Surprisingly, there are many similarities between Lizzo, the singer who advocates "fat aesthetics", and the economic imbalance of "Pax Americana". Don't get me wrong, whether you think "plump body" is an aesthetic or not is irrelevant. However, although the metabolic problems caused by obesity may sometimes seem "beautiful", they are always fatal. Similarly, although the US economy has benefited some people, in the end, extreme social disharmony may lead to revolution.
Waistlines and economic conditions during the Pax Americana weren’t always so out of balance. In the mid-20th century, Americans were neither universally obese nor economically lopsided. But over time, the problem worsened.
The food system has been hijacked by Big Ag, which promotes its own processed, “delicious” but nutrient-poor lab foods with fake nutrition guidelines. Americans are becoming increasingly obese and chronically ill after consuming these nutrient-poor foods, while Big Pharma has taken advantage and launched a variety of drugs to treat the symptoms of these metabolic diseases (such as diabetes) rather than the root causes. Unwilling to curb the influence of the corporations that control the food supply, social discourse has shifted to the narrative of “fat aesthetics” or “fat is beautiful”, telling obese people that it is not the fault of the corrupt system, but that they should be proud of their “beautiful bodies”. As a result, stars like Lizzo have been promoted to the altar, and although she is a talented singer, her message promotes a lifestyle that may lead to early death. Lizzo represents the status quo of obesity, which is extremely profitable for a few corporate giants.
The U.S. economy has also been hijacked by the “printing press.” Before the creation of the Federal Reserve in 1913, financial panics ensued when credit expansion outpaced cash flow support. Some bad businesses and some good ones went bankrupt, the economy was reset, credit was cleared, and the system was revitalized. However, since the birth of the Federal Reserve, every credit bubble has been countered by massive money printing. Starting with the Great Depression of the 1930s, the imbalances in the U.S. economy have never really been corrected.
This is the root cause of the imbalances in trade and financial capital during the Pax Americana, not the level of tariffs (Daniel Oliver has written a brilliant article on why excess credit is the root cause of trade imbalances and tariffs are a fallacy). The status quo has led to inequality, despair, and addiction for ordinary people, while the "masters of the universe" who control stocks, bonds, and real estate assets enjoy unprecedented wealth in the history of human civilization.
All hope is not lost, change is still possible, but you can choose to do it the hard way or the easy way.
For decades, the pharmaceutical industry has been marketing drugs that "miracle" melt fat away. Remember Fen-Phen? None of them actually worked. So the only viable solutions are complex, unpopular, expensive, and low-profit: hit the gym, cut back on cheap processed foods, and switch to fresh, organically grown produce. Yet even these methods aren't enough to solve the problem, because once you enter the "obesity state," your body adjusts your hunger and metabolism to ensure that it stays that way. According to some scientists, it can take up to seven years to change your body's metabolism to support a leaner body.
Then, along came the “easy button.” GLP-1 agonists, a class of drugs originally developed to treat diabetes, were found to reduce cravings for food and addictive substances like alcohol and nicotine. Drugs like Ozempic, Wegovy and Monjaro produced dramatic weight loss in a short period of time. Now, the drugs have proven safe enough that some believe many formerly obese people may take them for life. Thanks to modern medicine, these shots or pills offer an easy “off switch” for obesity, if you can afford it.
Even Lizzo eventually chose this “miracle weight loss pill” to avoid an early death from preventable metabolic disease. Awesome! However, she may not be invited to support Kamala Harris in 2028… There are painful and painless solutions to solving the US trade imbalance. For American politicians, adopting policies that make neutral voters painful or uncomfortable will undoubtedly lead to their defeat in the election.
Previously, the Trump administration tried the hard and painful option, but soon discovered that the median voter could not tolerate higher prices for American goods that might take a decade to achieve, nor could they tolerate empty shelves during that time when American manufacturers could not produce the large quantities of goods that China once supplied. This dissatisfaction was conveyed to members of Congress and senators, especially in Republican districts, and the Trump team backed off and must now find other ways to achieve the same rebalancing. The move to unwind the maximum tariffs is underway, as evidenced by the recently announced 90-day bilateral reduction of US-China tariffs to about 10%.
