Translation: BitMEX Founder Calls for Bitcoin's Economic and Political Fantasies of One Million US Dollars

This article is translated and organized from the article "The Doom Loop" by BitMEX co-founder Arthur Hayes. The content reflects Arthur Hayes' observations on the current political and economic situation, as well as the potential impacts of policy changes in various countries. It also provides insights into how a Bitcoin supporter might integrate it into a "savior" narrative, as Arthur Hayes repeatedly emphasizes in the article that this is a form of evangelism.

It is believed that such narratives can only serve as references and may not reflect all real-life conditions, only holding true in deductions based on limited conditions.

Foreword

Commodities and Energy Continue to Drive Inflation

From a commodity perspective: Inflation persists as the global supply chain struggles to meet the needs of the affluent class transitioning to work-from-home setups during the pandemic.

From an energy perspective: The affluent West has decided to reduce investments in petrochemical energy in favor of renewable energy, but the latter offers much lower returns on investments. However, the battle between the West and carbon emissions requires wind and solar energy infrastructure, which in turn relies on developing countries producing large quantities of industrial metal commodities and extracting raw materials through the combustion of petrochemical fuels. With decreasing capital expenditures, the demand for hydrocarbons continues to rise. Hayes believes that this illogical energy policy will continue to drive up the prices of petrochemical fuels.

Hayes believes that both scenarios will lead to price increases.

Short-Sighted Policies Will Cause Long-Term Economic Devastation

Due to Russia possessing the petrochemical fuels needed by the West but facing Western intervention due to its militaristic actions, a series of economic sanctions have been imposed rather than direct military force. Hayes believes that the Western financial response is not based on a macroeconomic model that considers the worst-case scenario but rather measures the future based on past historical experiences.

However, Hayes argues that during the pandemic and war, unprecedented events are occurring, causing the system to be in disarray. It is subject to natural laws, creating volatility that cannot be quelled by resorting to order. He believes that moderate solutions without sacrifice, which trade short-term gains for future losses, will lead to significant damage. Extreme policies accompanied by sacrifices from individuals are necessary for long-term economic success, according to Hayes.

Unfortunately, most countries have chosen to take a short-sighted approach, stifling natural instability by printing money through central banks.

This article will discuss how non-Western countries are responding to the consequences of Russian sanctions, using China, a major power, and El Salvador, a smaller country, to explain his "Bitcoin Function" and predict potential outcomes.

Preaching Bitcoin: A Seat in National Investment Portfolios

Before delving into his formal discourse, Hayes inserts a passage on advocating for Bitcoin, highlighting the following points:

While Bitcoin does not depreciate annually like fiat currency, it has seen significant appreciation, giving rise to the hodl culture. However, when Bitcoin no longer has mining rewards, miners will rely on transaction fee income to maintain the network. Therefore, a lack of Bitcoin liquidity would be detrimental to the infrastructure of Bitcoin.

Hayes believes that Western powers sanctioning the world's largest energy and commodity producers have been the biggest promotion for Bitcoin's presence in sovereign currency reserve portfolios. This article will also explain why he believes Bitcoin should enter national investment portfolios, which is also beneficial for the widespread adoption and continuity of Bitcoin.

Three Solutions to the Deficit Cycle

Hayes states that surplus countries purchasing assets with savings is crucial for the US and the EU as they need foreign savings to offset their national-level negative savings (dissaving).

According to Hayes, Western countries can compensate for deficits through three methods:

1. Selling debt to domestic entities. However, this channels funds to the government rather than productive enterprises.
2. Printing money through the central bank to purchase government-issued debt. This leads to inflation.
3. Selling debt to foreigners. This keeps domestic interest rates low without expanding the money supply, preventing inflation.

Currently, most Western countries opt for the third option and to a lesser extent, the second option.

Warning to the EU: Germany Losing Competitiveness

Hayes states that Germany, the EU's largest net exporter, influences the entire EU's surplus performance and also affects the EU's energy policy towards Russia. Germany relies on Russian natural gas for about 50% to 60% of its electricity generation, which also affects the cost of its industrial products. Therefore, Germany vehemently opposes sanctions on Russian energy sources.

