Arthur Hayes's new article: The New Model of Quantitative Easing under "Trump Economics" and Bitcoin's Path to One Million Dollars

Original Title: "Black or White?"

Author: Arthur Hayes

Translation by: Deep Tide TechFlow

(This article expresses the author's personal opinions and should not be considered as a basis for investment decisions or as investment trading advice.)

What do you think the price of Bitcoin will be on December 31, 2024? Over $100,000 or under $100,000?

There is a famous saying in China: "It doesn't matter if it's a black cat or a white cat, as long as it catches mice, it's a good cat."

I will refer to the policies implemented by President Trump after his election as "American capitalism with Chinese characteristics."

The elites ruling Pax Americana do not care whether the economic system is capitalism, socialism, or fascism; they only care whether the policies implemented help maintain their power. The United States has not been purely capitalist since the early 19th century. Capitalism means that when the rich make poor decisions, they lose money. This situation was prohibited when the Federal Reserve System was established in 1913. With the privatization of profits and socialization of losses affecting the nation, and the extreme class division created between the "deplorables" or "lower class" living in many inland areas and the noble, respected coastal elites, President Roosevelt had to correct the course by dispensing some crumbs to the poor through his "New Deal" policies. Then, just like now, expanding government relief for the disadvantaged was not a welcomed policy by the so-called wealthy capitalists.

The shift from extreme socialism (in 1944, the highest marginal tax rate for incomes over $200,000 was raised to 94%) to unrestricted corporate socialism began in the 1980s under Reagan. Subsequently, the central bank injected funds into the financial services industry by printing money, hoping that wealth would gradually trickle down from the top. This neoliberal economic policy continued until the COVID pandemic in 2020. President Trump, in responding to the crisis, displayed his inner Roosevelt spirit; he directly distributed the most funds to the entire population for the first time since the New Deal. The U.S. printed 40% of the world's dollars between 2020 and 2021. Trump initiated the distribution of "stimulus checks," and President Biden continued this popular policy during his term. Some peculiar phenomena appeared when assessing the impact of the government's balance sheet between 2008-2020 and 2020-2022.

From 2009 to the second quarter of 2020, it was the peak of so-called "trickle-down economics," during which economic growth primarily relied on the central bank's money-printing policies, commonly known as quantitative easing (QE). As you can see, the growth rate of the economy (nominal GDP) was lower than the accumulation rate of national debt. In other words, the rich used the funds they received from the government to purchase assets. Such transactions did not generate substantial economic activity. Therefore, providing trillions of dollars in debt to wealthy financial asset holders actually increased the ratio of debt to nominal GDP.

From the second quarter of 2020 to the first quarter of 2023, Presidents Trump and Biden took different approaches. Their Treasury issued debt purchased by the Federal Reserve through quantitative easing (QE), but this time it was not given to the rich; instead, checks were sent directly to every citizen. The poor indeed received cash in their bank accounts. Clearly, JPMorgan's CEO Jamie Dimon profited significantly from the fees on government transfers… He is known as America's Li Ka-shing, and you can't avoid paying him. The poor are poor because they spend all their money on goods and services, and during this period, they indeed did so. With the velocity of money circulation significantly increasing, economic growth surged. That is to say, $1 of debt generated more than $1 of economic activity. As a result, the U.S. debt-to-nominal GDP ratio miraculously decreased.

However, inflation intensified because the growth in the supply of goods and services could not keep up with the increase in purchasing power obtained by people through government debt. The wealthy holding government bonds were dissatisfied with these populist policies. These wealthy individuals experienced the worst total returns since 1812. In retaliation, they sent out Federal Reserve Chairman Jay Powell, who began raising interest rates in early 2022 to control inflation, while the general public hoped for another round of stimulus checks, but such policies had been prohibited. U.S. Treasury Secretary Yellen intervened to offset the impact of the Federal Reserve tightening monetary policy. She depleted the Federal Reserve's reverse repurchase facility (RRP) by shifting debt issuance from long-term bonds to short-term notes. This injected nearly $2.5 trillion in fiscal stimulus into the market, primarily benefiting those holding financial assets; as a result, the asset market thrived. Similar to after 2008, the government relief for these wealthy individuals did not generate actual economic activity, and the U.S. debt-to-nominal GDP ratio began to rise again.