A successful general can retreat from a faulty strategy and still win.
Another, more politically palatable approach to U.S. trade rebalancing would be to attack the capital account surplus through various forms of capital controls. These capital controls would function as a tax on foreigners who buy and hold U.S. financial assets. If foreigners stop buying U.S. financial assets because of higher taxes, they must also stop selling cheap goods to the U.S. If foreigners still sell cheap goods and buy assets, then the tax revenues can be returned to the median voter in the form of stimulus checks or lower income taxes. In this way, Trump can claim that he hit those “evil foreigners” and provided lower taxes for the American public. This strategy won the midterm and presidential elections and achieved the same goal of reducing the influx of cheap foreign goods into the U.S. consumer market and relocating manufacturing capacity back home.
The net result of Trump’s shift from hard solutions to easy solutions is that foreign capital will gradually and then suddenly flee U.S. stocks, bonds, and real estate. The dollar will then depreciate relative to the currencies of surplus countries. The question facing the U.S., and especially Treasury Secretary Bessent, is who will finance the exponentially growing U.S. Treasury debt if foreigners turn from net buyers to sellers. The question facing governments and corporations in surplus countries is where to “store” those surpluses if they continue to run them. The answer to the former is to print money, the answer to the latter is to buy gold and Bitcoin.
The core of this article will focus on the mathematical identities of trade, how capital controls work - the "boiling frog" theory, how these taxes affect capital flows in surplus countries, how Bessent explicitly and implicitly prints money to fund the US Treasury market, and why Bitcoin will be the best performing asset during this global monetary transition.
Trade accounting identities and geopolitical issues
Let us use this ironic example to illustrate the relationship between the trade account and the capital account.
It’s 2025, and Trump’s election has reaffirmed the right of little boys to play with action toys again. Mattel is relaunching its He-Man action toy with an attached plastic AR-15 rifle. Masculinity is back, baby… and the face of the toy is Andrew Tate! Mattel needs to produce a million units fast and at rock-bottom prices. Since the U.S. manufacturing base is virtually nonexistent, Mattel must buy these toys from Chinese factories.
Mr. Zhou owns a manufacturing company in Guangdong Province that makes cheap plastic toys. He agrees to Mattel's terms, one of which is to be paid in U.S. dollars. Mattel wires the money to Mr. Zhou, and the toys arrive a month later. Wow, that's fast. Mr. Zhou's profit margin is 1%. Competition in China is fierce. Due to the volume of orders he handles, the total revenue from orders from Mattel and other similar companies is $1 billion. Mr. Zhou has to decide what to do with these dollars. He doesn't want to bring them back to China by converting them into RMB because there is no productive use for RMB given the low interest rates on government and corporate bonds. In addition, banks pay almost no interest on deposits.
Mr. Zhou doesn’t like all this anti-China talk because he felt unwelcome the last time he was in the US. His daughter attends UCLA and she gets looked at for driving the latest model Phantom Convertible, while the average American rides the LA Metro, ahem, I mean Uber, to class. So even though US Treasury yields are among the highest on government bonds in the world, he’d rather not buy them if he can. Mr. Zhou has a soft spot for Japan, and long-term government bond yields are much higher than they used to be. He asks his banker to help him buy Japanese Government Bonds (JGBs). The banker tells him that the Japanese government doesn’t want foreigners buying up their debt in large quantities because it would drive up the value of the yen, and they want to keep their exports competitive. If Mr. Zhou sells dollars to get the yen he needs to buy the JGBs, the yen will appreciate.
The JGB market was the only market large enough to absorb his surplus, and Japan didn't want foreigners pushing up the value of their currency. Zhou accepted reality and reluctantly used his dollar export earnings to buy US Treasuries.
What impact does this have on the U.S. trade and capital accounts?
US Trade Account:
Trade account deficit: $1 billion
Boss Zhou’s bank account: $1 billion in cash
Purchase: $1 billion in Treasury bonds.
