with it, have bought into this story.

They have bought in, and for the right reason. After World War II, we had the strongest, most diverse economy, replete with natural resources, and two friendly neighbors, to the north and south, and two oceans, on the east and west. We are a democracy, and our capitalist, free-market economy had turned our country into the strongest in the world, with the strongest military, no capital controls, and hey, we were responsible with our finances — our debt was manageable, and though we ran budget deficits, they were not huge.

No longer! Today our $27 trillion economy has $35 trillion in debt. We collect $4.8 trillion in taxes, but we spend $6.3 trillion — we’re running a 5.6 percent budget deficit. Already, our finances don’t inspire a lot of confidence in the US dollar: As we print more dollars every year to finance our growing budget deficits, the dollar story of an all-mighty reserve currency is losing its luster.

Anyone who is paying attention is already starting to question the trajectory of our finances as well as the state of our political system. We used to have the undisputed reserve currency because we were great on both an absolute and a relative basis. Today we are just the best alternative, not because we are so awesome but because we are a less-dirty shirt in the old laundry basket.

This brings us to Donald Trump’s rhetoric about wanting the US to build Bitcoin strategic reserves. Despite its astronomic price appreciation, the market value of Bitcoin is only about the size of Switzerland — an economy of 9 million people. Currently, Bitcoin is owned mostly by crypto bros and investors who wish they had bought it at 50 cents. This rhetoric from a presidential candidate is dangerous, and if he’s elected, this governmental policy drastically changes Bitcoin’s story, legitimizing it and making it a contender for global reserve currency status. This would be catastrophic for the US.

Bitcoin is not controlled by anyone, including our government. We cannot print more of it to finance student or medical debt forgiveness, help out with first-time buyer down payments, or deliver tax cuts when we are running huge budget deficits. Nor can our politicians print more of it to finance their campaign promises that we as a country cannot afford, just to buy themselves more votes. Yet Bitcoin, just like gold, looks shinier with every empty campaign promise and every trillion dollars we add to our debt.

What will happen if strangers fall in love with another story that is not green and doesn’t have pictures of the US presidents?

The demand for the US dollar will decline. Foreigners will stop financing our lavish lifestyle beyond our means. The interest we are paying on our debt will go up. Our budget deficits will rise, not because politicians bought more votes (at least some of the US populace will have gotten a free lunch), but because we are paying higher interest rates for past free lunches. Einstein called compounding the eighth wonder of the world. We’ll experience a lot of it, which will eventually turn into hyperinflation.

The US president and presidential candidates (if they love this country more than they love themselves) should be the US dollar’s biggest salespeople. And the Bitcoin story should not be promoted — Bitcoin should not even be accepted as a form of donation to candidates for the position of US President. Bitcoin is not going to make America great. What will help this country continue to be great is getting our debt and deficits under our control, and neither candidate is talking about that — they are too busy buying votes.

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I'd love to hear your thoughts, so please leave your comment and feedback here. Also, if you missed my previous article "The AI Revolution", you can view it and leave a comment here.

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Drawing is by my brother, Alex Katsenelson. Prints available on ArtistUSA.com.

Vivaldi's Concerto for Strings in G Minor

Today I am going to share with you “Vivaldi Variation,” an excerpt from Italian composer Antonio Vivaldi’s Concerto for Strings in G Minor arranged for piano by Florian Christl, a contemporary German composer.

Let’s start with the excerpt from the actual Vivaldi concerto.

Click here to listen.

Vitaliy Katsenelson is the CEO at IMA, a value investing firm in Denver. He has written two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. Soul in the Game: The Art of a Meaningful Life (Harriman House, 2022) is his first non-investing book. You can get unpublished bonus chapters by forwarding your purchase receipt to bonus@soulinthegame.net.

Please read the following important disclosure here.