Supplement: "German Deputy Prime Minister Hopes to Find Alternative Russian Oil Method Soon" Finance News

Hayes assumes that if Germany were to secure alternative energy sources through the United States, costs would increase significantly, leading to higher product prices. Unused Russian energy could be acquired by China at substantial discounts, making Chinese export goods more competitive than those from Germany.

If Germany were to adhere to the EU's Russia sanctions policy, it would no longer have the surplus it once did. Without energy sources for production or with high energy costs leading to reduced sales volumes, German goods would be less competitive compared to cheaper Chinese and Japanese products. This scenario poses concerns for the EU's surplus performance.

Consequences of US Sanctions: Propelling Bitcoin Towards $1 Million

Hayes believes that the US has the capacity to be self-sufficient in energy without relying on Russia. Even if food and fuel prices rise, the US political structure can still provide for its people. However, the high welfare society promised by the US, along with the defense budget required to act as the world's policeman, has established persistent deficits compared to tax levels. These deficits were originally offset by foreign individuals recycling US dollars back into US treasuries, enabling the Federal Reserve to print money to counteract deflation caused by technological and demographic structural challenges without significant inflation spilling over into the real economy.

Hayes explains that from 2008 to 2022, the US 10-year Treasury yield is represented by the yellow line, and the Federal Reserve's balance sheet size is shown by the white line. The green trend channel indicates that as the balance sheet size expands, yields generally decline. This is because surplus countries aid by buying US treasuries to "save."

However, if surplus countries stop buying treasuries due to the Russian sanctions, who will fund the US deficits?

The Federal Reserve announced it would start tapering its balance sheet from May 2022. The best-case scenario is that the Federal Reserve only allows its bond holdings to run off. The worst-case scenario is that the Federal Reserve allows bonds to run off and directly sells bonds. But who will buy the trillions of dollars' worth of US treasuries issued at negative real rates by the federal government?

Supplement: "FED Plans to Accelerate Balance Sheet Reduction! Monthly Reduction of $95 Billion in Bonds, May Fearing Another 2-Digit Rate Hike" Eastern News

Hayes believes the answer will not come from foreigners or the Federal Reserve but from the first solution to the deficit cycle mentioned earlier: domestic entities. Commercial banks might become the destination for these bonds. However, JPMorgan has already announced it will no longer purchase excess cash to buy treasuries to avoid violating capital adequacy norms. Therefore, the US may need to relax regulations to allow commercial banks to buy treasuries in bulk.

"If the US government is forced to pay much higher interest rates than now, the interest on its debt payments will soon exceed its tax revenue. This is the beginning of a bankruptcy cycle," Hayes states.

He believes that the obvious solution is to have the Federal Reserve shift back to loose policy from the anti-inflation path. This adjustment will manifest in the form of a clearly priced government bond curve control, euphemistically called Yield Curve Control (YCC).

Hayes points out that after World War II, the Federal Reserve and the Treasury colluded to fix the 10-year Treasury yield and limit retail bank deposit rates, resulting in extremely negative real rates. These negative real rates allowed the US government to expand its debt due to the war won. Hayes references Regulation Q and mentions that this also led to the establishment of the Eurodollar market.

Hayes sees YCC as the endgame. It will inevitably signal the value of the "dollar" relative to gold and more importantly, Bitcoin. YCC is the way to push Bitcoin to $1 million and gold to $10,000 to $20,000. The sanctions on Russia and surplus countries ceasing to buy US treasuries will accelerate the occurrence of YCC. Even if surplus countries opt for buying gold instead of Bitcoin, YCC will still happen.

YCC = $1 million Bitcoin.

EU Disintegration: Propelling Bitcoin Towards $1 Million

Hayes argues that the EU lacks self-sufficiency and therefore cannot bear the cost of blocking Russia but must comply due to its relationship with the US. Without financial assistance from Germany, France, and Northern Europe, most regions in Southern Europe would be considered developing countries, with little in common other than the Judeo-Christian culture.

During the 2011 Eurozone crisis, the European Central Bank pledged to "do whatever it takes" to ensure the survival of the Euro project, which meant printing money and buying weak EU member bonds to enable EU members to afford financing costs. This strategy worked when petrochemical fuels and food were cheap, but printing money comes with real costs now.