Because these surpluses are not flowing back to China, Japan or elsewhere, but are being recycled into US Treasury bonds:
U.S. Capital Account:
Capital account surplus: $1 billion
The moral of this part of the story is that if other countries are unwilling to let their currencies appreciate, a trade account deficit will turn into a capital account surplus. This is the current situation: no market other than the United States is large enough or willing to absorb global trade imbalances. This is why the dollar remains strong even though the United States issues trillions of dollars in debt every year to finance its government. By the way, many years ago China asked Japan if it could buy Japanese government bonds (JGBs), but Japan responded: "No, not unless you let us buy Chinese government bonds (CGBs)." China responded: "No, you can't buy CGBs." So both countries continue to dump their surplus capital into US financial assets.
In the current global trade landscape, any discussion about the renminbi, yen or euro replacing the dollar as the global reserve currency is nonsense unless China, Japan or the EU are willing to open their capital accounts and their financial markets are large enough to absorb the income of surplus countries.
Next, Trump announced that the US must revive manufacturing and reverse the trade account deficit. His current tool of choice is tariffs. But let’s analyze why tariffs are politically unfeasible.
Take Mattel, for example. They sell cheap dolls to little boys. However, most families are financially strapped and don’t even have $1,000 in emergency savings. If the price of the doll goes from $10 to $20, Jonny can’t afford it. Without tariffs, Mattel could sell the doll for $10 because it’s cheap to make in China. But now, Trump imposes a 100% tariff on Chinese goods. Boss Zhou can’t afford the tariff cost, so he passes it on to Mattel. And Mattel, with a profit margin of only 10%, passes the cost on to consumers.
As a result, the price of the dolls soared to $20. This was too expensive for most families, so they chose not to buy it. And the little boy Jonny didn't understand why his parents didn't buy him his beloved gun-fighting doll. His parents worked hard driving Uber and delivering food to barely make a living, and now because Trump made toys more expensive, the child was throwing a tantrum at home. In the next election, will his parents vote Republican or Democratic?
Before the election, they might diagnose their child with ADHD and give him medicine to keep him quiet. The Democrats will campaign on the platform of "making toys and other goods affordable again" and advocating a return to "free trade" policies to allow China to continue dumping cheap goods into the US market. The Democrats will claim that all smart economists agree that "free trade" allows Americans to enjoy cheap goods and maintain their lifestyle; and Trump and his advisers are a bunch of ignorant fools. If things continue on the current trend, the Democrats may make a comeback in the 2026 midterm elections.
Can Mr. Zhou circumvent the tariffs by moving production from China to a country with lower tariffs? Of course he can.
Since the early 2000s, Mr. Zhou has accumulated a lot of wealth by investing in factories in Mexico, Vietnam, Thailand, and other places. He started producing dolls in these places and shipped them to the United States. The effective tariff dropped, and he could sell the doll for $12 instead of $20. Parents can accept to spend an extra $2 to avoid their children's temper tantrums and avoid their children's premature dependence on prescription drugs.
Since Trump has not proposed a uniform tariff for all markets, but has adopted scattered bilateral agreements, savvy manufacturers like Mr. Zhou can always find a low-tariff path to the United States. The Trump team knows this, but due to geopolitical considerations, such as whether a country has US military bases, sells key goods to the United States, or sends soldiers to participate in the United States' long-term wars, they cannot completely block the economies of their allies, otherwise these countries may choose not to cooperate with the "American world policeman."
Without uniform tariffs, there will always be countries or regions that become “transshipment arbitrage points.” For example, China’s arbitrage mechanism for obtaining advanced semiconductors and AI chips through TSMC and NVIDIA can also allow Chinese goods or Chinese-owned manufacturers to circumvent high tariffs on goods exported directly from China to the United States.
Ultimately, tariffs will not achieve their goal of significantly reducing the U.S. trade deficit. The American public will not be willing to wait five to ten years for manufacturing to reshore enough to fill store shelves with cheap goods again. And if the trade deficit does not shrink significantly over the next 12 months, Trump’s policies will only lead to more inflation for goods, with no tangible benefits to an economically distressed public.
Ultimately, the problem is not the tariffs themselves, but that for them to work, every country must face the same rate, without any trade-offs or exemptions. However, this is not realistically possible, especially when the surplus countries are not just “evil China” but also staunch allies like Japan and Germany. It is absurd to expect Japan to continue to contain China and Russia at the naval level, station tens of thousands of U.S. troops and host more than 120 military bases, while having its manufacturing industry crushed by tariffs.
