Think Bitcoin™ Issue #25
The Great Geopolitical Game (and Why Bitcoin is a Powerful Chess Piece)
Hey friends, welcome back to Think Bitcoin™ for issue #25. And a special welcome to all the new subscribers. It’s been really amazing and deeply gratifying to see this community grow so fast over the last few months. Let’s keep it going. As always, if you have any questions or comments, feel free to reach out! You can also find me on Twitter (@TheWhyOfFI).
In this issue:
Headlines/Insights: The Great Geopolitical Game (Russia, Ukraine, China, the U.S., and Bitcoin)
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Headlines and Insights
The Great Geopolitical Game (and Why Bitcoin is a Powerful Chess Piece)
There is a prevailing belief, shared by ordinary citizens and ordinary investors alike, that, to the extent there is a grand geopolitical game of chess being played, the U.S. has already won, or else has too large of an advantage to ever credibly be at risk of losing. This may be the result of the World War II generation dying out, or a fading collective memory of prior global transitions, or a leftover sense of total victory stemming from the collapse of the Soviet Union, or a calculated effort by politically opposed countries to sow obfuscation and division. Maybe it’s a combination of these, or perhaps it’s due to something else. But, whatever the cause, ordinary citizens (and the ordinary investors I interact with in the various corners of the personal finance world) are not attuned to the global chess match being played, its massive scope, and, most importantly, the downstream implications of different results.
The alliterative “Great Geopolitical Game,” as I’ve termed it, is the ongoing struggle for power and influence in the emerging post-petrodollar, post-Pax-Americana system. For the last 50 years or so, since Nixon took the world off gold and established the petrodollar system, the dollar has held reserve currency status (with U.S. Treasuries serving as the global reserve asset). As I’ve written about numerous times, this has allowed the U.S. to incur more and more debt, financed by foreign investors.1 It has also created a global economic order in which we call most of the shots.
This order is, understandably, not universally beloved. It grants the U.S. an exorbitant amount of power. As an emerging hegemon, China is looking to disrupt this existing order and establish itself as the dominant global force. Russia, though not an emerging hegemon, also has an interest in weakening the control the U.S. wields over the global economy. After decades of challenging the U.S., the Soviet Union collapsed, leaving Russia a shell of its former self. Putin now obviously wants to relitigate the end of the Cold War and make Russia an essential power player on the geopolitical stage again.
In the words of Bruno Maçães:
“Putin is particularly sensitive to the question of global hierarchy because he started at the bottom. Russia, a former superpower, began the new century diminished in status and subject to the whims of American power. For the first five or six years as president he played more or less duly by the rules, although it may well be that even then there was a covert plan to grow in strength without calling too much attention to the process.”
So let’s examine how we might play this game if we were China or Russia. First, we would want to catalogue our strengths and figure out ways to press them for maximum advantage. Russia is one of the world’s biggest suppliers of natural gas. It’s also the largest exporter of wheat and fertilizer, and it’s a significant producer of aluminum and palladium. China is the world’s largest manufacturer and is rich in all the rare earth metals, which are used to make all the high-tech stuff we rely on and enjoy.
In sum, China and Russia are long natural resources and vital commodities. Much of the western world, whether naturally or through policy, is (comparatively) woefully short. So, if we were China or Russia, we would press these advantages and increase our leverage by doing whatever we could to preserve and increase the world’s dependency on our resources. The EU is currently the largest importer of natural gas in the world, and they get 41% of it from Russia.2 The EU has been phasing out coal (which is good, obviously), but they’ve also been reluctant to dive into nuclear, and renewables can’t yet sustain the grid. So it is more dependent than ever on Russia for its energy needs. Russia, for its part, has been fostering this dependency for decades,3 including advocacy against shale,4 which some believe could help bridge us to a future of renewable energy.
