Brought to you by:

"If it just ends up being a store of value and nothing more, I don't think it gains relevance at all."

— Jack Dorsey on bitcoin

The US dollar may (finally) be losing relevance

The worst argument against the US dollar (and in favor of bitcoin) is Michael Saylor's idea that its value decreases at the same rate that its supply grows.

That would be roughly correct for a commodity like gold — or Saylor's digital gold — where new supply dilutes existing holders.

But that's not how it works with a national currency like the US dollar.

Instead, the supply of dollars grows mostly in response to the demand for dollars — most money is created by banks and banks create money when their customers demand it (in the form of loans).

One Federal Reserve study estimates that as much as 92% of deposits in the US banking system were created by banks, mostly by lending to customers.

Under normal conditions then, the supply of money in the United States is primarily a function of banks creating money for productive purposes.

That doesn't have to be inflationary: If the economy's capacity expands via productivity or globalization (may it rest in peace), more money may support more output without higher prices.

I'm not an economist, so I'm sure I'm missing some nuance here, but empirical evidence suggests I'm at least directionally correct: Fred data shows that from 2000-2020, M2 money supply increased 227% while CPI increased only 47%.

Sometimes, of course, the Federal Reserve dilutes existing dollar holders by printing — just as newly dug-up gold or newly mined bitcoin dilutes the existing holders of those "hard" monies.

But even then, the impact on inflation is far from 1:1, as Mr. Saylor implies.

Growth in M2 hit an astonishing 26.9% in February 2021, but inflation never got above 9%.

The supply of money also goes down on occasion: In 2023, M2 fell by 5%, for example — but I don't recall anyone thinking that their dollars were suddenly 5% more valuable.

So, I believe we can disregard Mr. Saylor's idea that M2 growth represents the "negative real yield" of US dollars.

The second worst argument against the US dollar is the more conventional one: that it devalues at the rate of inflation.

Yes, physical cash dollars and dollars kept in checking accounts do indeed lose their purchasing power at the rate of inflation — but who keeps all their money in cash and checking accounts?

That's just your "walking around" money and your working capital (the bank balance you have to maintain to avoid bouncing checks).

Any money you have in excess of that should be kept in a money market fund — a no-risk investment vehicle that magically transforms dollars into an appreciating asset (most of the time).

Investors in money market funds, for example, are up about 1.06% so far this year, while US CPI is up only 0.64%.

So, dollars held in those funds will buy 0.4% more goods and services than they did at the start of the year.

They will also buy 9% more of US equities and 13% more of bitcoin.

Pretty good!

This, perhaps, is why Jack Dorsey says that if bitcoin is only used by people as a store of value and not for "everyday payments," he'll consider it a failure.

Dollars have been a better store of value than bitcoiners like Mr. Saylor would have you believe because they're useful — people use dollars to do stuff and the more stuff they do, the more dollars they need.

Much of that stuff happens outside the US: USD accounts for 59% of global foreign currency reserves, 64% of the world's debt, 58% of non-US international payments, and 54% of foreign trade invoices.

But maybe not for long!

Deutsche Bank warns that markets are "dedollarizing" in the wake of Trump's tariffs: In times of market turmoil, global investors typically rush into US Treasurys as the financial safe haven of last resort — but this week they seem to be rushing out of them.

That is genuinely frightening — if the global financial system is a troupe of trapeze artists, it may now be doing its daredevil tricks without a net.

But it's not just financial markets that are opting out.

VanEck's Matthew Sigel also cites China and Russia settling energy transactions in bitcoin and Bolivia paying for electricity in crypto as evidence that whole economies are "looking to bypass the dollar and reduce exposure to US-led financial systems."

This is the real bear case for the dollar.

President Trump's kamikaze tariffs have shaken confidence in the US financial system and people are increasingly looking for ways to avoid it.

If enough of them do so by making payments in bitcoin, the store-of-value cryptocurrency will be newly relevant.

— Byron Gilliam

Brought to you by:

That Bitcoin L2 is never going to generate sustainable yield.

Secured by decentralized custody, zenBTC ensures that Bitcoin holders can securely and seamlessly earn yield on Solana by aggregating restaking rewards.

zenBTC is unlocking a $2T asset class; just over 1% of Bitcoin, the world's largest cryptocurrency, is actively engaged in DeFi.

This is your chance to enter one of the largest untapped opportunities in crypto with BTCFi.

Explore zenBTC

Trump Is 'Kitchen Sinking' the US Economy

42Macro's Darius Dale discusses the potential for a recession and the threat of a debt refinancing air pocket. Get insights as to why the Fed needs to transition to QE and how to approach portfolio allocation and risk management.

Listen to Forward Guidance on Spotify, Apple Podcasts or YouTube.