Did Trump's incoming cabinet learn from the recent history of the U.S. economy? I believe they did.

Scott Bassett, widely regarded as Trump's pick to succeed Yellen as U.S. Treasury Secretary, has given many speeches on how he would "fix" America. His speeches and columns detail how to implement Trump's "America First Plan," which bears a striking resemblance to China's development strategy (which began in the 1980s under Deng Xiaoping and continues to this day). This plan aims to promote the return of key industries (such as shipbuilding, semiconductor factories, automotive manufacturing, etc.) through government-provided tax credits and subsidies, thereby boosting nominal GDP growth. Eligible companies would be able to obtain low-interest bank loans. Banks would once again actively lend to these operational companies, as their profitability would be guaranteed by the U.S. government. As companies expand their operations in the U.S., they would need to hire American workers. Ordinary Americans receiving higher-paying jobs means increased consumer spending. If Trump restricts immigration from certain countries, these effects would be even more pronounced. These measures would stimulate economic activity, and the government would gain revenue through corporate profits and personal income taxes. To support these plans, the government deficit would need to remain at a high level, and the Treasury would raise funds by selling bonds to banks. Since the Federal Reserve or legislators have suspended the supplementary leverage ratio, banks can now re-leverage their balance sheets. The winners are ordinary workers, companies producing "qualified" products and services, and the U.S. government, whose debt-to-nominal GDP ratio decreases. This policy is equivalent to super quantitative easing for the poor.

Sounds great. Who would oppose such a prosperous era for America?

The losers are those holding long-term bonds or savings deposits, as the yields on these instruments will be deliberately suppressed below the nominal growth rate of the U.S. economy. If your wages cannot keep up with the higher inflation levels, you will also be affected. Notably, joining unions is becoming popular again. "4 and 40" has become the new slogan, meaning a 40% pay raise for workers over the next four years, or a 10% raise each year, to incentivize them to continue working.

For those readers who consider themselves wealthy, don't worry. Here’s an investment guide. This is not financial advice; I am simply sharing my actions in my personal investment portfolio. Whenever a bill passes and allocates funds to a specific industry, read it carefully and then invest in stocks of those industries. Instead of putting money into government bonds or bank deposits, consider buying gold (as a hedge against financial repression for the baby boomer generation) or Bitcoin (as a hedge against financial repression for the millennial generation).

Clearly, my portfolio prioritizes Bitcoin, other cryptocurrencies, and stocks of cryptocurrency-related companies, followed by gold stored in vaults, and finally stocks. I will keep a small amount of cash in a money market fund to pay my Amex bills.

In the remainder of this article, I will explain how the quantitative easing policies for the rich and the poor affect economic growth and the money supply. Next, I will predict how the exemption of the supplementary leverage ratio (SLR) will again make unlimited quantitative easing for the poor possible. In the final section, I will introduce a new index to track the supply of bank credit in the U.S. and show how Bitcoin has outperformed all other assets after adjusting for bank credit supply.

Money Supply

I have a profound admiration for the high quality of Zoltan Pozar's Ex Uno Plures series of articles. During my recent long weekend in the Maldives, I enjoyed surfing, Iyengar yoga, and fascia massage while reading all of his works. His work will frequently appear in the remainder of this article.

Next, I will present a series of hypothetical accounting entries. On the left side of the T-account are assets, and on the right side are liabilities. Blue entries indicate an increase in value, while red entries indicate a decrease in value.