This has created a situation in which Russia is effectively getting paid more and more to provide energy to Europe. It can then use those proceeds to bulk up its own military, which it has now obviously used to invade Ukraine. The gamble here from Russia is the assumption that the EU and the U.S. can’t levy overly devastating sanctions because they need Russia’s natural gas. The Biden administration has stated multiple time that they are trying to tailor sanctions in such a way as to limit any effects on the price of energy. See, for example, this excerpt from a briefing with Daleep Singh, Biden’s Deputy National Security Advisor for International Economics:
On Saturday night (2/26), the White House announced that key Russian banks would be disconnected from the SWIFT system. Initially there was some hesitation about disconnecting Russian banks from SWIFT (and potentially all Russian banks) because of concerns over access to energy on the part of countries like Germany and Italy. Even with this move to disconnect certain banks, the Biden administration is still looking or ways to prevent or at least limit the damage incurred to energy markets. From a senior White House official on Saturday:
So we know the salient strengths of Russia and China, and we know they’re pressing those strengths for advantage. In their shoes, surely we would also want to eliminate our own weak spots and vulnerabilities. Both China and Russia are attempting to do this by making themselves more resilient in the face of inevitable sanctions. After all, sanction power is the West’s weapon/deterrent of choice. China and Russia have both worked on developing alternatives to SWIFT. China is working on CIPS (Cross-Border Inter-Bank Payments System), which isn’t quite ready yet. Russia has SPFS. Importantly, they also both have each other as trading partners, and Russia has China as a buyer of last resort.5 6
Both countries have also been stocking up on gold and de-dollarizing.
However, this de-dollarization, something Putin has been working on for a while, may not end up having the desired effect. The U.S. and the EU have increased sanctions to essentially freeze the Russian Central Bank’s assets/reserves. Thus, much of Putin’s $640 billion war chest will be rendered inaccessible. About $400 billion of this $640 billion is held in G7 countries, who are freezing access to those funds. The remaining approx. $240 billion is in gold or in Renminbi. The gold, to be practicably usable, would presumably need to be liquidated, a prospect which these sanctions have made quite difficult.
The U.S. and the EU have declared financial war on Russia, and it remains to be seen how a cornered Vladimir Putin responds. As I write, he has put deterrent forces (including nuclear) on high alert.
To recap the state of the game, we’ve taken a look at some of the advantages China and Russia maintain (and seen how some of these have played out so far), as well as how they have worked to address some of their weak spots. The advantages are natural resources and manufacturing capacity. The weaknesses are living in a largely dollar-denominated world over which the U.S. wields disproportionate power over the monetary rules. The advantages are pressed by fostering western dependency on those resources and that manufacturing capacity. The weaknesses are improved by developing new ways to transact outside of dollar-dominated systems while simultaneously undermining the dollar system.
Continuing to view this game from the perspective of these two nations, we would also want to consider American (and European) weaknesses and explore how to most effectively exploit them.
The U.S. has four major weaknesses in this game. First, as the reserve currency issuer, the U.S. is now in the throes of Triffin’s Dilemma7, and China has figured out how to use USD reserve status to continue pressing its own advantages. Second, the U.S. (and certainly Europe) is not energy independent. Third, U.S. politics is deeply polarized. Lastly, there is some question as to whether the U.S. and Europe have the will to fight, if necessary.
With respect to Triffin’s Dilemma, the demand for dollars (as the reserve currency) drives up the dollar, which makes our exports noncompetitive. As Luke Gromen has discussed at length, this has led to a massive off-shoring of our manufacturing capacity. We end up sending huge amounts of dollars to China for goods. China used to recycle the dollars back into U.S. Treasuries, but they’ve stopped doing this. Now they use the dollars to go buy up U.S. equities, build out their Belt and Road Initiative, and accumulate more hard assets. China is also making dollar-denominated loans to developing countries, often collateralized by hard, strategic assets like ports or airports. In other words, China has figured out how to use the current system to its advantage to position and make an eventual play for a post-USD-dominant world.8 Meanwhile, reserve currency status forces the U.S. to inject massive amounts of dollars into the system any time it’s stressed, which drives up inflation at home.
With respect to energy independence, we’re simply not at the stage where we can function on renewables alone. In our justifiable and laudable drive to transition from fossil fuels to renewables as quickly as possible we’ve focused less on effectively bridging the gap between these worlds, creating vulnerabilities in the interim.