Therefore, this 90-day suspension of tariffs will eventually become a permanent suspension.
Tax me, baby
If attacking a trade account deficit for domestic political and geopolitical reasons is problematic, how about moving to a capital account surplus? Is there a way to discourage foreign investors from accumulating U.S. financial assets? The answer is yes. However, for the wealthy who believe deeply in the glory of the free market, the method may seem dirty and despicable - it is capital controls. Specifically, I don't mean that the United States prohibits or significantly restricts foreigners from holding financial assets (this is the practice of most countries in the world), but I mean that foreigners' asset holdings are taxed. Foreigners can still hold most U.S. financial assets of any size, but their asset value will continue to be taxed a certain percentage.
These tax revenues will be returned to ordinary Americans through reduced income taxes or other government subsidies to ensure their support. The result may be that foreigners continue to generate surpluses by selling goods to the United States, but their earnings are taxed at the same time; or they reduce exports to the United States to avoid paying taxes; or they turn to buying other stateless financial assets, such as gold or Bitcoin.
There are many ways to tax foreign capital. But to simplify the tax effect, we assume that all foreign capital is taxed at a rate of 2% per year. The main focus here is on foreign portfolio assets, which are highly liquid stocks, bonds, and real estate, and do not include illiquid assets such as a foreign automaker's factory in Ohio.
Currently, the total value of foreign portfolio assets is approximately $33 trillion. Assuming constant prices and no capital outflows due to taxes, let's look at the annual tax benefits.
It is worth noting that the bottom 90% of income earners in the United States will pay a total of about $600 billion in income taxes in 2022. Therefore, Trump can completely eliminate income taxes for the vast majority of voters by imposing a 2% capital tax on foreign-held stocks, bonds, and real estate. This is undoubtedly an extremely attractive political strategy.
Next, let’s examine the effects of capital taxes vs. tariffs:
Collection capacity:
The U.S. Treasury has complete control over the banking system and financial markets. They may not know the exact owner of each asset, but they can distinguish whether the asset is held by a U.S. entity or a foreign entity. Therefore, it is relatively simple for financial institutions or local governments to tax only stocks, bonds, and properties held by non-U.S. entities. In contrast, the collection of tariffs is more complicated because it is difficult to accurately track the origin of each item or the links where its value is added in the supply chain. This also makes it easier for tariff policies to be exploited.
Unified tax rate: one tax for all
The purpose of a capital tax is to eliminate a net capital account surplus, which only requires a flat tax rate. If foreigners are unwilling to pay this tax, then they should not buy U.S. financial assets. They can reinvest their export earnings in their home markets. This tax does not immediately stop exporters from selling cheap goods to the United States, so the impact on the volume of traded goods will not be immediately apparent. While capital controls can generate revenue to reduce income taxes, will they help bring manufacturing back to the United States?
Suppose exporters don’t want to pay a 2% tax every year for holding U.S. financial assets. They see a lower net expected return after tax and choose investment opportunities in their home country instead. They sell their assets, exchange them for dollars, and then convert the dollars back to their home currency. The net result is a weaker dollar and a stronger currency in the surplus country (like the yen). Over time, the dollar will gradually weaken and the surplus country’s currency will significantly strengthen. At that point, even without the tariffs, goods produced in Japan will become more expensive in dollar terms—and that’s the point.
American-made goods will become cheaper, while foreign goods will become more expensive over time. This process may take decades, but American voters will benefit either way. Either foreign capital stays and pays taxes, which are used to eliminate income taxes for most voters; or foreign capital withdraws, and American manufacturing grows, providing more high-paying jobs, thereby improving voters' income levels. Either way, the shelves will not be empty immediately, and there will be no inflation in commodity prices.
Capital controls remain stable
I am a global macro DJ who likes to remix other people's ideas and add my own language style and rhythm. Just like every house music has standard drums, snare drums, claps and syncopation, my "drums" are based on the rhythm of the "money printing machine". I hope to add interesting "bass lines", "harmony" and "special effects" to the text, and finally present a wonderful "decomposition" and "explosion point" like Solomun.