The first example focuses on how the Federal Reserve's purchase of bonds through quantitative easing affects the money supply and economic growth. Of course, this example and the subsequent ones will be slightly humorous to add interest and appeal.

Imagine you are Powell during the U.S. regional banking crisis in March 2023. To relieve stress, Powell heads to the Racquet and Tennis Club at 370 Park Avenue in New York City to play squash with a billionaire old friend. Powell's friend is very anxious.

This friend, whom we will call Kevin, is a seasoned financial professional, and he says, "Jay, I might have to sell my house in the Hamptons. All my money is in Signature Bank, and clearly, my balance exceeds the federal deposit insurance limit. You have to help me. You know how hard it is for a rabbit to stay in the city for a day in the summer."

Jay replies, "Don't worry, I'll take care of it. I will initiate $2 trillion in quantitative easing. This will be announced on Sunday night. You know the Fed always has your back. Without your contributions, who knows what America would look like? Just imagine if Trump regained power because Biden had to deal with a financial crisis. I still remember Trump stealing my girlfriend at Dorsia in the early '80s; it was infuriating."

The Federal Reserve created the Bank Term Funding Program, which is different from direct quantitative easing, to address the banking crisis. But allow me to add a bit of artistic flair here. Now, let's see how $2 trillion in quantitative easing affects the money supply. All figures will be in billions of dollars.

1. The Federal Reserve purchases $200 billion in Treasury bonds from Blackrock and pays with reserves. JP Morgan acts as the intermediary bank in this transaction. JP Morgan receives $200 billion in reserves and credits Blackrock with $200 billion in deposits. The Fed's quantitative easing policy allows banks to create deposits, which ultimately become money.

2. Having lost the Treasury bonds, Blackrock needs to reinvest this money into other interest-bearing assets. Blackrock's CEO, Larry Fink, typically only collaborates with industry leaders, and at this moment, he is quite interested in the tech sector. A new social networking application called Anaconda is building a user community to share user-uploaded photos. Anaconda is in its growth phase, and Blackrock is happy to purchase $200 billion in bonds from them.

3. Anaconda has become a significant player in the U.S. capital markets. They successfully attract a male user base aged 18 to 45, who become addicted to the app. As these users reduce their reading time and instead spend time browsing the app, their productivity declines significantly. Anaconda funds stock buybacks through debt issuance for tax optimization, so they do not need to repatriate retained earnings from overseas. Reducing the number of shares not only boosts the stock price but also increases earnings per share as the denominator decreases. Consequently, passive index investors like Blackrock are more inclined to purchase their stock. The result is that after selling their stock, the nobles have an additional $200 billion in deposits in their bank accounts.

4. The wealthy shareholders of Anaconda do not urgently need to use this money. Gagosian hosts a grand party at the Miami Basel Art Fair. At the party, the nobles decide to purchase the latest artworks to enhance their reputation as serious art collectors while also impressing the beauties at the booth. The sellers of these artworks are also individuals from the same economic class. The result is that the buyers' bank accounts are credited, while the sellers' accounts are debited.

After all these transactions, no actual economic activity has been created. By injecting $2 trillion into the economy, the Federal Reserve has merely increased the bank account balances of the wealthy. Even financing for an American company did not generate economic growth, as these funds were used to inflate stock prices without creating new jobs. $1 of quantitative easing resulted in a $1 increase in the money supply but did not generate any economic activity. This is not a reasonable use of debt. Therefore, from 2008 to 2020, the debt-to-nominal GDP ratio rose among the wealthy.

Now, let's look at President Trump's decision-making process during COVID. Back to March 2020: at the onset of the COVID outbreak, Trump's advisors suggested he "flatten the curve." They advised him to shut down the economy and only allow "essential workers" to continue working, who are typically those who maintain operations at low wages.

Trump: "Do I really need to shut down the economy because some doctors think this flu is serious?"