Hayes illustrates the difference between credit default swaps (CDS) on Greek five-year sovereign bonds and Germany during high-risk times for Greece in 2011, which significantly decreased when the European Central Bank announced bond purchases of weak member country bonds. This is effective monetary policy. However, what will happen when the European Central Bank stops buying bonds?

The EU aims to have green energy while relying on Russian natural gas to achieve a domestic green economy. Simultaneously, there is a serious consideration to wean off Russian energy imports. The only way for governments to pacify populations enduring high living costs is by printing money to subsidize energy, keeping food and energy consumption prices at reasonable levels.

Hayes states that before the Russia-Ukraine war, inflation rates in EU member countries had reached their highest levels in 40 years. The European Central Bank wanted to raise interest rates to combat inflation, but raising rates and halting the purchase of weak member country bonds would put Southern Europe in a bankruptcy crisis. Portugal, Italy, Greece, and Spain might opt to leave the Eurozone, switch to local currencies, and gain more financial flexibility, leading to the end of the Euro, with Northern European banks facing significant Southern European corporate debt issues, with debts denominated in euros but repaid in local currencies.

Hayes believes that both the European Central Bank and the EU will face dilemmas. After the EU disintegrates, countries will start using their own currencies, leading to hyperinflation. European depositors will flock to hard assets like gold and Bitcoin, according to Hayes, who defines Bitcoin as a hard asset.

EU disintegration = $1 million Bitcoin.

Hayes says, "Now that we understand the importance of surplus countries' preferences for savings, we do not know the currency in which most global bilateral trade prices are denominated. Let us now delve into the considerations of large and small surplus countries."

China: Defending Against Western Financial Weapons

Hayes cites a Nikkei report "China scrambles for cover from West's financial weapons":

"Following Russia's invasion of Ukraine, the West froze half of Russia's gold and foreign exchange reserves, shocking Moscow and surprising Beijing. While the US previously imposed sanctions on dozens of Chinese companies, including Huawei and ZTE, Chinese policymakers never believed Washington would weaponize the entire global financial system. However, that notion has changed."

"According to data from the US Treasury Department, as of January this year, China holds just over $1 trillion in US treasuries in its approximately $3 trillion foreign exchange reserves. According to the latest data released by the State Administration of Foreign Exchange (SAFE), over half of China's reserves are denominated in dollars, compared to 59% in 2016. The wisdom of this arrangement has now sparked much internal debate in China, as efforts to prevent financial sanctions could have far-reaching implications for the global economy."

Famous economist and former adviser to the People's Bank of China, Yu Yongding, stated, "We never thought that one day the US would freeze a country's foreign exchange reserves. This action fundamentally undermines the country's reputation in the global monetary system. The question now is, what can China do to ensure the security of its foreign assets if the US no longer plays by the rules? We don't have an answer yet, but we must think very hard about it."

Hayes believes that China will gradually reduce its holdings of dollar- and euro-denominated assets without disrupting the global financial system. This may involve reinvesting maturing bonds back into the Western financial system and allowing Chinese and proxy country banks to divest from Western stocks and real estate without disrupting the market.

For Hayes, China's international reserve currency should transition to: storable goods, gold, and Bitcoin.

He also notes that as China's trade surplus grows, the issues mentioned above become increasingly significant. Related information:

He continues to discuss the three options of storable goods, gold, and Bitcoin in China's case: first, he believes that storable goods such as industrial metals, petrochemical fuels, and food are not suitable for large investments due to storage space, transfer, and liquidity challenges.

Next is gold. If China were to store internationally accepted and settlement-ready gold in significant quantities, it would prefer domestically produced gold. However, the gold production volume is far from sufficient to meet China's trade surplus, covering only 8.68%; paying domestic miners in renminbi will convert foreign currency assets into renminbi, affecting the exchange rate, which is undesirable. Shanghai Gold Exchange futures contracts are also priced in renminbi; both pathways cannot be used to convert foreign currency surpluses. Even seeking COMEX, the Western gold derivative market, to convert USD to gold may face delivery challenges due to insufficient physical gold for delivery.

If China were to seek spot gold purchases from all gold-producing countries globally, even without considering whether a depreciating USD would be accepted indefinitely, the total global annual gold production would only satisfy 35.2% of China's surplus.

He estimates that even if COMEX delivered all gold spot contracts and bought the global annual gold production, it