The reason I say this is to emphasize that the idea of using capital controls instead of tariffs to reduce U.S. trade and capital account imbalances is not new, nor is it my original idea. During the negotiations of the Bretton Woods system after World War II, economist Maynard Keynes advocated imposing a "user fee" on capital in surplus countries and circulating it to the capital markets of deficit countries to balance trade and capital flows. More recently, Stephen Miran (current chairman of the Council of Economic Advisers) discussed in his paper "A Guide to Reshaping the Global Trading System" how to force capital flows to rebalance by imposing specific types of fees on foreign holdings and transactions in U.S. financial assets. Another very influential macro analyst (who requested anonymity) has published several articles in the past year arguing that capital controls are necessary and that countries that want to be allies of the United States must pay for them. In addition, Michael Pettis speculated in a recent webinar that tariffs will not substantially reduce the U.S. trade deficit and capital account surplus with the world, and he concluded that capital controls are coming because the government realizes that this is the only way to truly change the flow of money.
I mention these people to demonstrate that today’s financial think tanks are advocating capital controls, not tariffs. The benefit to investors is that we can watch in real time how the tariff hardliners, led by Secretary of Commerce Howard Lutnick, implement their plans to reduce U.S. imbalances. However, due to the collapse of financial markets in early April this year, tariffs were hastily implemented and the internal fighting seemed to be over. Capital control lobbyists, such as Bessent, are now taking over. My description of the effectiveness of capital controls may be as optimistic as Sam Bankman-Fried (SBF)’s “pie in the sky” when he presented FTX/Alameda’s financial situation to investors. However, the implementation of capital controls in the “Pax Americana” financial markets may have serious consequences. I predict that the implementation of capital controls will lead to an accelerated rise in the price of Bitcoin. This is the core of what I call the “boiling frog theory”.
The crash that never happened
These measures will be implemented gradually due to the negative impact of capital controls on US financial assets. Global financial markets will slowly accept US capital controls as the norm rather than some kind of heresy. Just like a frog in gradually warming water does not know that it is about to be boiled, capital controls will quietly become the new normal.
Foreigners receive a lot of dollars from selling goods to Americans, and they have no choice but to reinvest these dollars in the US stock, bond and real estate markets. Here are some charts that show the outperformance of US financial markets as foreign capital pours in. The chart below is the cornerstone of all my analysis. If you are the issuer of the reserve currency and must open the capital account, then a trade deficit will lead to a capital account surplus.
For the next three charts, I use data from 2002 to early 2025 because China joined the World Trade Organization in 2002 and early January 2025 was a period of high optimism in the US market about “Trump is going to fix the world.”
Since 2022, the MSCI USA Index (white) has outperformed the MSCI World Index (gold) by 148%: exceptional performance of the US stock market.
The total amount of tradable US Treasuries (gold) increased by 1000%, but the 10-year US Treasury yield fell slightly: a special performance of the US bond market.
The US working age population (gold) grew by only 14%, but the Cash Shiller National House Price Index (white) grew by 177%: a unique performance of the US housing market. This is quite striking, as data from the 2008 global financial crisis is also included.
If foreign capital is taxed, and they decide on the margin that investing in the U.S. is no longer viable, then mathematically, stock, bond, and real estate prices must fall. This is a problem for several reasons. If stocks fall, capital gains tax revenue decreases, and those taxes are a marginal revenue driver for the government. If bond prices fall and yields rise, the government’s interest payments will increase because it must continue to issue new bonds to finance its massive deficits and roll over its existing $3.6 trillion in debt. If home prices fall, middle-class and wealthy baby boomer Americans who own most of their real estate will see their net worth collapse just when they need that wealth to fund many years of retirement. These are the people who will vote against the incumbent Republicans in the November 2026 midterm elections.
Pax Americana depends on foreign capital, and if capital controls are imposed and foreign capital leaves, then that is bad news for the economy. Can politicians, the Fed, and the Treasury take steps to replace foreign capital and maintain financial market stability? Remember that four-quarter drumbeat, Brrr button. You all know the answer. The answer is the same as always. If foreigners don’t provide dollars, the government will provide them through the printing press. Here are the policies that the Fed, Treasury, and Republican lawmakers will take to replace foreign capital:
Fed:
· End quantitative tightening (QT) on mortgage-backed securities (MBS) and Treasury bonds.