Advisor: "Yes, Mr. President. I must remind you that primarily older individuals like yourself are at risk of complications from COVID-19 infections. I also want to point out that if they get sick and need hospitalization, treating the entire population over 65 will be very expensive. You need to lock down all non-essential workers."

Trump: "This will lead to an economic collapse; we should send checks to everyone so they won't complain. The Federal Reserve can buy the debt issued by the Treasury, which will fund these subsidies."

Next, let's use the same accounting framework to analyze step by step how quantitative easing impacts ordinary people.

1. Just like in the first example, the Federal Reserve conducts $200 billion in quantitative easing by purchasing Treasury bonds from Blackrock using reserves.

2. Unlike the first example, this time the Treasury is also involved in the flow of funds. To pay for the economic stimulus checks from the Trump administration, the government needs to raise funds by issuing Treasury bonds. Blackrock chooses to purchase Treasury bonds instead of corporate bonds. JP Morgan assists Blackrock in converting its bank deposits into Federal Reserve reserves, which can be used to purchase Treasury bonds. The Treasury receives deposits similar to a checking account in the Federal Reserve's General Account (TGA).

3. The Treasury sends stimulus checks to everyone, primarily to the vast ordinary public. This leads to a decrease in the TGA balance, while the reserves held by the Federal Reserve increase correspondingly, becoming the bank deposits of ordinary people at JP Morgan.

4. Ordinary people spend all their stimulus checks on purchasing new Ford F-150 pickup trucks. Ignoring the trend of electric vehicles, this is America; they still love traditional gasoline vehicles. The bank accounts of ordinary people are debited, while Ford's bank account increases in deposits.

5. When Ford sells these trucks, they do two things. First, they pay the workers' wages, transferring deposits from Ford's account to the employees' accounts. Then, Ford applies for a loan from the bank to expand production; the issuance of loans creates new deposits and increases the money supply. Finally, ordinary people plan to go on vacation and obtain personal loans from the bank, as the economic situation is good and they have high-paying jobs, the bank is happy to provide loans. The bank loans to ordinary people also create additional deposits, just like when Ford borrows money.

6. The final deposit or money balance is $300 billion, which is $100 billion more than the $200 billion initially injected by the Federal Reserve through quantitative easing. This example shows that quantitative easing for ordinary people stimulates economic growth. The stimulus checks issued by the Treasury encourage ordinary people to purchase trucks. Due to the demand for goods, Ford is able to pay employee wages and apply for loans to increase production. Employees with high-paying jobs obtain bank credit, allowing them to consume more. $1 of debt generates more than $1 of economic activity. This is a positive outcome for the government.

I want to further explore how banks can infinitely finance the Treasury.

We will start from step 3 above.

1. The Treasury begins issuing a new round of economic stimulus funds. To raise these funds, the Treasury finances through bond auctions, with JPMorgan as the primary dealer, using its reserves at the Federal Reserve to purchase these bonds. After selling the bonds, the Treasury's balance in the Federal Reserve's TGA account increases.

2. Just like in previous examples, the checks issued by the Treasury are deposited into the accounts of ordinary people at JPMorgan.

When the Treasury issues bonds purchased by the banking system, it transforms otherwise useless Federal Reserve reserves into deposits for ordinary people, which can be used for consumption, thereby driving economic activity.

Now let's look at another T-account example. What happens when the government encourages companies to produce specific goods and services by providing tax breaks and subsidies?

In this example, the U.S. runs out of bullets while filming a Gulf War movie inspired by Clint Eastwood's Westerns. The government passes a bill promising to subsidize the production of ammunition. Smith & Wesson applies for and receives a contract to supply ammunition to the military, but they cannot produce enough bullets to fulfill the contract, so they apply for a loan from JPMorgan to build a new factory.

1. JPMorgan's loan officer, upon receiving the government contract, confidently loans $1,000 to Smith & Wesson. This loan creates $1,000 of funds out of thin air.