Then there’s the question of political will. One of Putin’s calculations (and I think Xi is thinking similarly with respect to Taiwan) is that the west has no appetite for a hot war anywhere. The withdrawal from Afghanistan and subsequent Taliban takeover was internationally embarrassing for the U.S., and was the culmination of an aimless, ineffective two decades of war.
U.S. presidents get elected every four years, which lends itself to comparatively short-term thinking and short-term plans. Presidents are elected to improve healthcare or reduce taxes - not to fulfill a grandiose, expansionary vision of American empire. Putin and Xi, on the other hand, are essentially heads of state for life, which affords the ability to both craft and execute decades-long plans. The time horizon for policies is markedly different, which, in turn, expands the policy possibilities.
I am in no way suggesting that the U.S. should strengthen itself by jettisoning term limits. I only mean to suggest that when a leader such as Putin or Xi doesn’t have to concern himself as much with re-election, he has more time and resources to focus on, say, reviving the USSR, or gradually undermining the current global order, or annexing Taiwan.
Despite its weaknesses, the U.S. maintains significant power over the global financial system and access thereto. In recent days, the U.S., along with the EU, has essentially weaponized this control over the financial system in an attempt to break Russia. The urgent question is how does Putin respond?
This is the geopolitical game we’re playing.
Where does Bitcoin fit in?
Bitcoin gives the U.S. an opportunity to shore up its weaknesses. First, moving to a neutral reserve asset system and unburdening itself of reserve status would depreciate the dollar, harming bondholders and Wall Street. There would be pain in the near term. But it would also make possible an on-shoring of our industrial capacity and make our exports competitive again, both of which improve things for the working and middle classes. In addition to shoring up one of own weaknesses, it would decrease one of China’s strengths, namely our dependence on China for goods and materials.
Bitcoin mining could also help us achieve energy independence. In order to fully transition to renewables we need to make them profitable and find a way to balance supply and demand with flexible load.9 An embrace and build-out of bitcoin mining takes Russia’s leverage away. Russia’s political influence is largely predicated on the energy dependence of its opponents. Become energy independent and you shrink Russian influence.
Because of this, and in light of Russia’s previous anti-shale campaigns, I wouldn’t at all be surprised to see Putin attempt to dissuade the U.S. from embracing Bitcoin, perhaps by embracing it himself, knowing that a Russian embrace would likely lead the U.S. to recoil reflexively or malign it as pro-Russian. I’ve already seen headlines alleging Russia may turn to “crypto” to evade sanctions. It’s important to remember, when you see these headlines, that crypto is also the quickest way to send money internationally and is being used by Ukrainians (including their government) to raise funds.
At the same time, given that access to the global financial system can be and is weaponized, it would also make sense for Russia to look for alternative systems that are not manipulable by their opponents. This, of course, makes Bitcoin attractive. While the U.S. can disconnect Russian banks from SWIFT, the U.S. cannot shut down the Bitcoin network. The west can nuke an economy by denying it access to the global economic system, but it cannot deny access to the Bitcoin network.
So as we reach the late innings of the increasingly precarious current economic order, the Bitcoin game theory appears to be getting clearer. And the first side to embrace it fully is going to win. An embrace by the U.S. would simultaneously be an acknowledgment that the old system is dead and a powerful strategic step into the new system. Unfortunately, the U.S. government still seems to view reserve currency status as a categorical, unqualified good. And for this reason, I fear it might act too slowly.
As always, thanks for reading! If you enjoyed it or found it useful, share this newsletter widely and freely!
“Civilization is in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.” -H.G. Wells
See you next week,
Logan
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DISCLAIMER: I am not investment advisor and this is not investment advice. This is not, nor is it intended to be, a recommendation to buy or sell any security or digital asset. Nothing in this newsletter should be interpreted as a solicitation, a recommendation, or advice to buy or sell any security or digital asset. Nothing in this newsletter should be considered legal advice of any kind. This newsletter exists for educational and informational purposes only. Do your own research before making any investment decisions.
© Copyright Logan Bolinger
For a deep dive, see Alex Gladstein’s piece, “Uncovering the Hidden Costs of the Petrodollar.”
Triffin’s Dilemma, Wikipedia
Luke Gromen is a great person to follow on this.