· Restart quantitative easing (QE) on MBS and Treasuries.
· Exclude MBS and Treasuries from the supplementary leverage ratio (SLR).
Ministry of Finance:
· Increase the amount of Treasury bond repurchases every quarter.
· Continue to issue large amounts of short-term Treasury bills (<1 year maturity) rather than long-term Treasury bonds (>10 years maturity).
Republican lawmakers:
End the conservatorship of Fannie Mae and Freddie Mac. You don’t have to stretch to imagine the Treasury and Republican lawmakers following Trump’s orders, but why would the Fed do what Trump wants? The answer to that question is that it’s the wrong question. The Fed is already doing what Trump and Bessent want behind the scenes. Check out this beautiful example marked by Luke Gromen:
The Fed is shrinking its balance sheet. However, it has some discretion in how to achieve this, not least because the policy mandate is a net reduction, not an even reduction across all maturity categories. Yellen and now Bessent need to finance the government’s massive debt. Foreign investors and the US private sector like to buy Treasury bills because they are short-term bonds and pay interest, meaning they are a high-yielding cash alternative that is preferred to low-yielding bank deposits. But no one wants to buy long-term, meaning 10 years and up. To help Yellen and now Bessent raise funds, the Fed has given a big leg up by engaging in quantitative easing (QE) of 10-year Treasuries. Powell cites government deficits as a problem but continues to push down 10-year yields to keep them politically acceptably low via the printing press, which is highly dishonest.
Given that Powell is already doing covert Treasury QE, he will also accept pleas from the BBC and powerful commercial banks (like JPMorgan CEO Jamie Dimon) to stop QT, resume QE, and grant SLR exemptions. I don’t care how stubborn he is in his press conferences in response to Trump’s calls for easier monetary conditions. Powell’s position is set, and he’s not moving away. Now, get on with it.
These measures will provide money printing through various channels to replace foreign capital lost to capital controls and boost stock, bond and real estate prices in the following ways:
Bond prices will rise and yields will collapse. The Fed will buy bonds because of its quantitative easing. Banks will buy bonds because they can use unlimited leverage to buy and they will buy before the Fed does. The stock market as a whole will rise because of the lower discount rate applied to future earnings; some industries will benefit more than others. Manufacturing companies will benefit the most because the cost of credit falls and its availability rises. This is a direct result of lower government bond yields and banks having more balance sheets to lend to the real economy.
Because mortgage rates will fall, house prices will rise. The Fed's quantitative easing purchases of mortgage-backed securities will lower mortgage rates. As Fannie Mae and Freddie Mac rush back into the loan underwriting business, taking advantage of their implicit government guarantees, the amount of credit available will increase. Don't expect these policies to be implemented overnight. It's a multi-year process, but it has to happen; otherwise, U.S. financial markets will collapse. Given that politicians can't handle financial distress a week after Emancipation Day, they will always hit the money-printing button one way or another.
Will they withdraw their investment?
Before concluding my Bitcoin price prediction, we must ask a big question: Is foreign capital leaving? If so, are there any signs that this assumption is becoming a reality?
My hypothesis, shared by many other analysts, is that the rapid appreciation of certain Asian exporter currencies in recent weeks, such as the Taiwan dollar and the Korean won, suggests that capital flows are reversing. This, therefore, lends credence to the view that capital controls are imminent, while also suggesting that some forward-looking market participants are pulling out ahead of time. Furthermore, finance ministers responsible for setting monetary policy are allowing their currencies to appreciate as this particular carry trade is being unwound.
Private capital from Asian companies, insurance companies and pension funds usually moves with market trends. Since the 1997-1998 Asian financial crisis, when Asian exporters devalued their currencies and adopted a policy of manipulating their currencies against the dollar, Asian private capital has been:
· Capital earned overseas stays overseas.
· Domestic capital was transferred overseas, primarily into U.S. financial markets to seek higher returns.