2. Smith & Wesson builds the factory, bringing in wage income, which ultimately becomes deposits at JPMorgan. The funds created by JPMorgan turn into deposits for those most likely to consume, namely ordinary people. I have already explained how the consumption habits of ordinary people drive economic activity. Let’s slightly adjust this example.

3. The Treasury needs to issue $1,000 in new debt through an auction to fund the subsidy to Smith & Wesson. JPMorgan participates in the auction to purchase the debt but does not have enough reserves to pay for it. Since there is no longer any negative impact from using the Federal Reserve's discount window, JPMorgan uses its corporate debt asset from Smith & Wesson as collateral to obtain a reserve loan from the Federal Reserve. These reserves are used to purchase the newly issued Treasury debt. The Treasury then pays the subsidy to Smith & Wesson, which again becomes deposits at JPMorgan.

This example illustrates how the U.S. government encourages JPMorgan to create loans through industrial policy and uses the assets formed by those loans as collateral to purchase more U.S. Treasury debt.

The Treasury, the Federal Reserve, and banks seem to operate a magical "money-making machine" that can achieve the following functions:

1. Increase financial assets for the wealthy, but these assets do not generate actual economic activity.

2. Inject funds into the bank accounts of the poor, who typically spend this money on goods and services, thereby driving actual economic activity.

3. Ensure the profitability of certain companies in specific industries, allowing them to expand through bank credit, thus driving actual economic activity.

So, are there any limits to such operations?

Of course, there are. Banks cannot create funds indefinitely because they must prepare expensive equity for every debt asset they hold. In technical terms, different types of assets have risk-weighted asset costs. Even "risk-free" government bonds and central bank reserves require equity capital expenditures. Therefore, at some point, banks cannot effectively participate in U.S. Treasury auctions or issue corporate loans.

The reason banks need to provide equity for loans and other debt securities is that if a borrower defaults, whether a government or a corporation, someone has to bear the loss. Since banks choose to create money or purchase government bonds for profit, it is reasonable that their shareholders bear these losses. When losses exceed a bank's equity, the bank will fail. A bank failure not only results in deposit losses for depositors, which is already bad, but from a systemic perspective, it is worse because the bank cannot continue to expand the credit volume in the economy. Since the fractional reserve banking system requires continuous credit issuance to operate, a bank failure could cause the entire financial system to collapse like a house of cards. Remember—one person's asset is another person's liability.

When a bank's equity credit is exhausted, the only way to save the system is for the central bank to create new legal tender and exchange it for the bank's bad assets. Imagine if Signature Bank only lent to the now-defunct Three Arrows Capital (3AC) founders Su Zhu and Kyle Davies. Su and Kyle provided the bank with false financial statements, misleading the bank about the company's financial health. They then withdrew cash from the fund and transferred it to their wives, hoping these funds would escape bankruptcy liquidation. When the fund went bankrupt, the bank had no assets to recover, and the loans became worthless. This is a fictional scenario; Su and Kyle are good people, and they wouldn't do such a thing ;). Signature donated a large amount of campaign funds to Senator Elizabeth Warren, who is a member of the U.S. Senate Banking Committee. With political influence, Signature persuaded Senator Warren that they deserved to be saved. Senator Warren contacted Federal Reserve Chairman Powell, requesting that the Fed exchange 3AC's debt at face value through the discount window. The Fed complied, allowing Signature to exchange 3AC's bonds for newly issued dollars to cope with any deposit outflows. Of course, this is just a fictional example, but its implication is that if banks do not provide sufficient equity capital, ultimately, society will bear the consequences of currency devaluation.

Perhaps there is some truth in my assumptions; here is a recent news article from the Straits Times :

The wife of Zhu Su, co-founder of the defunct cryptocurrency hedge fund Three Arrows Capital (3AC), successfully sold her mansion in Singapore for $51 million, despite the court freezing some of the couple's other assets.