Essentially, this is a giant carry trade. Eventually, this capital either has to be returned to local shareholders in local Asian currency or it needs to meet liabilities denominated in local Asian currency. Therefore, Asian private capital is actually short on the local currency. In some cases, they are even borrowing domestically because domestic interest rates are very low due to the large amount of local currency bank deposits created by central banks to keep the local currency weak. At the same time, Asian private capital holds long positions in high-yielding US dollar assets such as stocks, bonds and real estate. They do not hedge these US dollar longs because the state-sponsored policies themselves manipulate the local currency price downward.
This arbitrage trade will be unwound in two cases:
· Narrowing yield spreads between U.S. and local financial assets.
· Asian currencies begin to appreciate relative to the US dollar.
Capital controls reduce the net rate of return on U.S. financial assets. If the net rate of return falls, or if the market expects this trend to continue due to rising taxes on foreign capital, then Asian private sector capital will begin to unwind its carry trades. They will sell stocks, bonds, and real estate and then convert dollars into local Asian currencies. At the margin, this will cause the prices of some U.S. financial assets to fall, while Asian currencies will appreciate relative to the dollar.
In terms of U.S. assets, the first and most critical battleground will be the U.S. Treasury market, especially the long-term Treasury market of 10 years and above. This market is most vulnerable to foreign selling because almost no one wants to hold these "junk bonds." The corresponding currency market battlefield will be the currencies of certain Asian exporters.
When the price of USDKRW falls, the won appreciates relative to the dollar. Many sovereign and private foreign investors are also engaged in similar carry trades. If Asian private capital flows are reversing, then these funds must also unwind their positions. Therefore, even before the size and scope of US capital controls are clear, foreign investors holding US assets and local currency liabilities must start selling stocks, bonds and real estate and buying back their local currencies.
What will eventually force the Fed, Treasury, and politicians to implement some or all of their money printing measures will be a slow but irreversible rise in the 10-year Treasury yield. As capital repatriation intensifies, yields will rise. The yield strike in the financial markets is between 4.5% and 5% on the 10-year Treasury due to the massive leverage embedded in the system. As yields rise, volatility in the bond market will increase, which can be observed through the MOVE index. Remember, when this index exceeds 140, policy action is immediate and inevitable. Therefore, even if rising yields put a cap on the stock market rally, Bitcoin will see an acceleration in money printing through this weakness.
Bloomberg Asian Dollar Index (gold) vs. US 10-year Treasury yield (white). When the US dollar index rises, local Asian currencies strengthen and we see a corresponding rise in 10-year yields.
lifeboat
As the US-China relationship gradually splits, the global financial market will move towards Balkanization. Monetary policy that puts national interests first will require capital controls, which will be implemented everywhere, including the United States. No matter who you are, there is no guarantee that your capital can be invested in the fiat financial system assets with the highest returns and lowest risks in the world. In the past, gold was the only liquid connection between different financial systems, but now Satoshi Nakamoto has given believers Bitcoin!
As long as you have an internet connection, you can convert fiat currency into Bitcoin.
Even if centralized exchanges are banned and banks are prohibited from processing Bitcoin-related transactions, you can still convert fiat into Bitcoin. Since 2017, China has effectively banned centralized exchanges from operating on a central limit spot order book. The OTC Bitcoin market in mainland China remains very active. So get your money out now! Listen to my talk at the Crypto Finance Conference earlier this year to learn why capital controls are coming to the EU.
A big question is whether the Trump team will try to sink gold and Bitcoin, the two lifeboats of global capital. I think not, because he and his lieutenants believe that the post-1971 arrangement of US Treasuries as the global reserve asset has not benefited the segment of Americans that propelled them to power. They believe that the financialization of the US has led to a decline in military preparedness, manufacturing capacity, and social harmony. To address this, gold and/or Bitcoin will be promoted as neutral global reserve assets. Imbalances in countries will be balanced through gold, and in private through Bitcoin.
We know Team Trump is positive about gold because it was exempted from the tariffs at the outset. We also know Team Trump is positive about Bitcoin because of the changes to various regulators. While I think these measures may not be what is needed for Bitcoin to truly scale fairly under Pax Americana, you can’t deny that the retreat of various law enforcement agencies is not a significant step in the right direction. Considering we know that foreign portfolio assets total $33 trillion, the next question is how much capital will be withdrawn from the United States and flow into Bitcoin. Depending on how quickly you want it to be done, this determines what percentage of assets will flee to Bitcoin.