Assuming the government wants to create unlimited bank credit, they must modify the rules so that Treasury bonds and certain "approved" corporate debts (e.g., investment-grade bonds or debts issued by specific industries like semiconductor companies) can be exempt from the supplementary leverage ratio (SLR) restrictions.

If Treasury bonds, central bank reserves, and/or approved corporate debt securities are exempt from SLR restrictions, banks can purchase these debts in unlimited quantities without incurring expensive equity. The Federal Reserve has the power to grant such exemptions, and they did so from April 2020 to March 2021. At that time, the U.S. credit market was stagnant. To get banks back into Treasury auctions and provide loans to the U.S. government, the Federal Reserve took action because the government planned to issue trillions of dollars in stimulus funds but lacked sufficient tax revenue to support it. This exemption had a significant effect, and banks began purchasing Treasury bonds in large quantities. However, the cost was that when Powell raised interest rates from 0% to 5%, the prices of these Treasury bonds plummeted, leading to the regional banking crisis in March 2023. There is no such thing as a free lunch.

Moreover, the level of bank reserves also affects banks' willingness to purchase Treasury bonds in auctions. When banks feel that their reserves at the Federal Reserve have reached the minimum comfortable reserve level (LCLoR), they will stop participating in auctions. The specific value of LCLoR is only known in hindsight.

This is a chart from the Treasury Borrowing Advisory Committee (TBAC) presentation on financial resilience released on October 29, 2024. The chart shows that the proportion of Treasury bonds held by the banking system relative to total outstanding debt is decreasing, approaching the minimum comfortable reserve level (LCLoR). This raises concerns because as the Federal Reserve conducts quantitative tightening (QT) and central banks of surplus countries sell or cease to invest their net export earnings (i.e., de-dollarization), the marginal buyers in the Treasury bond market become unstable bond trading hedge funds.

This is another chart from the same presentation. From the chart, it can be seen that hedge funds are filling the gap left by banks. However, hedge funds are not substantial buyers of funds. They profit through arbitrage trading, buying low-priced cash Treasury bonds while shorting Treasury bond futures contracts. The cash portion of the trade is financed through the repo market. Repo trading refers to exchanging assets (such as Treasury bills) for cash over a period at a certain interest rate. The pricing in the repo market when using Treasury bonds as collateral for overnight financing is based on the available capacity of commercial banks' balance sheets. As the balance sheet capacity decreases, repo rates will rise. If the financing cost of Treasury bonds increases, hedge funds can only buy more when Treasury bonds are cheap relative to futures prices. This means that Treasury bond auction prices need to fall, and yields need to rise. This is contrary to the Treasury's goal, as they want to issue more debt at a lower cost.

Due to regulatory constraints, banks cannot purchase enough Treasury bonds, nor can they provide financing for hedge funds' Treasury bond purchases at reasonable prices. Therefore, the Federal Reserve needs to exempt banks' SLR again. This would help improve liquidity in the Treasury bond market and allow unlimited quantitative easing (QE) policies to be applied to productive sectors of the U.S. economy.

If you are still unsure whether the Treasury and the Federal Reserve recognize the importance of loosening bank regulations, TBAC explicitly pointed out this need in slide 29 of the same presentation.

Tracking Indicators

If Trumponomics operates as I have described, then we need to pay attention to the potential for bank credit growth. From previous examples, we understand that quantitative easing (QE) for the wealthy is achieved by increasing bank reserves, while quantitative easing for the poor is achieved by increasing bank deposits. Fortunately, the Federal Reserve provides both of these data for the entire banking system weekly.

I have created a custom Bloomie index that combines reserves and other deposits and liabilities \ . This is my custom index for tracking the quantity of bank credit in the U.S. In my view, this is the most important indicator of money supply. As you can see, sometimes it leads Bitcoin, such as in 2020, and sometimes it lags behind Bitcoin, such as in 2024.