What if 10% of these assets ($3.3 trillion) flowed into Bitcoin over the next few years? At current market prices, exchanges hold about $300 billion in Bitcoin. If 10x the capital tried to squeeze into the market, the price would go up far more than 10x. That's because the last price was set at the margin. Sure, if the price surged to $1 million, long-term holders would show up and sell their Bitcoin for fiat, but as these portfolio assets migrated to Bitcoin, an epic short squeeze would ensue.
The reason why Bitcoin is a superior vehicle for capital flows in the global financial Balkans is that it is a digitally held asset. There is no need for an intermediary to store and transfer wealth. Gold, despite its 10,000-year history as stateless capital, can only circulate digitally in paper form. This means that a financial intermediary must be trusted to warehouse your physical gold, and then you trade a digital receipt. These intermediaries will be subject to financial regulations designed to isolate capital within the country so that it can be taxed to pay for national priority industrial policies. Therefore, unless you are a state or quasi-state actor, gold as a physical held asset cannot move quickly in the global digital economy. Bitcoin is the perfect and only lifeboat that global capital must leave the United States and elsewhere.
Additional bullish momentum will come from the US actually defaulting on its massive national debt. A $1,000 face value bond will receive $1,000 when it matures, meaning nominally you will get your principal back. But that future $1,000 will buy fewer units of energy. The US started defaulting on the real value of its national debt in earnest after the 2008 global financial crisis, when they decided to print money to solve the problem. But the pace of defaults has accelerated after COVID. This trend will accelerate again as the Trump team revitalizes the US economy by devaluing national debt relative to hard currencies like gold and Bitcoin. This is the real lesson to be learned from the “Liberation Day” tariff farce. Nominal growth will surge as businesses rebuild better at home; however, high single-digit nominal GDP growth will not be matched by high single-digit yields on national debt and bank deposits. This inflation will show up in future gold and Bitcoin prices as it has in the past.
This chart shows the performance of the US Long-Term Treasury ETF (TLT) in terms of gold (gold) and Bitcoin (red), relative to 100 since 2009. Since 2021, Treasuries have lost 64% and 84% of their value relative to gold and Bitcoin, respectively.
The return of foreign capital and the devaluation of the US’s massive stock of national debt will be the two catalysts that will drive Bitcoin to $1 million between now and 2028. I mention 2028 because that is the time of the next US presidential election, and it is still unknown who will win and what policies will be implemented. Perhaps, through some divine intervention, the American public will be ready to accept the "monetary hangover" brought about by the profligacy of the past century and eliminate the rotten credit that is destroying society. Of course, I don’t have high hopes for this, but it is not completely impossible. Therefore, now is the time to seize the opportunity, and when the "Sun King" (referring to the current market environment) shows favor to Bitcoin, don’t miss it.
Trading strategies
From a macro perspective, I have done my part as Maelstrom’s CIO. At the end of January, I reduced risk and increased my fiat exposure. Subsequently, I gradually re-entered the market from late March to early April. During the financial market crash during the week of “Liberation Day”, we maximized our exposure to cryptocurrencies. Now it is time to decide which quality “Altcoin” will outperform Bitcoin in the next leg of the bull market.
I believe that this time the market will reward “Altcoin” that have real users, users paying real money for products or services, and protocols that return a portion of profits to token holders. Two projects that stood out and Maelstrom bought at the lows are $PENDLE and $ETHFI. Pendle will dominate the crypto fixed income trading market, which in my opinion is the largest untapped opportunity in crypto capital markets. Ether.fi will become the “American Express” of the crypto space, a prototype crypto financial institution for wealthy coin holders. I will comment further on these “Altcoin” in subsequent posts.
While I believe Bitcoin will hit $1 million, that doesn’t mean there aren’t opportunities for tactical shorts. Capital controls and money printing are coming, but the road between now and then is bumpy. Team Trump isn’t betting entirely on capital controls, so expect those who wanted Trump to take the empire in a different direction to regain their voices. Trump has no fixed ideology; he adjusts direction based on the constraints of his environment, zigzagging to achieve his goals. Therefore, the trend is your friend — until it isn’t.
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