However, what is more critical is the performance of assets when the supply of bank credit is shrinking. Bitcoin (white), the S&P 500 index (gold), and gold (green) have all been adjusted according to my bank credit index. The values are normalized to 100, and it can be seen that Bitcoin's performance is the most outstanding, having risen over 400% since 2020. If you can only take one measure to hedge against fiat currency devaluation, it is to invest in Bitcoin. The mathematical data is indisputable.

Future Directions

Trump and his economic team have made it clear that they will implement policies that weaken the dollar and provide necessary funding to support the return of American industry. As the Republican Party will control all three branches of government in the next two years, they can advance Trump's entire economic plan without obstruction. I believe the Democrats will also join this "money-printing party," as no politician can resist the temptation to distribute benefits to voters.

The Republicans will first pass a series of bills encouraging manufacturers of key goods and materials to expand production domestically. These bills will be similar to the CHIPS Act, Infrastructure Act, and Green New Deal passed during Biden's administration. As companies accept government subsidies and obtain loans, bank credit will surge. For those skilled in stock picking, consider investing in publicly traded companies that produce the products the government needs.

Ultimately, the Federal Reserve may loosen policies, at least exempting Treasury bonds and central bank reserves from SLR (supplementary leverage ratio). At that point, the path for unlimited quantitative easing will be clear.

The combination of legislatively driven industrial policies and SLR exemptions will trigger a surge in bank credit. I have already demonstrated that the velocity of funds in this policy is much higher than the traditional quantitative easing methods for the wealthy employed by the Federal Reserve. Therefore, we can expect Bitcoin and cryptocurrencies to perform at least as well as they did from March 2020 to November 2021, if not better. The real question is, how much credit will be created?

The stimulus measures during the pandemic injected about $4 trillion in credit. This time, the scale will be even larger. The growth rate of defense and healthcare spending has already surpassed the growth rate of nominal GDP. As the U.S. increases defense spending to respond to a multipolar geopolitical environment, these expenditures will continue to grow rapidly. By 2030, the proportion of the population aged 65 and older in the U.S. will peak, meaning that healthcare spending will accelerate from now until 2030. No politician dares to cut defense and healthcare spending, or they will quickly be ousted by voters. All of this means that the Treasury will continuously inject debt into the market just to maintain normal operations. I have previously shown that the combination of quantitative easing and Treasury borrowing has a velocity of money greater than 1. This deficit spending will enhance the nominal growth potential of the U.S.

In pursuing the return of American companies, the cost of achieving this goal will reach trillions of dollars. Since the U.S. allowed China to join the World Trade Organization in 2001, it has actively transferred its manufacturing base to China. In less than thirty years, China has become the global manufacturing center, producing high-quality products at the lowest cost. Even companies planning to diversify their supply chains to countries outside of China, which are supposedly lower in cost, find that the deep integration of numerous suppliers on China's east coast is highly efficient. Even if countries like Vietnam have lower labor costs, these companies still need to import intermediate products from China to complete production. Therefore, relocating the supply chain back to the U.S. will be a daunting task, and if it must be done for political reasons, the costs will be exorbitant. I mean that it will require providing trillions of dollars in cheap bank financing to shift production capacity from China back to the U.S.

Reducing the debt-to-nominal GDP ratio from 132% to 115% cost $4 trillion. Assuming the U.S. aims to further reduce this ratio to 70% as it was in September 2008, then according to linear projections, it would require creating $10.5 trillion in credit to achieve this deleveraging. This is why the price of Bitcoin could reach $1 million, as prices are determined at the margin. As the circulating supply of Bitcoin decreases, a large amount of fiat currency worldwide will compete for safe-haven assets, not just from the U.S., but also from investors in China, Japan, and Western Europe. Buy and hold for the long term. If you are skeptical about my analysis of the impact of quantitative easing for the poor, just look back at the economic development history of China over the past thirty years, and you will understand why I refer to the new Pax Americana economic system as "American capitalism with Chinese characteristics."